5.7.2 Targeting Investors
The target investors identified in a marketing plan will likely be different for each range of maturity.101 Accordingly, structuring a debt issue should involve identification and selection of market conventions preferred by target investors that will best enable the issuer to minimize interest costs. The types of investors an issuer targets in an offering are often determined by the purpose and structure of the debt financing. Also, while the senior managing underwriter may offer a marketing strategy that identifies which investors are likely to be interested in the debt issuance, the recommendation should reflect the issuer’s goals and objectives for the offering. For example, if an objective of an issuer is to increase participation of local investors in the debt issuance, the marketing plan’s list of target investors should include local retail investors as a target group.
If the issuer’s goal is to promote retail investor participation and help ensure that individual investors have an opportunity to purchase bonds in a public offering in advance of orders placed by institutional investors, issuers may require underwriters to conduct a retail order period. An issuer may give preference to retail investors under the established “syndicate rules,” which lay out the priority under which orders will be filled and how underwriter compensation will be distributed if there is more than one underwriter. According to the MSRB, giving priority to retail orders may allow issuers to maintain access to different types of investors, make bonds available to target investors in their communities, set the tone for pricing in the institutional period, support fair pricing for retail investors, and overall, achieve favorable pricing of the debt issue.102 Issuers may define retail investors in one or more categories, including individual investors, professional retail investors (often placed by institutions that separately manage accounts for wealthy individuals), or non institutional investors.
To ensure that a prospective investment security is suitable for an investor, securities laws require underwriters and broker dealers to match up the sophistication, risk tolerance, and economic situation of a potential investor with the structural features, liquidity, and credit quality of the bonds being offered. It is important for issuers to know which suitability considerations an underwriter or broker-dealer will use in selling the issuer’s debt to target investors, including sources of repayment and pledges of security. An investor often considers the essentially of the project financed by a municipal debt security to be a critical factor in an assessment of credit risk and, therefore, investment suitability. Issuers should recognize how the purpose of the project and use of proceeds can help to market a debt offering to target investors. The more a project is seen as supporting a critical function of the issuer, the less an issuer is likely to default on the financing, which should be particularly attractive to retail and institutional investors alike. Additionally, public agencies seeking to finance projects related to the management of natural resources or environmental protection may have opportunities to market debt offerings to target investors with socially responsible investment and policy goals, i.e. Green Bonds.103