On Thursday, March 22, 2012, Zions Direct acted as the auction agent for the sale of $300 million of Zions Bancorporation senior notes. The auction results, as well as a listing of current live auctions, can be viewed by visiting www.auctions.zionsdirect.com. You can also participate in Zions Direct Auctions on your iPhone or iPad by downloading the Zions Direct Auctions application at Apple’s App Store. Over the past five years, Zions Direct has hosted over 5,000 auctions and sold nearly $1.5 billion of securities from over 1,000 issuers.
The $300 million auction of Zions’ senior notes was the largest auction Zions Direct has hosted to date. A record 171 bidders participated in the auction and submitted 243 bids totaling $785 million. In addition to Zions Direct’s registered bidders, clients of the underwriters—Deutsche Bank Securities, Goldman Sachs & Co. and J.P. Morgan Securities—were invited to participate. Prior to this issue, the largest auction was the sale of $36,750,000 of Zions Bancorporation warrants in September 2010.
Traditionally, large corporate debt issues such as this are conducted in a closed process whereby investment banks facilitate the sale of the bonds to their favorite large customers. By inviting large and small investors to jointly participate openly in bidding for the bonds, Zions provided investors bidding on smaller amounts the opportunity to take part. In this auction, winning bids were submitted by 142 bidders and 54 of the winning bidders purchased 25 or fewer bonds.
Zions used the proceeds of the auction to repay half of the U.S. Treasury’s investment in Zions Bancorporation under its Capital Purchase Program, often referred to as TARP (Troubled Asset Relief Program). On March 13, 2012, Zions announced that the Federal Reserve had accepted its proposed capital plan, part of which is the repayment of TARP funds. On March 28, 2012, Zions repaid $700 million of the $1.4 billion obligation.
While Zions Bancorporation and Zions Direct have realized many benefits from its highly developed auction platform, the auction platform was originally created in 2006 for a much different purpose. When corporations grant stock options to their employees, accounting rules require them to estimate the value of those options. Existing mathematical models such as the commonly used Black-Scholes formula were not designed for the unique features of employee stock options and therefore are not able to accurately estimate the value of the options. The accounting rules allow a company to use a market value of the options, if available. Zions invented a way to determine a market value by selling, in an auction, a security that mirrored the payments of employee stock options. The U.S. Securities and Exchange Commission’s Chief Accountant agreed that Zions’ method indeed worked.
Although Zions’ employee stock option valuation method did not become a commercial success, it did help us to realize how efficient and effective open auctions can be at fairly determining the price and allocation of securities. Zions Direct soon branched out into FDIC-insured certificates of deposit (CDs). In February 2007, Zions Direct auctioned $2 million of Zions First National Bank six-month FDIC-insured CDs in its first CD auction. Other auctions conducted by Zions Direct include U.S. agency securities, municipal bonds, corporate bonds and preferred stock and stock warrants.
W. David Hemingway is a Senior Investment Officer of Zions Bancorporation and is Chairman of the Board for Zions Direct.
Please note: The preceding article is offered for informational purposes only. Investment products and services are available through Zions Direct, member of FINRA/SIPC, a nonbank subsidiary of Zions Bank. Investment products are NOT FDIC insured, are NOT guaranteed by Zions Bancorporation or any of its affiliates, and MAY lose value.
