How a new municipal issue gets sold to investors. The issuer chooses a sale method, sets terms, and selects underwriters. Once the syndicate is in the picture, the mechanics covered in the next section (Municipal Syndicate Operations) take over.
Competitive Sale
- The issuer publishes a notice of sale specifying the terms and inviting sealed bids from underwriting syndicates
- The syndicate offering the lowest net interest cost (NIC) or true interest cost (TIC) to the issuer wins the bid
- Common for general obligation (GO) bonds (many issuers are required by law to sell GOs competitively)
- The notice of sale includes: par amount, maturity schedule, call provisions, delivery date, bid specifications, and good-faith deposit requirement
NIC vs. TIC:
- NIC (Net Interest Cost): A simple average of the coupon rates, weighted by maturity. Does not account for the time value of money
- TIC (True Interest Cost): Accounts for the time value of money, making it a more accurate measure of the issuer's borrowing cost. TIC is the more modern method
Exam Tip: Gotchas
- NIC does NOT account for time value of money; TIC does. If a question asks which method is more accurate, TIC is the answer.
- The notice of sale is used ONLY for competitive sales, not negotiated sales.
Negotiated Sale
- The issuer selects an underwriter (or syndicate) and negotiates the terms of the offering directly
- More common for revenue bonds and complex financings
- Allows the underwriter to pre-market the issue and gauge investor demand before pricing
- The issuer has more flexibility but may receive less competitive pricing
| Feature | Competitive Sale | Negotiated Sale |
|---|---|---|
| How underwriter is selected | Lowest bid wins | Issuer selects directly |
| Common for | GO bonds | Revenue bonds |
| Pre-marketing | Not allowed before bid | Allowed (gauges demand) |
| Pricing | More competitive | More flexible |
Exam Tip: Gotchas
- GO bonds = competitive; revenue bonds = negotiated. This is the default pairing, though exceptions exist.
- The MSRB pay-to-play rule prohibits a dealer from doing negotiated underwriting business with an issuer for two years after making a political contribution to an official of that issuer. This restriction applies to negotiated underwritings only, not competitive bids.
Private Placement (Private Offering)
- Bonds are sold directly to a small number of institutional investors without a public offering
- Avoids the costs of a public offering and underwriting
- Less liquidity for the investor since these bonds are not publicly traded
What Comes Next
Once the sale method is chosen and a syndicate is in place, the syndicate mechanics (formation, account types, spread components, order priority, and settlement) all live in the next section, Municipal Syndicate Operations. The disclosure obligations that attach to a new issue (official statement, preliminary official statement, EMMA, the municipal-disclosure rule) are covered in Advertising and Communications.