Competitive Bid vs.
Negotiated Sale
Gary Breaux
Director of Finance
East Bay Municipal Utility District
Don Backstrom
Managing Director
Backstrom McCarley Berry & Co
CALIFORNIA
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Competitive Bid vs. Negotiated Sale I
EBT AND
NVESTMENT
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C OMMISSION
Definition
Competitive Bid
The underwriters bid against each other by submitting
to the issuer on a given day at a given time a sealed
bid to buy the issuer’s bonds. The underwriter that
offers to pay the lowest interest cost for the bonds will
win the competitive sale.
Negotiated Sale
Before the sale, the issuer selects the underwriter(s)
who will work with the issuer on a one-on-one basis.
The issuer and underwriter agree upon a yield level
(interest cost to the issuer) at which the underwriter
will offer the bonds to investors.
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Competitive Bid vs. Negotiated Sale I
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History
Muni Bonds have been issued since the 1800s
1977 Negotiated Bonds sales overtake Competitive Bid
What Happened
1978 Prop 13
New Issuers
New Financial Tools
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Competitive Bid vs. Negotiated Sale I
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California
2005 85% of issuance were sold on a
negotiated basis vs. 15% competitive bid
2005 California Competitive Bid vs. Negotiated Sale California Competitive Bid vs. Negotiated Sale
by Volume
$90,000,000,000
$80,000,000,000
Competitive, $70,000,000,000
$10,040,919,330 , 15%
$60,000,000,000
$50,000,000,000
$40,000,000,000
$30,000,000,000
$20,000,000,000
$10,000,000,000
Negotiated,
$-
$54,765,035,594 , 85% 2003 2004 2005
Source: CDIAC Source: CDIAC Negotiated Competitive
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Competitive Bid vs. Negotiated Sale I
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Debt Structure, Credit Quality
Conditions Favoring a Conditions Favoring a
COMPETITIVE SALE NEGOTIATED SALE
DEBT STRUCTURE
Pledged Revenues General Obligations or Strong Project Supported Revenues
System Revenue
Security Structure Conventional Resolution & Unusual or Weak Covenants
(For Revenue Bonds) Cash Flow Subordinate Debt
Rate Covenant & Coverage
Debt Instrument Traditional Serial & Term, Full Use of Innovative Structuring or
Coupon Bonds Derivative Products
Structured to Attract Particular
Investors (e.g. Discount Bonds)
CREDIT QUALITY
Rating “AA” or Better Below Single “A”
Outlook Stable Weak but Improving
Under Stress
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Competitive Bid vs. Negotiated Sale I
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Issuer Characteristics
Conditions Favoring a Conditions Favoring a
COMPETITIVE SALE NEGOTIATED SALE
ISSUER
CHARACTERISTICS
Type of Organization Broad-Based, General Special Purpose,
Purpose Borrower Independent Authority
Frequency of Issuance Regular Borrower in Public New or Infrequent Issuer
Market
Market Awareness Active Secondary Market Little or No Institutional
with Broad Investor Base Awareness of Issuer
Historical Antipathy
Investor Comfort Well-Known, Stable Issuer Issuer Experiencing
Significant Financial, Legal
or Other Problems
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Competitive Bid vs. Negotiated Sale I
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Market Conditions, Policy Considerations
Conditions Favoring a Conditions Favoring a
COMPETITIVE SALE NEGOTIATED SALE
MARKET
CONDITIONS
Interest Rates Stable, Predictable Market Volatile or Declining Market
Supply and Demand Strong Investor Demand Oversold Market
Good Liquidity Heavy Supply
Light Forward Calendar
POLICY
CONSIDERATIONS
Participation in Limited Need for Broad Market Desire to Direct Business to
Sale of Bonds Participation Small or Regional Firms
Stimulation of Limited Need for Broad Market Desire to Direct Business to
Investor Interest Participation Retail and Local/Regional
Investors
Procurement Process Political Safety Net Use of Prequalified Pool and/or
RFP/RFQ
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Competitive Bid vs. Negotiated Sale I
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Negotiated Calendar
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Competitive Bid vs. Negotiated Sale I
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Competitive Calendar
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