CITY CONDUCTS INTERNET SALE OF BONDS

The Investment and Debt Management Division of the Office of the City Controller today took another step toward a paperless office by using high technology to issue debt. Building on a process begun in 2000 and utilizing the Grant Street Group (formerly MuniAuction), a municipal bond auction web site, the City sold $150 million in Tax and Revenue Anticipation Notes (TRANS) via the Internet. Twelve dealers participated, submitting a total of 32 bids. The notes sold at an average yield of 2.53%.

According to Jim Moncur, Director of Investment & Debt Management for the City Controller, this method of selling notes introduces elements of competition, transparency, and speed that are not present in the sealed bid format previously used by the City. It also eliminates the City’s need to print and mail offering documents, a costly and time-consuming process. The auction system allows buyers to bid against each other on an electronic platform in a process that can be observed by all participants. The bidding process is observable by the issuer, which ensures the integrity of the auction, and can reveal information as to the market’s appetite for the issue.

Use of the Internet also speeds up the selling process. A bidder can wait until just before the deadline, submit a bid and know almost immediately who won the auction. Compared to a sealed bid format, this reduces the need for a bidder to add a cushion to their price to protect against adverse market moves while the issuer determines who bought the bonds.

The City first sold notes via the Internet in 2000. This year new features were added to the bidding process that made the auction even more competitive. A new "two minute rule" automatically extends the auction by two minutes if the lead changes within two minutes of the deadline. In today’s sale, the auction was extended by 2 minutes and 9 seconds in order to accommodate last minute bids. Also new this year is the allowance of partial bids. Previously, one winning bidder was required to take the entire issue. Now, partial bids may be accepted for amounts as small as $10 million. The smaller minimum allows more firms and

smaller firms to participate. It also allows for more than one winner, starting with the bidder whose price results in the lowest interest rate, and progressing to the bidder with the next lowest interest rate until the entire $150 million issue is awarded. In the Houston sale there were three winning bidders.

Controller Garcia praised the on-line municipal bond auction process. "This is performance government in action," the Controller said. "The results of all of these factors are better prices for the City’s bonds and lower costs to the taxpayers."