Municipal new issues: negotiated vs. competitive underwriting, syndicates, the official statement and continuing disclosure

Bringing municipal bonds to market

A municipal issuer can use competitive or negotiated underwriting. In a competitive sale, underwriting firms or syndicates submit bids under the issuer's announced terms. The issuer awards the issue according to the stated bid criteria, commonly the lowest interest cost. In a negotiated sale, the issuer selects an underwriter and negotiates the purchase price, underwriting compensation, and other offering terms. Competitive versus negotiated describes how the underwriter is selected and terms are established; either method can use a syndicate.

Sharing the underwriting

A syndicate is a group of underwriting firms that joins to purchase and distribute an issue. Its manager coordinates the offering and allocations. Under a firm commitment, the underwriters purchase the bonds and bear the risk of unsold inventory. A selling-group member helps distribute bonds for a selling concession without taking the syndicate's underwriting commitment. The underwriting spread is the difference between the price paid to the issuer and the public offering price. It compensates underwriting and distribution activities; it is not the bond's coupon.

Disclosure at the offering

The official statement describes the issue's terms, repayment sources, financial and operating information, risks, and continuing disclosure undertaking. It is the municipal offering disclosure document, distinct from a corporate prospectus. A preliminary official statement can omit specified pricing and related information that has not yet been determined. The final official statement completes the offering information. It is disclosure, not regulatory approval or protection from loss.

SEC Rule 15c2-12 generally applies to municipal primary offerings of at least $1 million, with exemptions and limited exceptions. For a covered offering, before bidding, purchasing, offering, or selling, a participating underwriter must obtain and review an official statement the issuer deems final except for permitted omissions. The underwriter must contract to receive final official statements within seven business days after the final agreement and in time to accompany a confirmation requesting payment. Competitive bidding does not eliminate the review requirement.

Disclosure after issuance

Continuing disclosure carries information beyond the initial sale. Before participating in a covered offering, the underwriter must reasonably determine that the issuer or an obligated person has entered a written undertaking for bondholders' benefit. It covers annual financial information and notices of specified events. An obligated person supports payment of the bonds; it may differ from the governmental issuer. Specified event notices generally are due within ten business days of the event, while the undertaking sets the annual reporting deadline.

The Municipal Securities Rulemaking Board, or MSRB, operates Electronic Municipal Market Access, or EMMA, where investors can find official statements and continuing disclosures. A disclosure filing supplies information for evaluation; it does not certify repayment. Remember the sequence: choose the underwriting method, distribute the issue, and continue disclosure after issuance.