The government of Guam may not have been getting the best prices possible on all of its bond issuances, according to Guam Del. Michael San Nicolas, who raised the concern during an information session with lawmakers and officials from the Municipal Securities Rulemaking Board Friday morning.

According to the delegate, 11 out of about GovGuam 24 bond undertakings – either to borrow or refinance – going back about a decade were more than four times oversubscribed. An oversubscription refers to when the demand from bond investors exceed the amount of bonds available. The 11 issuances ranged from about six times to a little more than 21 times oversubscribed. 

"Oversubscriptions are a reflection of how much demand was out there to purchase the bond that was being issued at the time, and that demand is what drives the final interest expense you're going to be paying on the bond," San Nicolas said.

When demand is low, the interest rate on the bond would be higher to attract more buyers. And when demand is high, the interest rate should be at a "sweet spot," where the bond attracts enough buyers without the rate being priced at such a disadvantage to the issuer "that everyone is kind of falling over themselves trying to buy it," San Nicolas said. 

A general principle in the bond market is that a four-times oversubscription is around a healthy bond issuance and anything beyond that may require additional observation, according to the delegate.

During the meeting Friday, Mark Kim, the chief executive officer for the MSRB, presented a diagram of a "deal team" separated into two sides by a "deal table." On the right side of the table were underwriters and their counsels, and other parties involved with putting a bond out to market.

The left side consisted of bond counsel, a municipal advisor and the issuer, which would be Guam or specifically, the Guam Economic Development Authority. The bond counsel and municipal advisor provide legal and financial advice to the issuer, respectively.

"Those folks on the left side, they are literally on your side," Kim said.

But San Nicolas said he did not believe Guam has ever used an MSRB-licensed municipal advisor, who would have a fiduciary duty to give advice on the type of issuance Guam should do and whether oversubscriptions are appropriate, or a sign that the deal was not the most advantageous. No one on the right side of the "deal table" has a fiduciary duty to the issuer, he added.

GEDA Administrator Melanie Mendiola, who was not at the meeting, told The Guam Daily Post that she believed the island did use an advisor up until 2011.

San Nicolas said Friday that he believed there was an advisor around 2008 for a couple of years, which is around the timeframe Mendiola provided, but he did not believe this advisor was licensed by the MSRB.

"An important point to also know is that there is no law that requires a municipal advisor is actually licensed. We can hire one, and they can advise us, but not wearing that fiduciary hat as (an) MSRB licensed advisor," San Nicolas told lawmakers during the information meeting.

However, Mendiola clarified that Bank of America was the previous advisor and the representative serving Guam held at a minimum the general securities license, which granted them authority to give advice.

"Bank of America is most certainly registered with the MSRB - the financial advisor at the time would either have possessed, be supported by or report to a person who held the required licenses if the advisor didn't at the time," Mendiola said.

Still, it has been about a decade since the advisor was on board.

GEDA did issue an RFP for a financial advisor several weeks ago. The request for proposals is set to close on Oct. 26 and does require MSRB licensing, according to Mendiola.

Meanwhile, at the information meeting, San Nicolas emphasized a need to clearly understand how all pieces come into play with bond issuances.

"Because if the sweet spot for subscriptions is around four times more than what we're looking for, and if 11 of our 24 (issuances) in the last 10 years have been over or significantly over that sweet spot, there's a high likelihood we've been having a pricing problem and we've been having an issue on our side of the table," San Nicolas said, adding later that Guam may want to consider employing a municipal advisor not just to assist with future issuances but to also analyze previous issuances.

"And maybe even, in their capacity, give us ... what potential pricing we could have gotten if we were more competitively priced and how much money we didn't just leave on the table but how much money we're actually losing, hypothetically, in terms of added interest costs as a result of those oversubscriptions."


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