5.2 Competitive Sales
A competitive sale is a public offering that prices a debt issuance through a bidding process. Statutes often refer to competitive sales as public sales. In a competitive sale, a public agency sells its bonds to the underwriter or group of underwriters offering the best bid while meeting the terms of the sale. The issuer, typically with the assistance of bond counsel and a municipal advisor, conducts all the tasks necessary to prepare the bonds for sale. These tasks include structuring the maturity schedule, preparing the Preliminary Official Statement (POS), verifying legal documents, obtaining a rating, securing any credit enhancement, and timing the sale.
California Government Code Section 53692 requires that the issuer of bonds to be sold through a competitive sale publish a notice of its intention to sell the bonds. The notice must be in a financial publication generally circulated throughout the state or reasonably expected to be disseminated among prospective bidders for the bonds. The notice must appear at least 15 days before the public sale of any bonds having a principal amount of $1 million–$10 million and at least 5 days before the public sale of any bonds having a principal amount that exceeds $10 million. The notice must include the date, time, and place of the intended sale and the amount of the bonds to be sold.
The issuer advertises the sale of the bonds in advance of the specified sale date through a Notice of Sale (NOS). The NOS contains relevant information (including a schedule for submittal of bids, distribution of a POS, etc.) on the proposed issue, and the criteria by which the bonds will be awarded. At the specified date, time, and venue, the issuer receives bids. The issuer reviews them and awards the right to purchase the bonds to the underwriter or group of underwriters with the best bid.
Identification of the best bid is based on the criteria specified in the NOS—generally the lowest true interest cost, a metric that accounts for the interest rate to be paid on the bonds by the public agency, as well as other one time premiums and discounts paid by or to the public agency in connection with the initial sale of the bonds. Bids can be required to be delivered in person or by facsimile, although most competitive sales are conducted through an electronic bidding platform. The bonds are sold to the winning bidder, which may be a single underwriting firm or a syndicate of firms, generally on an “all or none” basis. (The NOS can specify that awards will be made on a maturity by maturity basis, but this is usually only for very large TRAN offerings.)
Although the underwriters purchase the bonds from the public agency and resell them to investors, they do not play an active role in structuring the transaction. The underwriters are generally compensated by bidding interest coupons on the bonds, allowing the underwriters to resell the bonds to investors for more than the price they paid for the bonds or receive an underwriter’s discount from the public agency, or some combination thereof. Additionally, issuers may require bidders to provide a good faith deposit in an escrow or other type of account as a minimum qualification to participate in the competitive offering.