Over some 35-plus years, Hough has built William R. Hough & Co. into the biggest municipal bond firm in Florida and a national powerhouse that competes with the Merrill Lynches and Solomon, Smith, Barneys in the low-profile but lucrative business of helping governments borrow money. He's done business with virtually every county in Florida and employs 265 people at 16 offices, including operations in Baltimore, Dallas, Houston, Denver, Omaha, Neb., and Charleston, S.C.
Hough & Co. won't disclose revenue or profit figures, but last year, in Florida alone, the firm was lead underwriter on more than $1.5 billion worth of bonds involving 89 issues. The firm acted as financial adviser on 33 other issues. Those figures gave Hough & Co. a 23% share of the state's bond market, and the firm's performance has made the Houghs and a number of top employees at the firm wealthy. Arch Roberts, a former Hough competitor who sold his municipal bond firm to Raymond James & Associates in 1990, says Hough "has been a visionary. He was the first Florida-domiciled bond underwriter to recognize that the world didn't revolve around New York."
He'll also be a tough act to follow, as his children acknowledge: A few offices down from Bill Hough, and about three years from taking full control of the firm, William Robb Hough Jr., 46, says that for years he resisted the idea of assuming his father's mantle. "I wanted to go to another city where I wasn't Bill Hough's son," he says. At first glance, he shows a markedly different style: Taller and heavier than his father, Robb is rumpled where Bill is tailored; he jokes wryly where his father remains taciturn. His passions surface in music rather than sports: A classically trained pianist, he jams in a five-piece rock 'n' roll band, Doctor Rockit.
But he can be as tough-minded and hard-headed as his father. And since returning to St. Petersburg in 1986, Robb Hough has eased into the role of heir apparent, taking on the president's title and most of the day-to-day decisions. He's helped steer the firm's expansion from municipal bonds into corporate finance and retail brokerage services. Meanwhile, another Hough, Helen Hough Feinberg, 36, Robb's youngest sister and a tenacious, self-described workaholic, runs the firm's housing finance division. (Yet another daughter, Susan Hough, is a songwriter in Nashville.)
With more than half the privately held firm's shares (about two dozen senior managers collectively own less than 50%), the Hough family will retain financial control after Bill Hough formally retires. But as management passes to Robb and Helen over the next few years, their mettle will be tested. The core bond business is in good shape, but the firm's expansion into corporate finance and retail brokerage services has created both financial and managerial issues. Republic Bancshares, a Hough-backed St. Petersburg-based institution with $2 billion in assets, was to have provided outlets for the firm's retail brokerage sales, but the bank stumbled badly last year and will have to be rehabilitated or sold.
In addition, the Houghs are still buffing out some tarnish to their firm's reputation: A Securities and Exchange Commission and Internal Revenue Service investigation probed allegations that numerous investment industry firms -- including Hough & Co. -- improperly profited from the sale of Treasury securities as part of complex bond refinancings in the early 1990s.
The biggest issue for Robb and Helen, however, may simply be developing an identity for the firm that's their own creation rather than an extension of their father. The Hough saga is in any event likely to be among Florida's most interesting -- and high stakes -- family successions.
Creditworthiness
Born in Fort Myers, Bill Hough grew up in St. Petersburg, got his undergraduate degree from the Miami University of Ohio and became the first graduate of the University of Florida's Master of Business Administration program in 1948. He worked as a stock analyst in New York and Florida, then co-founded a small brokerage firm before leaving to start William R. Hough & Co., focusing on Florida's then-fledgling municipal bond business.
At its heart, the municipal bond business is simply the process of matching a government entity that wants to borrow money with investors willing to lend it. A bond underwriter's key task is to establish an interest rate for the debt that's low enough to be attractive to the municipality, but high enough -- and safe enough -- to attract investors. Set the rate too low, and investors will look elsewhere for a better return. Set it too high, and the government will pick another bond firm to handle the deal. The broker, who usually makes his money on the narrow spread between the price he pays the municipality for the bonds and the price he gets from investors, must be able to identify those investors -- often big institutions like insurance companies -- and convince them of the municipality's creditworthiness.
From the time he started his company in 1962, Hough has excelled both at establishing solid relationships with local governments in Florida and in convincing investors that those governments would repay their debts. When he began, there wasn't a big market for Florida bonds. Investors viewed the Sunshine State as either too sleepy or too risky, remembering the boom-and-bust era in the early part of the century that produced dozens of municipal bankruptcies and reams of worthless bond certificates. Moreover, the big New York bond rating firms -- S&P and Moody's -- refused to give credit ratings on many of the bonds issued by smaller Florida communities.
Almost single-handedly, Bill Hough went about showing the outside world that Florida governments could be trusted to repay their bond debts. Hough's firm prepared detailed research on the growth prospects of Florida communities that needed to finance everything from sewage plants to schools. He developed a keen knowledge of every corner of the state, and no public finance deal was too small. He once underwrote a $20,000 bond offering to expand the water system in Malone, a tiny Panhandle town just down the road from Two Egg. "They were ignorant of the real creditworthiness of Florida communities," Hough says of New York bankers.
Underwriting
Hough also built his credibility with municipal governments by agreeing to underwrite bonds -- using big chunks of his own firm's capital to buy bonds from municipal issuers and then reselling them. The risk-taking and relationship-building paid off: Hough has been better able to assess a bond's value than his competitors -- and to know when to do a deal and when not to. Scott Johnston, a senior vice president at Hough & Co. and the firm's top underwriter, recalls one meeting in New York where he, Hough and a group of investment bankers gathered to discuss a Florida bond deal. When it came time to commit to buying a portion of the bonds, all but one of the participants said they'd have to think about it. Hough, however, was ready to sign for his portion of the deal. "He recognized the value of the securities," says Johnston, who joined the firm 20 years ago straight out of college. "It's a game Bill Hough is very comfortable playing."
Hough takes intense pride in spotting value where others don't. In the early 1980s, he eagerly pursued a new sector of public finance in Florida: housing. Today, the firm's housing finance department ranks No. 3 in the nation in the number of bond deals. In one recent underwriting deal, Hough sold bonds that produced a record-setting low fixed mortgage rate of 5.6% for Escambia County. "They could sell an Eskimo two refrigerators and a deep freeze," says Gordon R. Jernigan, executive director of the Escambia County Housing Finance Authority in Pensacola.
In recent years, as he's passed off most of his firm's day-to-day responsibilities to Robb, Bill Hough has explored business ventures unrelated to municipal bond financing. In 1993, for example, he formed WRH Mortgage Co. to buy undervalued mortgages on commercial properties from the Resolution Trust Corp., the federal agency that oversaw the savings and loan bailout. Today, WRH Mortgage and an affiliated company, WRH Properties, have a combined net worth of $14.2 million and own about $130 million in mortgages on apartment complexes and other commercial buildings in Florida, Texas and Tennessee. "It's been a great deal at the government's expense," says Hough, who serves as president of the two companies.
His investment in Republic hasn't gone as smoothly. In 1993, Hough and John Sapanski, a former S&L chief who'd been hired to run the mortgage company, teamed up to buy a controlling stake in the St. Petersburg-based bank for $4.5 million from First Union. Rapidly, the bank expanded its branch network in Florida and into southern Georgia. Meanwhile, the bank's mortgage unit aggressively pushed into the profitable, but risky, business of lending money to consumers with spotty credit at higher rates. This included home equity loans that exceeded the value of a borrower's home, the so-called high loan-to-value business.
Republic's profits came from originating these loans and then quickly selling them off to investors. But the market for the loans collapsed last fall when investors fled for safer territory. Republic lost $21.1 million in the fourth quarter last year; $12 million for the entire year. The bank shut down its sub-prime mortgage business and laid off 550 workers. Sapanski retired as chairman and CEO, but retained his seat on the bank's board of directors. Republic has hired an investment banking firm to help it explore its options, and an outright sale of the bank is a possibility. But it appears more likely that Hough, ever-prideful, wants to keep the bank independent, improve its performance and, ultimately, boost the value of the 4 million shares of Republic stock he owns personally.
Savvy
Working for the hard-driving Hough isn't always easy, as some former employees will privately attest, and for years Robb Hough pursued an independent career. After graduating from Vanderbilt University law school, he moved to Corpus Christi, Texas, where he practiced bankruptcy law and married. He agreed to join Hough & Co. in 1986, and helped steer the firm through a difficult time: A Hillsborough County commissioner had been indicted for taking bribes in a 2-year-old bond deal that involved Hough & Co. The commissioner was later convicted, but Hough & Co. was never accused of any involvement in the scheme.
Robb Hough worked his way up, from analysis and underwriting and running the public finance department to the president's job in 1994. Along the way, he hasn't shied away from standing up to his father, and has shown some generational savvy that has served the firm well. Three years ago, for example, the Houghs decided to enter the student loan financing business. They found a seasoned banker named Loren Carlson to head up the unit. Carlson wanted to work out of Charleston, S.C., but Bill Hough insisted he move to the firm's St. Petersburg headquarters. Backing Carlson, Robb Hough prevailed. The Charleston office, the firm's first outside of Florida, has proven profitable. "Robb Hough understands the business," Carlson says.
Lately, Robb Hough, more than his father, has had to deal with a problem Hough & Co. shares with many major bond brokers in the country. As part of thousands of bond refinancings in the early 1990s, investment firms routinely sold Treasury securities to municipal bond issuers to be held in escrow until all outstanding bonds from the original issue could be redeemed. The SEC and IRS have been reviewing those bond transactions, including some involving Hough & Co.; at issue is whether the investment firms charged excessive markups on the sale of the Treasury securities in a practice known as "yield burning."
The IRS, contending the excessive markups violate the limit on escrow earnings, has indicated it might declare the bond offerings taxable. That, in turn, would prompt a chain of lawsuits: Investors would sue the municipalities that issued the bonds; the municipalities would then sue their financial advisers and underwriters. Hough & Co. did nothing wrong and followed the "applicable legal standards'' governing the industry at the time, says Robb Hough. He calls the investigation "distracting for the entire municipal bond industry," and says his firm has "cooperated with the investigations by federal agencies and we intend to cooperate in the future, and it is our hope that this matter will soon be resolved."
Yet, the firm recently settled one alleged yield burning case with Charlotte County by agreeing to put $805,000 in an escrow account the county can tap, with Hough's consent, if it has to pay the IRS in the dispute. Meanwhile, an industrywide "global" settlement between investment firms and the IRS and SEC is said to be in the works.
At Hough & Co., Robb Hough says he will continue to diversify. The company now offers money management services to wealthy clients, and he wants to expand the firm's fledgling corporate finance business outside of Florida. Already in the works is a deal with a Michigan company that has operations in Florida. "Ten years from now, we'll be a more balanced firm," he says.
Robb Hough says he's completely comfortable with the transition. "I'm still learning to run the firm," he says, but adds that "I've been president for five years of a very different firm than the one Dad ran as president for 32 years. We're three times as big now." Helen says she's content with the management structure her father and brother have built and wants to stick to running the housing section. "I love housing," she says. "I don't want to move."
As he slowly gives way to his son, it's almost unthinkable that Bill Hough won't still be looking for undervalued business deals. In addition to his sports activities, he and his wife have become well-regarded philanthropists and patrons of the arts in St. Petersburg, as well as collectors. Recently, the two were instrumental in rehabbing a former church downtown as a performing arts venue called the Palladium Theater. In addition, the Salvador Dali Museum, where Bill is treasurer, is looking to expand its facility, and Marshall Rousseau, the museum's director, says, "I intend to use Bill to make that happen."
In much the same way, Bill Hough is counting on Robb to carry the family torch. "I think he's doing a fine job," he says of Robb's leadership. "I don't even have to go into the office everyday."