In a negotiated sale
A borrower appoints an investment bank or group of investment banks as underwriters for the public sale. The bank’s underwriters inform potential bond buyers of the date of sale, maturity dates, face amounts of the bonds, the coupons, and the yields. The bank then tries to find investors and lock them into committing to buy the bonds in the future – usually in 7-14 days – at a fair market yield. If the bank is unable to find investors for all the bonds, it will buy them from the borrower. The date the bank finds buyers is the sale date.
In a competitive sale
A borrower or municipal advisor advertises the public sale of the bonds on a specific date, known as the sale date. Investment banks and other potential buyers submit bids on the yields based on market conditions, and determine the price they’re willing to pay for the bonds. The buyer (or group of buyers) that is willing to pay the most for the bonds wins the bid, gets the bonds, and then usually resells the bonds at a profit. If they can not find buyers, they place the bonds in their inventory and try to sell them in the future.
If a municipal advisor is hired, they could have the responsibility for determining the maturity dates, the face amounts of each maturity, setting the coupons, and working on presentations to credit rating agencies and potential investors.
Example:
The borrower issued $100,000,000 Series A 20-year maturing bonds for the purpose of funding a power plant through a competitive sale.
First, the borrower advertised the competitive sale on March 8, 2022. The sale date of the bond was March 16, 2022.
A top tier investment firm won the bid and committed to actually purchase the bonds on March 24, 2022. By using a competitive sale, the borrower was able to sell the bonds at a lower than market yield due to the competition between firms to buy the bonds.
What’s important here?
When looking for funding through a public sale of bonds, borrowers have options. Each type of public sale has its benefits and liabilities.
The major benefit of a negotiated sale is that the borrower hires an investment bank to sell the bonds at the lowest yield to the investor (i.e., highest price). Along with helping the borrower prepare for the sale of the bonds by setting the bond structure, working with the credit agencies, and preparing investor presentations, the investment bank sets the yields of the bonds on the sale date. This can be helpful in the case of more complicated financings or for issuers with lower credit ratings. The investment bank then brings the bond issue to market. If all the bonds are not sold, the investment bank will purchase the bonds at the yield they set and place them in their inventory for future sale.
The major benefit of a competitive sale is that it can bring multiple bidders to the table who will compete against each other to purchase the bonds, which can lead to a lower interest rate and/or better terms for the issuer.
