Exxon Corp., which last year raised $54 million through a so-called "Dutch" auction, has decided it was so successful that it will once again circumvent Wall Street's underwriters and use the technique to float a new $250 million tax exempt bond issue.
Exxon today set May 3 for the auction of $250 million in Marine Terminal Revenue Bonds, the proceeds to be used for completion of the port facility at the end of the Alaska Pipe line. Technically, the City of Valdez, Alaska, will sell the bonds with Exxon guaranteeing repayment.
Exxon's senior vice president Jack F. Bennett expressed satisfaction with the last auction, said the company expects to once again raise money less expensively by using the technique, but conceled that the savinsgs to Exxon could come out of the hides of the individual investors who end up buying the bonds. Here's why.
Under traditionally financing practices, where bonds are sold at a negotiated price to an underwritting group which in turn distributes them to the public through a broker-dealer syndicate, the individual who buys the bond on the issue date avoids a brokerage fee because this fee is paid by the issuing company as part of the underwritting spread.
Under the "Dutch% auction practice, broker-dealers bid agains each other with the bonds going to those bidders offering the lowest interest rate, and with all of the successful bidders getting the bonds at the same cutoff price. The broker-dealers, in turn, mark up the bonds when they sell them to their customers.
Given the same market cinditions, the individual could end up playing more net for a $1,000 bond than be would in a traditional underwritting.
When Exxon last year experimented with the technique in the $54 million offering issued through the Gulf Coast Waste Disposal Authority, it was possible for members of the public to buy the bonda directly - though only 5 per cent did so, with the other 95 per cent going to the broker-dealer community which serves as a middle-man in getting them to the public.
But in the upcoming auction, only 2900 broker-dealers registered with the National Association of Securities Dealers with be eligible to bid, a seeming concession to the Wall Street firms which were unhappy that they were being potentially cut out of the financing picture entirely, not only in underwritting but also in distribution.
Exxon's Bennett said the company found its expenses on the $54 million offer: were less on the Dutch basis than they would have been on a negotiated basis, primarily because no underwriting fees were paid."