In the News: Recent Developments

February 26, 2008

New York Authority to Unveil Auction-Bond Details (Update1)

By Michael Quint

Published in Bloomberg News / BusinessWire

Feb. 26 (Bloomberg) — The New York Dormitory Authority plans to disclose bidding details for about $1.3 billion of its auction-rate bonds to attract more buyers and reduce interest costs, said David Brown, executive director. The authority will also open bidding to more banks and brokers and has enhanced its Web site to include a calendar of auctions and the latest results, Brown said. Currently, only one bank is allowed to bid at each of the authority’s 30 weekly auctions. “We are trying to get the auctions themselves to work better,” Brown said in a conference call with investors and bankers. “This has not been the investment banks’ finest hour.” The authority’s plan comes as borrowers nationwide confront surging interest costs on auction-rate bonds that failed to attract enough bidders, including among the banks who ran the sales and had previously committed their own capital. The authority wants to broaden competition at the auctions and provide greater access to information about bond credit quality and sales results. Providing details of auction bidding, such as the number and amount of bids, may help investors judge the risk that there won’t be enough buyers, leaving them holding securities they wanted to sell, Brown said. Bidding details have previously been kept private by bankers and issuers.

Eleven Private Issuers

The authority’s changes apply only to 11 private issuers of auction bonds, ranging from Memorial Sloan Kettering Cancer Center in Manhattan with $450 million to Brooklyn Law School with $20 million, and doesn’t include the $1.16 billion of auction bonds issued on behalf of New York State, and backed by state taxes or appropriations. It also doesn’t include $177 million of auction bonds issued for the New York City’s Health and Hospitals Corp. Brown said the authority, which has about $35 billion of bonds outstanding and was the third-largest borrower in the U.S. municipal market last year, will identify which banks succeed in selling more auction bonds and use that information to guide future selections of underwriters. “No investment bank has a lock on our business,” Brown said. The authority plans to begin choosing new underwriters by issuing a request for proposals to banks and brokers within a few weeks, he said. The authority issued $4.64 billion of bonds last year, generating fees to bankers of more than $18 million, in addition to the $6.75 million of fees paid to bankers for handling bidding on auction bonds sold in previous years.

Several Efforts

The authority’s plan is one of several efforts by issuers and others to reduce auction bond rates. New York’s Comptroller Thomas DiNapoli is looking at the possibility of buying auction bonds for the state’s $154.4 billion pension fund. A group of hospitals has asked federal regulators to permit them to bid on their own auction-rate bonds, the Bond Buyer newspaper reported. Restricted Stock Partners, a firm specializing in hard-to-trade assets, plans to begin trading auction-bonds March 3 on its Web site, the New York-based company said yesterday. The average seven-day rate on auction bonds, whose interest is exempt from federal tax, rose to a record 6.89 percent on Feb. 20, up from 3.92 percent at the end of January, according to an index published by the Securities Industry and Financial Markets Association. That rate is about three times higher than what Treasury bills pay and more than twice the rate corporations pay on commercial paper, both offering interest that is taxable.

Teachers College Bonds

Auction rates on dormitory authority bonds rose as high as 15 percent at Feb. 13 bidding for an issue of Teachers College, an affiliate of Columbia University. Teachers College’s rate fell to 7.46 percent Feb. 20. Brown said auction rates for most of the hospital and university-backed bonds have jumped to between 4 percent and 6 percent, up from 3 percent before February. Disclosure of auction results will resemble information provided for U.S. Treasury securities, including the number of bidders, amount of bids from investors who want to hold the bonds, the range of bids, and the ratio of bids to the amount of bonds available for sale, said Joseph Fichera, chief executive of Saber Partners, a financial adviser to the authority. The New York Division of Budget is working with six authorities that issue state-backed auction bonds to develop a “comprehensive solution,” Brown said. The Dormitory Authority, which has never had a default on debt it sold, issued about $1.16 billion of state-backed auction bonds. A recording of the telephone conference can be heard by U.S.-based callers at 866-314 0386.

— Editors: Michael Weiss, Stacie Servetah

— To contact the reporter on this story: Michael Quint in Albany, New York, at +1-518-426-9921 or

— To contact the editor responsible for this story: Beth Williams at +1-212-617-2307 or

—Last updated: February 26, 2008 15:57 EST (Adds executive director’s comments in seventh paragraph, rates on auction bonds in 10th paragraph.)

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