In a negotiated bond sale, the borrower pre-selects the lead underwriter or the underwriting syndicate it plans to use to sell the bonds to the capital market. Transactions with financing complications such as unique revenue support or specific structuring considerations are usually sold through a negotiated sale process. The process of selecting a lead underwriter or an underwriting syndicate typically includes interviews and financing idea presentations.
Once selected, the lead underwriter or underwriting syndicate may be responsible for:
The lead underwriter or underwriting syndicate is also responsible for setting the price of the bonds and finding investors to purchase the bonds.
Example:
A borrower issues bonds to raise capital for a major project. The bond repayment stream is based on a new tax that has no history. Buyers may hesitate to purchase bonds supported by a new and untested tax. For this reason, the bonds might sell better through a negotiated bond sale since the underwriting syndicate can work hard to find potential investors before the actual sale date of the bonds.
A negotiated sale may be preferable to a competitive sale when the borrower has a poor credit rating, the bond issue is unusually large, or the bond structure is particularly complex or has special considerations. However, there are also downsides to a negotiated sale including potentially higher interest rates and a less transparent process than a competitive bond sale.