Investment houses yesterday snapped up a $355 million Maryland Department of Transportation bond issue, and immediately began offering premium prices that bond buyers said indicated the state may be paying too much interest on the bonds.
The bonds which will refinance other Maryland DOT borrowings, mature in 15 years and pay 5 3/8 percent interest. They were rated double-A.
They were sold by an underwriting group headed by Werthem & Co. of New York and Alex Brown & Sons and Baker, Watts & Co., both of Baltimore.
The bonds originally had been offered to members of the underwriting syndicate at 99.5, a half-point below par, but that price was raised to 100 the day before the sale.
Even before the sale contract was signed yesterday, what bond market specialists called "a black market" for the bonds developed.
Would-be buyers reportedly were offering 101 to 101 1/4 for the bonds yesterday. Legally the securities can not be traded until today.
Bond dealers said that premium price indicated that investors considered the issue underpriced - they were willing to settle for a lower interest rate than the bonds paid.
One bond market specialist described the 1 1/4 premium as "very unusual" and noted that, if the interest rate had been one-eighth percent lower - 5 1/4 instead of 5 3/8 - the state would have saved about $6 million a year in interest.
Paul M. Hoid, director of Finance for the Maryland DOT, disputed the contention that the state had paid too high an interest rate on the issue. "It's easy to say afterward that you should have been higher," he said.
"Wer expected to pay some premium," he added, insisting the amount of the premium will not be known until actual trading of the bonds begins today and saying it would take a couple of days for the market in the bonds to "settle down."
The $355 million bond issue was the largest ever made by the Maryland DOT, which never before had sold more than $65 million worth of bonds at once, said Heid. He said the issue was "very well placed with institutional investors," indicating a strong demand for and confidence in, the Maryland securities.
Raising the price of the bonds from 99.5 to 100 got the state an addidional $1.8 million, he said. That additional money lowered the effective interest rate the state is paying on the bonds.
Any premium paid on the bonds today or after, however, will not benefit the state, but instead will mean profits for the investment firms that bought the bonds from the state and are reselling them.
Bond market sources said the premium price for the bonds developed in part because the underwriters could not fill the demand.
Industry sources said Wertheim & Co. received some $400 million in orders for the $355 million worth of bonds. Heid said the surplus of orders was even greater before the price was raised from 99.5 to 100. Raising the price again might have driven away so many buyers the issue could not be sould out, he said.
Because there were not enough bonds to go around some investment houses which placed orders did not get as many of the bonds as they had expected. Because some of the investment house already had resold their bonds to retail customers, a shortage developed.
In order to fill the short orders for their customers, the investment houses began offering to buy the bonds, - and pay a premium price - even before the trading could legally begin.
"It's not a good situation," said one bond specialist. "Things aren't supposed to work that way."
Officials of the three lead under-writing firms who were involved in the bond offering could not be reached for comment yesterday.
Another bond trader in one of the firms, however, said the municipal bond market had been very unsettled recently, marketing it difficult to set a price on the issue.