5.1.1 Sale Methods – Competitive or Negotiated Sale
In the absence of any legal or policy requirement to conduct a bond sale using a specific method, issuers will need to decide which method of sale—competitive or negotiated—best suits their objectives. Although the majority of municipal bonds today are sold through a negotiated method, competition inspires notions of fairness and transparency. The truth, however, is that each method offers advantages and disadvantages and the issuer must consider them and its political, financial, and legal goals in choosing one or the other.81 The appropriate sale method should be determined on a case by case basis after evaluating factors related to the proposed financing, the issuer, and the bond market.
The challenge for public issuers is to properly identify how the relevant decision factors apply to their proposed bond issues and whether one type of sale is preferable. The Government Finance Officers Association (GFOA) encourages issuers that do not possess in house expertise82 to engage a municipal advisor in the analysis and evaluation of the appropriate method of sale.
The GFOA recognizes that the following factors may warrant the use of a competitive sale method.83
- The rating of the bonds, either credit enhanced or unenhanced, is at least in the single A category.
- The bonds are general obligation bonds or full faith and credit obligations of the issuer, or they are secured by a strong, known, and long-standing revenue stream.
- The structure of the bonds does not include innovative or new financing features that require extensive explanation to the bond market.
- The issuer is well known and is frequently in the market.
Factors that may warrant the use of a negotiated sale include:
- The rating of the bonds, either credit enhanced or unenhanced, is lower than single A category.
- Bond insurance or other credit enhancement is unavailable or is not cost effective.
- The bond structure has features such as a pooled bond program, variable rate debt, deferred interest bonds, or other bonds that may be better suited to negotiation.
- The issuer desires to target underwriting participation to include disadvantaged business enterprises (DBEs) or local firms.
These are only a few of the factors that drive decision making in this area; others are discussed below.