Competitive Sales of Municipal Bonds: Process and Benefits
In a competitive sale of Municipal Bonds, issuers sell their bonds to an underwriter or underwriting syndicate – a group of investment banks that team up to bid together – who can then sell the bonds to the public.
A competitive sale can be executed two ways:
- Publish a Notice of Sale in a national trade publication that advertises the bonds are for sale on a certain date to all potential underwriters and/or underwriting syndicates. The Notice of Sale contains the terms of both the sale and the bond issue
- Send a Notice of Sale to select underwriters or underwriting syndicates
The bidding process starts on a certain date and for a select period of time (e.g., 9:00 am through 12:00 pm). Underwriters and underwriting syndicates can submit their bids anytime the bidding “window” is open.
The borrower then awards the bonds to the underwriter or syndicate offering the highest price – which corresponds to the lowest interest rate to borrower– that matches the criteria laid out in the Notice of Sale.
Competitive sales allow issuers to get offers from multiple underwriters and/or syndicates, which can result in an overall lower interest rate when compared to a negotiated sale.
Example:
A frequent borrower with an AAA credit rating plans to issue bonds to finance road improvements. The bond is backed by the borrower’s full faith and credit. Because of the strength of the bond issuance being offered (i.e., strong credit rating, frequent borrower, ease in which syndicates can sell the bonds to the public), this bond may be a good candidate for a competitive sale.
What’s important here?
Competitive sales are most effective for borrowers:
- With strong credit ratings, generally A+ or better and with a reliable history of repaying previously issued bonds on time
- Who issue a bond of reasonable size without unusual terms or security structure
