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On the rebound.

Denver Mayor Wellington E. Webb likes to brag about his city's new airport. And he has three good reasons to boast. He says the fiverunway airport will be the nation's largest. When completed in fall 1993, it will be the last U.S. airport built this century. And Denver's selection of an investment bank to leadmanage the last debt offering for the $2.7 billion project showed it was on the cutting edge of financial history. Pryor, McClendon, Counts & Co. (PMC), the nation's second-largest African Americanowned investment bank (see the 1992 BLACK ENTERPRISE INVESTMENT BANK LIST)is lead-managing the almost $400 million debt package.

This is the largest municipal finance deal ever led by a black-owned firm. But that distinction is nothing new to PMC. This year, the Philadelphia-based firm bests its own record. In 1990, PMC lead-managed Atlanta's $319 million airport extension debt offering. As lead- or book-running manager for both deals, PMC was in charge of choosing the participants and deciding what percentage of the package each would manage. PMC and the other banks profit from the spread between what they pay for the bonds and the selling price.

In recent years, black investment banks have made inroads in corporate finance, advisory services and mortgage-backed securitizations. But with the growth in the number of black elected officials, they remain busiest in the municipal-debt sector. In 1991, the 12 largest black investment banks underwrote new municipal issues with full credit to each manager worth $75.5 billion, A year earlier, they underwrote $67.5 billion.

William Michael Cunningham, a registered investment adviser whose Washington, D.C., company, Creative Investment Research, tracks black financial institutions, says cheap money propels the surge. Wardell R. Lazard, CEO of New York City-based W.R. Lazard & Co., ranked No. 4 on the BE INVESTMENT BANK LIST, agrees. He says projects that were prohibitive when interest rates were high became possible as they ratcheted down. An additional factor contributing to increased municipal issuances is that cities and states with revenue shortfalls were forced to borrow to keep operating.

But whether the debt is public or private, every firm wants to be lead manager. Municipalities issue bonds to pay for everything from stadiums to airports, hospitals and rapid transit systems. The investment banks operate as debt underwriters on the deals. But all underwriters are not equal. Investments banks often team up in an underwriting syndicate to sell the bond, but there are different levels of participation. The most important position is the lead, senior or book-running manager. That bank chooses how many bonds the other investment banks will receive to sell. The senior manager of an issue also generally makes the most money on a given underwriting.

Although more black investment banks are gaining that spot, it is necessary that they maintain their aggressive strategies. In 1991, Newark-based Securities Data Co. Inc., which tracks financial data, reported that Grigsby, Brandford & Co. Inc. (No. 1 on the 1992 BE INVESTMENT BANK LIST) was the only block firm omong the top 100 lead managers in municipal issuances. It placed 70th, senior-managing $275 million. By contrast, Goldman, Sachs & Co., ranked No. 1 in municipal bonds, lead-managed $21 billion.

Napoleon Brandford III, vice chairman of Grigsby Brandford sheds, some positive light on the difference. His firm handled two-tenths of 1% of 1991's total municipal issuances, while Goldman Sachs controlled 13% of the market. And Brandford notes that to get into the top 20, you have to do $1.2 billion. This obviously leaves "so much room for growth for a minority-owned firm," he says.

Nathan A. Chapman, chairman of Baltimore-based The Chapman Co. (No. 9 on the BE INVESTMENT BANK LIST) echoes the point. "You will see increasing opportunities for minorities to run transactions," he says.

This type of interest supports the reasoning behind our second annual BE INVESTMENT BANK LIST, which ranks the 12 largest black-owned investment banks. Investment banks at least 51% black-owned, fully operational during the previous calendar year and solvent as of Dec. 31, 1991, were eligible for the list. Although most of the banks engage in other business, they are ranked by total municipal bonds underwritten with full credit for each manager.

Taking Finance To A Different Level

When Mayor Webb took office, he knew that blacks rarely led deals and decided to change that. "I asked why the multinational investment banks are always in the lead spot," he says.

The most often cited reason why minority-owned firms don't get the top spot on financings is lack of capital. The rule is that investment banks are liable for the unsold portion of an issuance and must have the money to buy the unsold bonds.

Malcolm D. Pryor, chairman of PMC believes the capital issue is overplayed and makes several points to show how. According to Pryor, large municipal issuances often have a senior management group that divides the liability for the bonds. Most issuances are premarketed to ensure that when the deal is done there is a pool of investors ready to buy, thus reducing the liability. And if any bonds remain, they are divided among the senior managers leaving no one firm unduly burdened. In the Denver deal, 13 firms share the liability.

The key is getting the bonds to the market. "It's more important to have good salespeople and traders than to have capital,"Pryor says. "You can have $1 billion in capital, but if you don't have people who can structure, trade and sell, it won't matter."

Webb is a big advocate of large investment banks working with smaller ones."I think they have an obligation to support the small firms and give them an opportunity to grow. If we don't change the economic spectrum, then the big firms only get bigger and the smaller ones fall out," he says.

Maybe yes. Maybe no. Collaboration is nice, but beating the competition is better. Last January, Grigsby Brandford did just that when it was selected lead manager for the San Francisco Public Utilities Commission's $107 million water revenue bond refinancing. In the process, Grigsby Brandford bested competitors such as PaineWebber Inc., Goldman Sachs, Merrill Lynch & Co., The First Boston Corp. and Dean Witter Reynolds Inc.

The objective of the refinancing was to save money. And Thomas Elzey, general manager of the Public Utilities Commission for the City and County of San Francisco, says Grigsby Brandford "came up with a structure that created a greater level of savings than anyone else."

Grigsby Brandford's selection made Elzey, who is African-American, happy and breached a wall. Industry insiders cannot verify that this is the first time a black firm has lead-managed for a utility deal, but Elzey is sure it was a first in San Francisco. "We broke ground. A great deal of utility issues go on in California. However, the network is primarily dominated by whites, and sensitivity to minority issues is small. This showed that they [Grigsby Brandford] are clearly in the league with the big boys in terms of quality and technical proficiency."

In late 1991, a certified first was recorded by PMC. The Philadelphia firm became the first black-owned investment bank assigned a lead underwriting position by a federal agency when it was awarded a $200 million mortgage-backed securities offering from the Resolution Trust Corp. (RTC). In its charge to oversee the management and sale of failed savings and loans, the RTC is under federal mandate to provide opportunities for minority companies. The RTC was the single-largest reason black-owned investment banks increased their activity in the mortgage-backed security sector in 1991.

Good intentions aside, the gap between the business that black and white investment banks get is immense. In 1991, the Securities Data recorded 721 mortgage-backed securities issuances that raised $250 billion. In 1991, six black-owned investment banks: W.R. Lazard, New York; Laidlaw & Mead; Doley Securities Inc., New Orleans (No. 11 on the BE INVESTMENT BANK LIST); PMC, Philadelphia; M.R. Beal & Co., New York (No. 3 on the BE INVESTMENT BANK LIST); and Ewing Capital, Washington, D.C., all increased the amount credited to them as part of the RTC securitization management team. But the black firms participated in only $16 billion of the total $250 billion.

Sandra Nobles, an RTC senior securitization specialist, says that the agency averages at least two to three issuances per month, and a minority-owned and a woman-owned firm are always selected to participate as a co-manager. In addition, minority-owned firms not participating as a manager in transactions still receive bonds to sell. "That is so they get access to every RTC securitization," she says.

"That's due almost exclusively to the federal government securitization program, including the RTC," says Beal. "Without the RTC and the Veterans Administration, we wouldn't be able to get into the mortgage marketplace."

Access pays off. Securities Data reports that for the first six months of 1992, PMC had offered $5 billion worth of mortgage-backed debt (with full credit to each manager) and ranked 12th among debt managers. W.R. Lazard, Laidlaw & Mead, M.R. Beal, Doley Securities and Ewing Capital held down the 17th, 18th, 20th and 22nd spots, respectively.

The potential of mortgage-backed debt business is heating up competition among the black firms. Last winter, Donna Sims-Wilson, the former PMC senior vice president who set up its $200 million RTC offering, left PMC to join MR. Beal to establish its new federal financing division.

Corporate Finance--Big Money

The RTC is making steps, albeit small ones. But African-American investment banks are still shut out of major corporate equity offerings.

These underwritings may involve a new company's initial public offering or a stock offering by an existing company. In most cases, a syndicate of investment bankers purchases the shares from the issuer and resells them to investors. Money is made on the spread between the price the underwriters pay and the amount they receive from investors. Black investment banks have sold shares for the issuee's underwriters. But the selling group assumes no financial liability and does not share in the syndicate residuals of the equity issues. This situation galls Nathan Chapman of the Chapman Co. "There has never been a minority-owned investment bank that was a co-manager in a major corporate equity transaction."

The burden is on black as well as white companies. When BET Holdings Inc.--the parent company of Black Entertainment Television (BET) and Emerge and YSB magazines--went public last October, black firms helped sell the stock. But BET Holdings selected two white firms to co-lead its initial public offering.

Black investment bankers do not stand around cursing misfortune. They devise ways to expand their businesses, and not simply in the United States. Take for example M.R. Beal. On the domestic front, it served recently as chief financial adviser for an investment group that purchased Detroit's $435 million waste-resource recovery plant. Then last July, the New York City-based investment firm played host to an African Development Bank (ADB) delegation, The West Africa-based bank is a AAA-rated international lending organization affiliated with the World Bank. The ADB has used African-American investment banks to handle its private placements and is seeking new lines of financing for entrepreneurial development. Beal's role was to gather a bevy of financial heavy hitters. The firm hit its mark gathering more than 40 asset and pension-fund managers for lunch at New York City's posh St. Regis Hotel.

Rodney G. Ellis, co-chairman of Houston-based Apex Securities Inc. (No. 5 on the BE INVESTMENT BANK LIST ) thinks the same way. Last April, he led a trade mission of black businesspeople to Mexico. At press time, no business had resulted from the trip. But Ellis says it was worth it because "as minority bankers, we have to begin to think globally. It's not enough to do business in Detroit or Dallas." TABULAR DATA OMITTED
COPYRIGHT 1992 Earl G. Graves Publishing Co., Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1992, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:African American-owned investment banks
Author:Williams, Terry
Publication:Black Enterprise
Date:Oct 1, 1992
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