Bill would change cost of selling munisThe greater the...


August 05, 1993|By David Conn | David Conn,Staff Writer

Bill would change cost of selling munis

The greater the risk, the greater the return. Makes sense, right? Not always.

Normally, a single-A rated municipality such as the city of Hagerstown would have to pay about 10 basis points, or a tenth of a percent, more to sell its municipal bonds than a double-A rated county, such as Frederick, says Robert Reeves, senior vice president of Ferris, Baker Watts Inc.

But on May 11, Frederick sold $18.8 million in munis at maturities ranging from two years to 15 years. A day later, Hagerstown came to market with $2.6 million in bonds with similar maturities and paid an average of 36 basis points less than Frederick, at least for the first 10 years' worth of bonds.

What's going on here? The answer: Hagerstown's bonds were "bank-qualified," a rare category of municipal bond that allows banks to deduct 80 percent of the interest, or carrying cost, required to buy the bonds.

Before 1986, banks were allowed to deduct 80 percent of that carrying cost for all municipal bonds. Since then, only "bank-qualified" munis qualify -- those sold by issuers who float no more than $10 million in bonds a year.

Because the volume of bank-qualified paper is so small -- only four or five sales each year in Maryland, May 12 being the most recent -- the bigger banks can't buy enough at any one sale to make it worth their while.

Bankers, bond sellers and small municipalities are lobbying Congress to pass a bill that would raise the annual limit to $25 million. But industry members such as Mr. Reeves of Ferris don't give the bill much chance, at least not right now. Another tax loophole is the last thing budget negotiators need to worry about now.

Newport/Stegman puts together 1st deal

Newport/Stegman Financial, one of the Baltimore area's newest mergers and acquisitions firms, has done its first deal.

Last fall Newport/Stegman was created from current and former executives of Stegman & Co., the Towson accounting firm. It was the brainchild of Al Johnson, a former president of Stegman who left in 1989 to form a venture capital firm.

Last Friday ED-K Machine Inc., a precision machining company in Timonium, completed the $400,000 purchase of F.H. Klaunberg Inc., a Baltimore metal fabricating company whose founder is retiring. The two hooked up last fall via a Newport/Stegman ad that touted a fabricating business for sale.

"Lo and behold it was the F.H. Klaunberg Co., whom we've known in the business for years," said Ed Krug, president of ED-K Machine. The two companies have often referred clients to each other.

"They kind of go hand in hand," said Mr. Krug, whose clients' industries range from computers, packaging and food to utilities and box-makers.

With financing from Elkridge National Bank, ED-K has been able to start an addition to Klaunberg's building, where the company will operate, and buy $150,000 worth of new equipment to be installed next month. The company now has $2 million in annual sales.

William R. Ross, general manager of Newport/Stegman, and a director of Stegman & Co., helped put the deal together.

Newsletter takes stock of MBNA

Those who don't believe it's possible to crow and cluck at the same time should turn to Grant's Interest Rate Observer, the respected Wall Street newsletter.

In the July 16 edition you'll find editor James Grant's trenchant analysis of MBNA Corp., the nation's fourth-largest credit card company and a popular Baltimore-area stock since its 1991 spinoff from MNC Financial Inc.

By virtue of its successful affinity group program and its ever-widening interest spread -- "a thing of beauty (from the stockholders' point of view)" -- "MBNA is now, at this moment, a gold mine," Mr. Grant maintains.

So much for what MBNA has done for us lately. Mr. Grant is more interested in tomorrow, and here's where the clucking begins.

Though MBNA officials dismiss the prospect of tougher competition from card companies with lower-rates, Grant's is less sanguine. Further, if short-term interest rates rise, MBNA would be caught in a "scissor" squeeze as behemoths such as Citibank lower their rates and fees to counter a general reduction of consumer debt, Mr. Grant says.

Of course, he admits that when the company went public he was bearish. Since then, MBNA's stock has tripled.

NationsBank-MNC merger set for Oct. 1

Egg-in-the-Face Department: On Tuesday The Sun reported that the Federal Reserve Board's approval of the NationsBank/MNC merger meant the deal would be consummated in about 30 days. NationsBank had other ideas. In a statement issued later that day, it said it plans to complete the merger on Oct. 1, assuming Justice Department clearance.

Speaking of Charlotte, N.C., banks buying Maryland ones . . .

First Union Corp., which is consolidating its purchase of First American banks, plans to close six of its 14 Baltimore-area branches, says Ron Fowler, president of First Union's operations here. The company did not release details of the closings, or estimate how many employees would be affected. It also plans to close as many as 70 of the 184 branches in the Washington area.

Finally, kudos to Baltimore Bancorp, whose stock broke into double digits last week for the first time in two years. It closed yesterday at $11.75.

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