5.3.4 Pricing of a Negotiated Public Offering
Unlike a competitive sale, a negotiated public offering allows a public agency selling bonds to actively negotiate the price of the bonds. The borrowing cost of a negotiated public offering is established through a formal pricing process conducted by the underwriter that determines the interest rates and reoffering prices at which bonds of particular maturities will be offered to investors. The public agency issuer should be prepared to evaluate the proposed pricing scale relative to applicable benchmarks and negotiate changes to the pricing (the price of tax exempt bonds may be evaluated relative to indices, such as the Thomson Reuters Municipal Market Data index [MMD], where appropriate).
The underwriter’s spread, including takedown, expenses and any management fee, are also subject to negotiation. While an issuer may retain a pricing consultant or municipal advisor to assist with bond pricing, issuers should fundamentally understand how its debt should be expected to perform in the marketplace. The GFOA recommends that issuers develop an understanding of prevailing market conditions, evaluate key economic and financial indicators, and assess how these indicators likely will affect the timing and outcome of the pricing.87 To assist with this difficult responsibility, issuers may turn to financial advisors or others with pricing expertise to evaluate the pricing book received from the underwriter or the municipal advisor, including the following:
- “Comparable” recent sales
- Information on the interest rates and current market yields of recently priced and outstanding bonds with similar characteristics
- Interest rates and interest rate indices for bonds with similar characteristics provided by independent services that track pricing performance
- Historic benchmark index data for the bonds of the type being sold
Generally, the underwriters will have mailed or electronically distributed a POS to potential investors and to other underwriters about a week before the pricing date to announce the debt issuance to the market and to provide the information needed by prospective investors to make an informed investment decision. Federal securities laws generally require that if a POS is used to market an issue, it must fully disclose all facts that would be material to a potential buyer other than matters dependent on pricing. See Section 6.3, The Official Statement. The day before the date of pricing, the underwriter generally proposes and confers with the public agency issuer and its municipal advisor with respect to a debt structure and pre marketing pricing scale. The terms must be agreeable to the issuer.
On the pricing date, the underwriters offer the bonds to investors on the agreed terms, generally through a “pricing wire,” and they solicit orders. Electronic systems now allow the issuer and its municipal advisor to monitor the flow of orders for bonds in real time. If an appropriate number of orders are received, the issuer and the underwriters enter into a bond purchase contract on those terms. If not enough orders are received, or if orders for one or more maturities exceed the amount of bonds available (and the maturity would be “oversubscribed,”) the issue may be repriced to be more attractive to investors or to give a better rate to the issuer. At the end of the pricing period, the issuer will agree to the final pricing through a “verbal award,” with the information provided to the underwriter’s counsel for preparation of the final bond purchase agreement incorporating the terms of the sale. Typically, the bond purchase agreement is executed on the same day as the verbal award.