Municipal bonds are the primary financing instruments utilized by California school and community college districts to finance necessary facility upgrades or construction. The municipal bond issuance process typically includes determining funding needs, working with a municipal advisor to determine the municipal bond size and structure, and selling the bonds. You may be wondering; how do California school and community college districts sell their municipal bonds? In this article, Tony Hsieh of Keygent LLC discusses how districts sell their bonds, and why they may select a particular method.
There are two primary methods that California school and community college districts sell their bonds: competitive and negotiated sales.
Competitive sales of municipal bonds involve an open and transparent bidding process. During a competitive sale, school or community college districts provide a notice of sale that contains specific terms, such as interest rates, maturity dates, and call provisions. Included in the notice is a deadline for underwriting firms to submit their bids. The firm with the lowest bid is awarded the municipal bonds. Tony Hsieh of Keygent LLC noted, “One of the key advantages of competitive sales is that the competitive environment typically helps California school or community college districts secure the lowest possible borrowing cost for their municipal bonds.”
Typically, a municipal advisor will oversee the competitive bidding process for California school and community college districts. They work closely with the district to identify the best financing structure to help meet their project needs. With the necessary financing structure identified, municipal advisors will assist with determining the parameters to be included in the notice of sale to help ensure districts meet their financing needs. Municipal advisors also verify the bids received during the sale to ensure that they conform to the parameters set forth in the notice of sale.
While competitive sales rely on an open market approach, negotiated sales involve a more collaborative and tailored process. When municipal bonds are sold through a negotiated process, school or community college districts select an underwriting firm prior to the sale. This is typically done through a request for proposals process and the selection is based on the underwriter’s expertise, experience, and proposed fees. In negotiated sales, underwriters work closely with the school or community college district and the district’s municipal advisor to structure the municipal bond issuance in a way that meets the district’s financing needs. Tony Hsieh of Keygent LLC explained, “This collaborative approach allows for flexibility in terms of interest rates, amortization, financing term, and other financing details.” Negotiated sales are often preferred when districts require a more collaborative approach to the issuance of their municipal bonds.
California school and community college districts may opt for negotiated sales when dealing with complex financing structures or when they require more flexibility in the timing of their sale. The negotiated sale approach allows for a more in-depth discussion between the issuer, municipal advisor, and underwriter. By working collaboratively, districts can fine tune the issuance of their municipal bonds to meet their specific needs.
When deciding between competitive and negotiated sales for municipal bonds, California school and community college districts must carefully evaluate their financing needs and situation. Here are some key considerations:
Municipal Bond Complexity: If the financing structure is simple such as utilizing current interest bonds only or a standard optional redemption date, a competitive sale may be the ideal sale method for a district. However, for complex financing structures, such as the use of capital appreciation bonds or unique challenges, a negotiated sale may provide flexibility to ensure the necessary financing structure is achieved.
Municipal Bond Size: The size of a municipal bond can influence the amount of bidder interest received. If the par amount of the municipal bonds is large, a competitive sale is generally more favorable. Bonds with smaller par amounts may have a more challenging time drawing in interest from underwriter firms for bids and a negotiated sale may be more ideal in this scenario.
District Credit Rating: The credit rating of a California school or community college district also influences the amount of interest from potential bidders. Typically, higher rated districts may see stronger results from a competitive sale, while lower rated districts will find more success through a negotiated sale.
Market Conditions: Market conditions can significantly influence the choice between competitive and negotiated sales. In a market with stable interest rates and high demand for municipal bonds, a competitive sale may yield favorable results. Conversely, in volatile markets, a negotiated sale allows for flexibility to adapt to changing conditions if needed.
California school and community college districts face critical decisions when it comes to financing their projects through the issuance of municipal bonds. The choice between competitive and negotiated sales depends on the district needs, municipal bond structure, and current market environment. While competitive sales offer transparency and potential lower borrowing costs, negotiated sales provide flexibility and collaboration with the underwriter to meet district needs. Whether opting for a competitive or negotiated sale, districts must navigate the complexities of the municipal bond market with a clear understanding of their unique circumstances to secure the best possible financing for the benefit of their students and communities.
Keygent LLC is a municipal advisory services firm located in El Segundo, California. If you would like to learn more about municipal bond sale methods or explore what may be best for you, please visit www.keygentcorp.com.
