5.2.2 Disadvantages of a Competitive Sale
Because underwriters bidding on a competitive sale have no guarantee of being awarded the bonds, they cannot be expected to conduct the same level of pre sale marketing (canvassing prospective investors before the sale) as in a negotiated sale. To compensate for uncertainty about market demand, underwriters may include a hedge or a in their bids, which can show up either in the spread or the reoffering scale.
Additionally, public agency issuers may have limited flexibility with respect to the timing of the sale and changes to the proposed financing’s debt structure, because an issuer’s ability to make last-minute changes is limited by the competitive sale process. While an NOS can be structured to allow for postponement of a competitive sale and subsequent reoffering, legal notice requirements restrict the issuer’s ability to move the sale date forward.
Furthermore, the competitive sale restricts the issuer’s ability to adjust major structural features, such as final maturity and call provisions, to match the demand realized in the actual sale process. Again, while a properly structured NOS can increase the flexibility of a competitive sale by allowing for changes to bid terms before the bid and for modification of the size of the issue (within certain parameters) and principal maturity amounts, after bids are received, a negotiated sale still offers more flexibility in structuring.
With a competitive sale, the issuer relies on a competitive bidding method for underwriter selection and bond distribution. The issuer sells the bonds to the underwriter that submitted the best bid, based on the NOS criteria. Because of this the issuer is unable to ensure that its preferences will be met with regard to the type, size, or location of the firm(s) selected.