5.3 Negotiated Public Offerings

5.3 Negotiated Public Offerings

In a negotiated public offering, the public agency selects one or more underwriters with whom to negotiate the purchase of the bonds (for ultimate resale to investors). Statutes often refer to negotiated offerings as “private sales,” even though the bonds may be widely offered. Underwriter selection may be determined through a competitive request for qualifications (RFQ) or request for proposal (RFP) procurement process although the selection may be based upon other factors, such as an existing business relationship with an underwriter. The GFOA identifies five key components that should be included in each public agency RFP:84

1. A clear and concise description of the contemplated bond sale transaction or financing program
   
   
2. A statement noting whether firms may submit joint proposals and stating whether the issuer reserves the right to select more than one underwriter for a single transaction
   
   
3. A description of the objective evaluation and selection criteria and an explanation of how proposals will be evaluated
   
   
4. A requirement that all underwriter compensation structures be presented in a standard format (typically as a cost for $1,000 in bonds, either on average or on a maturity by maturity basis), indicating which fees are proposed on a not to exceed basis, describing any conditions, and explicitly stating which costs are included in the fee proposal and which costs are to be reimbursed
   
   
5. A requirement that the proposer provide at least three references from other public sector clients, preferably clients to whom the firm provided underwriting services similar to those proposed in the RFP

The selection of the underwriter or underwriters in a negotiated sale may target certain types of underwriting firms (including firms that may help an agency meet targeted business enterprise [TBE] participation goals) and establish goals for the distribution of bonds among prospective investors. The underwriting team may consist of a sole senior underwriter or a group of two or more underwriters (including a senior manager, co managers, and other dealers) called a syndicate, which shares in the underwriting risk associated with the debt issuance. Issuers trying to reach certain market sectors or types of investors may be able to negotiate with the underwriter to allocate bonds accordingly.

During the issuance process, the public agency works with the underwriters, bond counsel, and the public agency’s financial advisor to structure the transaction. See Chapter 2, Debt Structures: What Factors Drive Structuring Decisions? On the date set for pricing of the bonds, after the pricing process further described below, (see Section 5.3.4, Pricing of a Negotiated Public Offering), the public agency enters into a bond purchase contract with the underwriters in which the underwriters agree to accept delivery of and pay for the bonds on a specified date in the near future on the terms and conditions contained in the contract, including interest rates and underwriter’s compensation. See Section 5.3.3, Documentation for a Negotiated Public Offering. Before entering into the purchase contract, the underwriters have generally obtained commitments from investors for the purchase of most or all of the bonds. In a negotiated public offering, the underwriters generally buy the bonds at a discount from the price at which the underwriters expect to resell the bonds to investors (or are paid an underwriting fee) and this “underwriters’ discount” or “spread” is the principal form of compensation derived by the underwriters for their underwriting services.