It was a collapse of epic proportions. The financial crisis in 2008 created an atmosphere of panic and fear not only on Wall Street but throughout the world as the bursting of a global housing bubble left financial institutions without liquidity. The Lehman Bros. bankruptcy heralded unprecedented failures for American and European banks despite governmental bailout efforts. Markets worldwide plummeted in the worst financial catastrophe since the Great Depression.
This environment led James Reynolds Jr. and his team to put on their strategic thinking caps. The chairman and CEO of Chicago-based Loop Capital Markets L.L.C. (No. 1 in taxable securities with $2.248 billion in lead issues and No. 2 in tax-exempt securities with $4.961 billion in lead issues on the BE investment banks list) saw an opportunity as large, global investment banks–which were involved in the subprime market–downsized, merged, or went bankrupt, leaving scores of talented banking professionals jobless or disenchanted. “The collapse of behemoths Bear Stearns and Lehman Brothers, in addition to the acquisition of Merrill Lynch by Bank of America, presented a unique opportunity for Loop Capital Markets to expand,†recalls Reynolds.
All told, Loop Capital hired more than 25 people from large Wall Street companies that downsized their bond departments and global equity divisions. The larger staff enabled Loop Capital to service not just the largest institutional bond and equity investors but second- and third-tier institutions often overlooked by big Wall Street firms.
Loop Capital was not involved in the subprime market, in which financial institutions created highly leveraged mortgage-backed securities. While large, global firms were jumping into this once lucrative market, Reynolds and company focused on one of their core businesses: municipal bond underwriting. Although such bonds are not as profitable as some of the more creative securities that trade globally, they helped spare the boutique firm from the bloodbath that ensued when the housing market plummeted and banks found themselves unable to meet their capital requirements.
As a result, Reynolds and his team were the calm within the financial storm, pressing the advantage by retaining individuals who would help grow the business. Among them was former Merrill Lynch banker Michael Jang, who became critical in a David versus Goliath deal where Loop Capital beat out multinational investment banks on a structured underwriting of nearly $1 billion of general obligation refunding bonds for New York City–the largest underwriting deal completed by a minority-led syndicate in the city’s recent history.
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The Bond Buying Business
A municipal bond refunding, like the offering for New York City, can be a complicated process, but it usually boils down to replacing higher interest rate (old) debt with lower interest rate (new) debt. When a municipality wants to finance anything from construction of roads to schools or anything with a price tag attached to it, it may decide to issue bonds to fund the project. Hypothetically, an investor would purchase $5,000 of a particular muni bond, let’s say a 15-year bond that pays 5% annually. After 15 years have passed, the bond matures and the investor can redeem it for $5,000, having pocketed the interest it accrued over the life of the note (in this case $3,750).
Investment banks are the buyers and sellers of those bonds. They structure and purchase bonds from municipalities and, in turn, sell them to investors. In most cases, sales are done by a syndicate–a group of investment banks working together for a bond sale. The syndicate recommends pricing for the bonds as well as which investors they plan to sell them to. The lead manager (also called book-runner or main underwriter) is responsible for coordinating the transaction in return for a higher percentage of the profits than the other syndicate members.
Historically, it’s rare for an African American firm to be named book-runner on a major municipal bond underwriting deal. A
familiarity with big-name global behemoths by municipal decision makers, an exclusionary selection process, and a degree of institutional biases against smaller firms combine to relegate even be 100s firms to supporting roles. So when New York City Comptroller John C. Liu invited all firms to structure a bond issuance, Loop Capital’s management jumped at the opportunity.Typically the city would cycle through large global investment banks, but Liu decided to open the process to include smaller minority-owned firms. “In this particular bond sale was a potential opportunity, which my office seized upon, to go off of this regular rotation,†Liu stated. “And instead of having the next company in line lead the sale–and leading the sale means the biggest profits–we invited all the companies out there to make their best proposal to sell our bonds.†The general obligation bonds would be used to repurchase old bonds that paid higher interest rates–rates paid by city taxpayers.
Big Deal in the Big Apple
The comptroller’s message was clear: Firms that had not been in the city’s traditional pool of senior managers would now be on equal footing with the Wall Street elite. “His going away from the standard rotation, which would have resulted [in the selection of] a big firm, opening it up. And including minority firms in that open competition–I certainly was impressed with that,†says Reynolds. Though based in Chicago, much of Loop’s municipal bond sales team operates out of the firm’s 23,000-square-foot trading facility in lower Manhattan.
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Loop Capital had just a workweek to pore through volumes of data. “He [Liu] gave us all a series of bonds. He gave us all the interest rate assumptions and he gave us five days,†recalls Reynolds. “We got it on Monday and by Friday we had to come back with a structure that was most advantageous for New York City to pursue for a bond deal that would result in the most savings for New York City taxpayers.â€
The race was on, with a multitude of bankers focusing on how to distinguish their firms and win the appointment. To be in contention, firms had to have mastered New York state local finance law constraints and arcane tax law concepts involving cascading transferred proceeds, universal cap calculations, mixed escrow rules, current refunding transition rules, and other criteria that made such a transaction so complex. The stakes were high. “To lead a senior-managed issue for the City of New York is one of the industry’s most prized assignments,†asserts Alex Rorke, managing director and head of public finance for Loop Capital. “There were many late nights across Wall Street.â€
Led by Jang, a vice president in New York who specializes  in quantitative analysis, the team developed a proprietary linear optimization model for selecting bonds that would provide the greatest savings while meeting all the city’s guidelines. Simply put, it determines which existing debt should be repurchased and the terms of the new bonds that would be issued to finance that repurchase.
The eligible refunding candidates consisted of 170 prior series of bonds totaling more than $40 billion with varying terms and maturity dates. One of the outstanding series to be refunded under Jang’s model was $18.98 million fiscal 2001, Series D bonds. It had a coupon (interest rate) of 5.125% and matures Aug. 1, 2019. The bond from the new issue that refunded it yields 2.93%. Replacing the high interest rate debt with the lower interest rate provided a present value savings of $2.9 million.
Breaking the Glass Ceiling on Wall Street
All told, Loop Capital’s proposal would reduce city taxpayers’ interest burden by $84 million. The Comptroller’s Office was so happy with the result, it increased the initial $800 million bond sale to $962.5 million. Reynolds was at Chicago’s Midway Airport when he received the news that his firm
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Other black investment banking firms echo that statement. “Any time one of our firms is named as some form of lead on any kind of transaction, it’s meaningful,†says Christopher J. Williams, CEO of The Williams Capital Group L.P. (No. 2 in taxable securities with $1.846 billion in lead issues on the be investment banks list). “To me, it represents a continuation of the gaining of access to significant roles for minority firms.â€
The talent acquired during the turmoil in the financial markets enabled Loop Capital to beat out the big names. It showed that given the opportunity, David can slay Goliath. Liu is quick to point out that this was not a minority set-aside but an open competition in which the best team’s proposal won. “There were 10 companies that returned proposals. They were all evaluated objectively and in the end, Loop Capital came in on top,†says Liu, whose office examined the proposals with Mayor Michael Bloomberg’s Office of Management and Budget. “Their proposal yielded the largest savings for city taxpayers.â€
Loop Capital has come a long way since its first bond underwriting, a $499 million issuance for Chicago Public Schools in 1997. And with the New York City deal now on its résumé, the firm is even better positioned to continue to pursue larger, more complex, and lucrative underwriting transactions. “It shows our ability to go head to head with some of the large, global firms and come up with the best ideas,†says Rorke. All thanks to a CEO and management team that was able to identify the opportunity within the financial crisis.