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Underwriting Costs Fall Sharply in ’86

January 10, 1987

NEW YORK (AP) _ Towns, cities and other government groups paid a lot less in underwriting fees for their tax-exempt bond issues in 1986, and experts predict even more savings this year due largely to changes in the tax law.

″Gross spreads″ - or the income derived by investment firms for underwriting a tax-exempt government issue and selling the bonds to the public - fell an average 30 percent from 1985 to last year and 38 percent from 1984, according to Securities Data Co.

The business-information company recently examined the underwriting fees for several fixed-rate, high-rated revenue bond issues totaling at least $10 million.

It found, for example, that the average spread of a $10 million to $50 million tax-exempt issue fell from $25.65 per $1,000 bond in 1984 to $22.46 in 1985 and to $17.66 by the end of last year. The spreads for larger issues were equally lower.

On a $10 million bond issue, that meant a municipality had to pay an average $176,000 to an underwriter in 1986, compared with $256,500 two years earlier.

″I think that’s very significant,″ Neal Attermann, municipal reserach director of Kidder, Peabody & Co, said this past week. ″It shows the market is getting more efficient and more competitive.″

More importantly, he noted, municipalities received substantial savings in borrowing costs that could be passed on to the taxpayer.

″Municipalities had more money to finance other kinds of programs,″ Atterman said.

Underwriting fees declined as municipal bond volume fell in 1986.

Volume of municipal bond issues $5 million and higher totaled $143.54 billion in 1986, compared to $201 billion in 1985, according to Securities Data.

Tax-exempt issuers had gone to market in droves in 1985 to beat the first effective date for tax reform, Jan. 1, 1986, proposed by Congress. That date ultimately was pushed forward.

Many analysts predict the volume of tax-exempt bonds will be even lower this year due to changes in the tax structure, and that will further narrow the underwriter’s spreads because there will be fewer issues for which financial firms can compete.

The new tax law, which went into effect Jan. 1, puts a cap on the number of tax-exempt issues for each state. It also takes away the tax-exempt status of many other issues if more than 10 percent of the gross proceeds are for private use.

″We’re talking about more demand and less supply″ of tax-exempt bonds this year, Atterman said, adding that he expected volume to drop to $120 billion in 1987.

″There are more investment bankers who want to do these deals,″ he added.

Analysts also have attributed the lower spreads to a greater number of block buyers, such as tax-exempt mutual funds, insurance companies and banks.

End Adv Weekend Editions Jan. 10-11

01-09-87 1313EST

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