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Internet Gives Bidders on Portland Sewer Bonds a Chance to Tweak Their Offers

From The Bond Buyer – Portland, OR (September 11, 1998)

by Michael B. Marois

Portland, Ore., has decided to take a second swipe at electronic bidding over the Internet — this time employing a feature that will allow participants to see if they have the low bid, and if not, to adjust their offer prior to the deadline.

The city will sell $160 million of sewer revenue bonds over MuniAuction Inc.’s Website on Sept. 24. Portland will use the proceeds to fund its $700 million sewer system capital improvement program.

Portland’s first experience with cyberspace sales came in April, when it sold $29 million of debt via MuniAuction.

Key Facts

Issuer: Portland, Ore.

Issue: $160 million of sewer system revenue bonds

Purpose: sewer system capital improvement program

Pledge: Net revenues from the city’s sewer and storm water drainage utility system

Structure: Serials from 2000 out to 2018; bidder can mold term bonds out of two consecutive serials

Call features: 10 years at par

Sale date: Sept. 24

Sale type: Competitive on MuniAuction; all-or-none and maturity-by-maturity bids accepted

Insurance: At bidder’s option

Ratings: As yet unrated; previous deals rated A1 by Moody’s Investors Service and A-plus by Standard & Poor’s

Financial adviser: City has its own in-house FA department

Bond counsel: Stoel Rives

(Source: Preliminary official statement).

“When we did our previous sale in April, it was pretty much just like submitting a bid over the Internet without having any sort of auction element to it,” said Eric Johansen, the city’s acting debt manager. “You put your bid in and you wouldn’t know how you stood until the end of the period.”

Tuesday’s deal will be conducted as an open auction, in which participants will be able to hear other bids and try to top them.

“What we are hoping is that the auction element will encourage tighter bids as we get later into the bidding process,” Johansen said. “You will be able to put a bid in and find out whether or not you are the leading bid, and if so [you] may choose to hold that bid, and if you find out you are not the leading bid, you may choose to tighten it up a bit.”

Johansen said the city decided not to allow bidders to see other offers on its first Internet deal because the finance department was not sure how the market would accept the practice. However, the option has since been used with success by other cities, including MuniAuction’s hometown of Pittsburgh.

As in April, Portland will let underwriters bid either for individual maturities of the issue or submit a single price for the entire deal. Officials say allowing dealers to bid for only a piece of the issue allowed regional underwriters all across the country to bid on Portland bonds, Johansen said. That choice encourages competition and saves the city money.

“The reason we are going with the maturity-by-maturity and all-or-none options is to try to maximize the number of firms that participate in our bond sales, with the long-term goal of trying to bring down the overall borrowing costs by creating higher levels of competition,” Johansen said.

In the April deal, the city received 71 maturity-by-maturity bids. Portland took three bids for the traditional all-or-none option. Salomon Smith Barney Inc. won the entire deal with its all-or-none true interest cost of 4.9526%, while the aggregate of maturity bids had the cover with a TIC of 4.9574%.

However, from the city’s perspective it doesn’t really matter which option wins in Tuesday’s sale, since the objective is to shave costs, according to Johansen.

“I don’t think we care,” he said. “We want the lowest borrowing costs, and once the bonds are sold and you are through the closing, it doesn’t make any difference to us. We are just looking to see which of the two options will produce the lowest borrowing costs for us.”

Moody’s Investor Service currently rates the city’s sewer revenue bonds A1, and Standard & Poor’s rates them A-plus. As of Wednesday, neither agency had issued a rating report on the upcoming sale, but Johansen expects the ratings to be affirmed. The city’s $57 million of outstanding general obligation debt is rated Aaa by Moody’s.

Tuesday’s deal is tentatively structured to include serial bonds with maturities from 2000 out to 2018. All-or-none bidders may designate two or more consecutive maturities as term bonds.

The maturity sizes range from $4.2 million in the first maturity to $8.6 million in 2017. The city put $51.4 million in the last maturity of 2018 as a way of equalizing debt service over a long period of time.

“When we structure our new issues, we wrap the new debt service around the existing debt service, so when you look at all the sewer revenue debt for the city of Portland, it’s equal in annual payments approximately for the next 20 years after we sell these bonds,” Johansen explained.

Buyers said the deal should draw a lot of attention because of the size of the deal, the superb credit quality of Portland, and because the Oregon market has seen little decent paper in the last couple of weeks.

“In today’s environment, the long bonds will be in about the five percentish range,” said Scott Baines, a trader with Black & Co. in Portland. “We haven’t had a lot of high-grade size supply over the last month or so, so I think the issue will be well-received.”