In negotiated transactions, the underwriters are responsible for working with the issuer and all related parties to structure and sell the bond issuance. Issuers select who will underwrite the bonds directly or through a request for proposal (RFP) bidding process.
There are four levels of underwriters that may participate in municipal bond issuances, and together they are known as the syndicate.
- The senior underwriter, also known as the book-running manager, works directly with the issuer to structure the bond issuance. Its role includes, but is not limited to:
- Structuring the bonds
- Putting together marketing plans
- Creating necessary disclosures
- Working on both credit rating agency and investor presentations
- The co-senior manager usually focuses on a particular role, such as greater involvement in the presentations. Co-senior managers are also responsible for finding potential investors of the transaction.
- The co-managers’ usual responsibilities include assisting in marketing and finding investors for the bond.
Selling group members’ primary responsibility is to find investors for the bonds. - Selling group members’ primary responsibility is to find investors for the bonds.
In competitive transactions, the lead underwriter creates a syndicate of investment banks and works with the syndicate to create an aggressive bid for the bonds. If the syndicate wins the bid, the lead underwriter coordinates the sale of the bonds with the other members of the syndicate.
Example:
The issuer decides to sell a negotiated $2 billion general obligation bond issuance to fund a major project.
The issuer sends out an RFP to 10 separate banks for the senior manager position. Bank A wins the senior manager role. The issuer assigns Bank B as co-senior manager and Bank C and Bank D as co-managers.
Bank A works with the issuer on structuring the bonds, works with the lawyers on the documentation needed, and develops the investor presentation. Bank B is assigned the task of putting together the credit rating presentation. All four banks will be responsible for finding investors interested in buying the bonds.
What’s important here?
In a negotiated transaction, the senior underwriter, who is chosen by the issuer, will assist the issuer in preparing the financing to go to market. Once the bonds are ready for sale, all the members of the syndicate are responsible for finding investors. If they are unable to find investors, the members of the syndicate will buy the bonds.
In a competitive sale, the lead manager creates a syndicate of investment banks to bid on the bonds. The syndicate then bids on the bonds at the most aggressive levels they feel they can sell the bonds into the capital markets. If the syndicate wins the bid, all the members of the syndicate are responsible for selling the bonds. There is an agreement within the syndicate that if all the bonds are not sold, each syndicate participant will receive a percentage of the unsold bonds to either place in their inventory or take a loss and sell the bonds into the capital markets at a lower price, which results in a higher yield to the buyer.
