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The Honolulu Advertiser
Posted on: Saturday, January 28, 2006

Big Island to seek bids for Feb. 8 bond sale

By William Selway
Bloomberg News Service

SAN FRANCISCO Hawai'i County plans to take bids from investment banks on $50 million of bonds, the state's first public borrower in almost a decade to seek lower debt costs through an auction.

The county's decision bucks the trend in the $2 trillion municipal bond market, where most of the time borrowers select Wall Street bankers to arrange bond sales.

While such sellers argue that they benefit from bankers' expertise, some academic studies have concluded that taking bids in an auction is a less expensive way to borrow for projects such as schools and roads.

"There's no reason in the world not to do a competitive sale," said Gary Kitahata, the financial adviser on the Big Island transaction.

"It's a clean, straightforward process."

The last time a seller of tax-exempt bonds in Hawai'i allowed its borrowing costs to be set in an auction was in 1997. Hawai'i County hasn't sold bonds competitively since 1996, choosing instead to hire a bank ahead of time to arrange the sale and negotiate fees and terms.

Hawai'i and its local governments have gone the longest of any U.S. state without selling bonds by competitive bid. Hawai'i County, which has 163,000 residents, set the auction for Feb. 8.

"We wanted just to try it out," said Hawai'i County Treasurer Mike Okumoto.

U.S. state and local governments seldom require that underwriters compete for bond sales at a public auction, though they routinely take bids from vendors vying to provide services and equipment in an effort to get the best price.

Data compiled by Bloomberg on Hawai'i bond sales for an Aug. 31, 2005, article was in line with academic findings that favor auctions.

That data found that in four out of six instances last year when Hawai'i governments sold bonds at about the same time a similar issuer in another state took bids on debt, the publicly bid bonds were priced at lower rates.

So-called negotiated sales, in which banks arrange the sale, are the dominant method of selling tax-exempt debt, accounting for 81 percent of the record $407 billion in municipal bonds sold last year, according to Thomson Financial.

Negotiated sales are useful for borrowers with low credit ratings, which may have trouble finding buyers on their own, or those engaging in complex transactions, such as those involving interest-rate swaps, said Jon Teall, a spokesman for the Bond Market Association, which represents Wall Street bond firms as the industry's main trade group.

"There is a place for both competitive and so-called negotiated deals," Teall said.

Kitahata said Hawai'i County may benefit by forcing banks to bid for the bonds.

The county is selling general obligation bonds, or debt backed by the full faith and credit of the island government. The bonds are rated A1 by Moody's Investors Service, the fifth-highest of its 10 investment grades, and A+ by Standard & Poor's, also the fifth-highest, said county treasurer Okumoto.

About half the proceeds will be used for projects by the county's water department, he said, while the remainder will go to various public works.

The county has sold $170 million of bonds since its most recent competitive deal 10 years ago, and Okumoto said the county's decision to sell bonds via auction this time doesn't mean it won't go back to using negotiated sales in the future.

Because next month's bond will be a standard general obligation issue, it was a fitting issue to experiment with, he said.