5.3.2 Disadvantages of a Negotiated Public Offering

In a negotiated sale, the process of setting a price for the bonds is less subject to the rigors of competition because the underwriter obtains the exclusive right to purchase the bonds in advance of the pricing. The decision to use a negotiated sale rather than a competitive sale may generate concern among the issuer’s taxpayers or fee payers that the costs were not subject to competition. That is not to say that there is not an opportunity or incentive to lower the issuer’s borrowing costs through competition. First, underwriters are subject to Municipal Securities Rulemaking Board (MSRB) Rule G 17 (“fair dealing”) and, second, they are aware that delivering the lowest borrowing cost to the agency may lead to future business opportunities. They may also be able to generate competition by marketing to potential investors. Nonetheless, issuers should remain vigilant and obtain market information on comparable transactions at the time of the pricing. A municipal advisor can help the issuer obtain the information, as well as monitor investor interest and underwriter performance.

Underwriters in a negotiated sale can provide an array of financial services in addition to the actual underwriting of the bonds; however, these services come at a price. Because these services will be paid for as part of the underwriting spread (versus a flat fee), issuers should fully understand the services provided and the compensation proposed and disclosed by underwriters, in compliance with applicable MSRB rules.