Brawl Over Bonds : Selection of Minority-Owned Firm to Manage Record Muni Sale Criticized
The L.A. Convention Center is preparing what could be the largest sale of municipal bonds in the city’s history, totaling at least $400 million. But the size of the sale is beginning to pale next to the controversy over who gets to sell the bonds.
The flap stems in part because the Convention Center has selected a small but aggressive minority-owned investment banking firm in San Francisco--Grigsby Brandford & Co.--to manage the offering.
The selection was so unusual that it prompted one city official to compare Grigsby Brandford with the late Jackie Robinson, who broke major league baseball’s color barrier nearly a half-century ago. The firm beat out BankAmerica Corp. and several large Wall Street investment bankers.
The losers claim Grigsby Brandford was chosen for political reasons, while Grigsby Brandford insists it won on merit. The selection process is complex, however, and still awaits final approval from the Los Angeles City Council.
The controversy extends beyond politics. Huge sums of taxpayer money are at stake, and whoever gets final approval for the offering will reap hundreds of thousands of dollars in fees.
The flap has put an unaccustomed spotlight on the obscure but lucrative world of municipal-bond sales. Normally, these sales proceed with a minimum of attention from the general public even though the offerings are often snapped up by investors looking for tax-free investments.
The controversy also comes as the question of how municipal-bond contracts are awarded is getting increasing scrutiny nationwide. Several members of Congress have called for more intense regulation of the municipal bond industry.
The Securities & Exchange Commission also recently launched a probe into whether politics plays too big a role in how state and local governments parcel out these offerings.
The sale of the Los Angeles convention-center bonds, which are being issued to refinance existing debts at lower interest rates, requires a team of investment banks to sell them to the public. The team leader becomes the senior manager, a post for which 17 firms competed, including Goldman, Sachs & Co. and BankAmerica.
The center’s commissioners voted 10 to 1 on May 12 to select Grigsby Brandford as senior manager. In so doing, they rejected the advice from a screening panel of city finance experts and other officials, which had recommended Goldman Sachs.
Though without the financial clout of its larger rivals, Grigsby Brandford nonetheless has plenty of municipal-finance experience and, according to the research firm Securities Data Co., is the nation’s largest minority-owned investment bank.
“My feeling was that, given all that L.A. has been through, that if these firms are all qualified . . . then we have an opportunity to make history” by selecting Grigsby Brandford, said one commissioner, Steven Silberman.
But the matter does not end with Silberman and his colleagues, who formally comprise the L.A. Convention & Exhibition Center Authority and were mostly appointed by Mayor Tom Bradley. Because the City Council must give the matter final approval, the screening panel is still pushing to make Goldman Sachs top dog in the deal.
“We have no basis to change our recommendation,” said Gerry Miller, a panel member and the city’s finance specialist. Among the finalists for senior manager, Goldman Sachs had the most experience, and proposed to charge one of the lowest fees and provide the greatest savings for the city, he said.
Grigsby Brandford said its bid was just as competitive, and no one has suggested that the firm is not capable of handling the sale. Early this year, it managed a $170-million offering by Alameda County.
But some other investment banks, while not commenting publicly, complain privately that Grigsby Brandford got the nod because the commissioners were heavily lobbied by its allies, not because it had the best proposal for peddling the bonds.
BankAmerica even withdrew from the bidding and sent a letter to Keith Comrie, the city administrative officer, complaining that “professional lobbyists” influenced the outcome.
Beyond the sniping, however, is the threat that the dispute could be expensive for taxpayers at a time when the city is having severe budget problems.
The convention center is floating the bonds to refinance a big chunk of the $530 million of debt the center already has outstanding. By selling new bonds, it can take advantage of the drop in interest rates since the earlier debt was issued and save $15 million to $20 million a year.
But as the selection process drags on, the city runs the risk that interest rates will move higher, forcing the convention center to sell its bonds at higher rates and slashing the potential savings the refunding would provide taxpayers.
“It’s in the city’s interest to get this thing settled, and settled fast,” said another commissioner, Clinton Rosemond.
The outcome is also crucial to Grigsby Brandford. Getting the senior manager’s job would be a major step in the effort by minority-owned investment banks to get more of the top roles in big securities deals.
“It allows us to go to other issuers and say: ‘We have successfully done a financing for the city of Los Angeles, and you should consider us,’ ” said Napoleon Brandford III, the firm’s vice chairman.
As for the convention-center job, Brandford said the selection process was “fair and open” and his firm’s chances “look pretty good” for winning final approval. “But anything can happen,” he added.
In 1992, Grigsby Brandford was senior manager of $552 million of municipal bonds. But it is a small player in an arena where major firms handle billions a year.--
Goldman Sachs partner Garland E. Wood would say only that his firm was “disappointed” at not winning the convention-center job. But others said the firm was stunned, especially because local governments routinely rely on their staffs’ advice.
Likening Grigsby Brandford to a corporate Jackie Robinson, Commissioner Rosemond said the firm was as qualified as any of the other finalists.
“This was not just based on the fact that there was someone there of color. There was someone there of color who was qualified,” he said. “We’ve got to build firms like this in Southern California.”
In deals like these, the senior manager might get 30% of the total sale’s commissions, while the next two firms in seniority might each get only 15%. In this case, that could mean a paycheck of $600,000 versus $300,000.
First, however, Grigsby Brandford needs the approval of the City Council. And the council and Convention Center commissioners must agree on their choice.
So if the council chooses a firm other than Grigsby Brandford, the matter gets kicked back to the commission--to start the selection process over again. If that happened, Grigsby Brandford might face a whole new commission. Mayor-elect Richard Riordan has asked all of 200 or so commissioners of various city agencies to resign.
Seeking More of the Muni Market
Minority-owned investment banks are beginning to manage more sales of of municipal bonds, but their work is still a fraction of that handled by Wall Street’s largest investment firms. Figures are for sales in which the firm was senior manager.
* Wall Street Underwriting Firms
The Top 5 underwriters of municipal bonds overall in 1992 managed more than $100 billion in sales.
* In billion of dollars Goldman, Sachs & Co: $28.1 Merril Lynch & Co: $20.3 Lehman Bros: $19.2 Smith Barney, Harris Upham & Co.: $17.7 Liama Co.: $14.9 *Minority-Owned Underwriting Firms
The Top 5 minority-owned underwriters overall in 1992 managed nearly 1.7 billion, less than 2% of what the top Wall Street firms managed. In millions of dollars Grigsby, Brandford & Co.: $552 Pryor, McClendon, Counts & Co.: $485 W.R. Lazard & Co.: $350 First American Municipals Inc.: 180 Liama Co.: $121 Source: Securities Data Co.
