Issuing Municipal Securities

Prior to issuing any bonds, a municipal issuer must authorize the issuance of the bonds through a bond resolution and obtain a preliminary legal opinion. The bond resolution authorizes the sale of the bonds and describes the issuer’s obligations to the bondholders. The preliminary legal opinion helps to determine how the bonds may be offered.

Selecting an Underwriter

Municipal officials cannot effectively tend to their duties and try to find investors to purchase the municipality’s debt. As a result, municipal issuers will select an underwriter or a syndicate of underwriters to sell the bonds for them. There are two ways that the issuer may select an underwriter. An underwriter may be selected either through a negotiation with the issuer or through a competitive bidding process. Most revenue bonds are awarded to the underwriter through negotiation. In a negotiated underwriting, the issuer will select the underwriter and negotiate the best terms directly with them. Most general obligation bonds are awarded through competitive bidding. In competitive bidding the issuer will invite underwriters to bid on the terms of the issue by publishing an official notice of sale in the Daily Bond Buyer. The underwriter or syndicate, submitting the bid with the lowest net interest cost, or NIC, to the issuer, will be awarded the issue.

The official notice of sale will include:

  • Description of the Issuer
  • Description of the Issue
  • Dated Date
  • Maturity Structure
  • Date and Place of Sale. Including The Time of Sale
  • Denomination of Bonds
  • Call or Put Provisions
  • Sealed Bid or Other Bidding Provisions
  • Amount of Good Faith Deposit Required to Accompany all Bids
  • Name of bond Council
  • Paying Agent and Trustee
  • Expenses Allocated to issuer or purchaser
  • Terms of Delivery
  • Criteria for Awarding The Issue
  • Right of Rejection

Interested parties will submit bids based on their ability to market the bonds on behalf of the issuer.  The underwriter is trying to provide the issuer with a competitive rate on their bonds while still being able to earn a profit by selling the bonds to investors.

The official notice of sale does not include:

  • The Yield to Maturity or YTM
  • The Bond’s Rating
  • The Name of the Underwriter
  • The Amount of Accrued Interest

The municipal issuer prepares a bond contract for the benefit of the underwriter and issuer. The bonds contract includes:

  • Bond Resolution
  • Trust Indenture (If any)
  • Applicable State and Federal Laws
  • Any Other documentation regarding the issuer

These documents make up the bond contract and the issuer is required to adhere to all of the terms and conditions laid out in the various documents.

 

CREATING A SYNDICATE

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