Information & ResourcesAdvantages and Circumstances Favoring Competitive and Negotiated Sales of Securities
A number of factors are examined to determine which method of sale is best for each issue of each client. An examination of the benefits of each method of sale and the general circumstances favoring each method is presented below. While no hard and fast rules exist, these represent some rules of thumb.
Competitive Sale Advantages:
- Satisfies legal requirements in all states.
- Provides the best public perception of openness in the conduct of public business. Evidence in the form of written competitive bids provides a high level of comfort to the issuer, its constituents and the media that report on its conduct.
- Historically has been the most frequently used and familiar method of sale, particularly for general obligation debt.
- Provides the issuer control of the sale process, including when the securities are sold and when funds are received, through adherence to a timetable.
- Market competition among potential buyers tends to benefit the issuer with lower net interest rates during stable market conditions.
- All direct costs are established in advance. There is no underwriter management fee.
Circumstances indicating a competitive sale include:
- Attractive debt amount of $500,000 and up;
- A traditional financing structure such as a general obligation bond or a revenue bond;
- The issuer has a good reputation and name recognition in the municipal market;
- The issue has an investment grade credit rating; and
- Relatively stable conditions exist in the municipal securities market.
Negotiated Sale Advantages:
- Can be used to explain more complex or non-traditional financings to potential investors, thereby potentially reducing or removing market uncertainty.
- Provides a more flexible timetable which, during periods of high market volatility, may allow the issue to be sold at short notice when a "favorable market window" is perceived to exist.
- Allows a longer pre-sale market assessment by an underwriter, which reduces the perceived marketing risk and can result in lower interest rates based on known (versus perceived) resale ability.
- Until an actual agreement to sell is reached, underwriters typically serve at the pleasure of the issuer and may be removed or replaced. Speer Financial's assistance to the issuer in setting rates, terms, and conditions of the bond issue results in increased responsiveness from underwriters.
Circumstances favoring a negotiated sale include:
- Either an unusually large or a very small debt amount;
- A complex or non-traditional financing structure;
- The issuer is a new or infrequent participant in the market place;
- The issue has a low or questionable credit rating; and
- Volatile conditions exist in the municipal securities market.