Creating a Syndicate

Most municipal issues are sold to raise a substantial amount of money. In order to assist with the marketing of the issue and to spread the risk of underwriting the securities, several investment banks will form a syndicate. The syndicate is a group of underwriters responsible for selling the issue. Firms participating in a syndicate, formed to submit a bid in a competitive underwriting, must sign the syndicate letter or syndicate agreement. The syndicate letter will disclose all fees and expenses including clearing expenses.  Syndicate participants in a negotiated underwriting must sign the syndicate letter or syndicate contract.  The syndicate agreement will contain:

  • Each Members participation in the offering (member’s commitment)
  • Method of Allocating Bonds
  • Name of Managing Underwriter
  • Management Fee and Spread
  • Member Expenses and Amount of Good Faith Deposit
  • Liability for Unsold Bonds
  • Type of Syndicate Account, Eastern or Western

Syndicate Accounts 

Each syndicate member is responsible for selling the bonds that have been allocated to them based on their participation. A syndicate member may also be responsible for selling additional bonds if another syndicate member is unable to sell their entire allocation of bonds. There are two types of syndicate accounts: an eastern account also known as an undivided account, and a western account also known as a divided account. In an eastern account, if any bonds remain unsold, all of the underwriters must assist in selling the remaining bonds in accordance with their commitment level, regardless of which syndicate member was unable to sell them.

Submitting The Syndicate Bid

Syndicate members will engage in a series of meetings in order to determine the terms and conditions of their bid. The syndicate members must determine:

  • The Underwriter’s Spread
  • The Re-Offering Yield
  • The Prices and Yields to be Submitted To the Issuer

If all syndicate members cannot agree unanimously, on one or more conditions, they must agree to accept the decision of the majority of the syndicate members. Only one bid may be submitted for each syndicate and it will be submitted by the lead or managing underwriter.

Determining The Re Offering Yield

The Syndicate must determine the re offering yield that will be offered to the investing public. This is known as writing the scale. Most general obligation municipal bonds are issued with a serial maturity that matures over a period of years. The longer-term maturities carry higher yields than the bonds that mature earlier. When the syndicate has determined the prices and yields, they will submit the bid to the issuer, along with the required good faith deposit. All competitive underwritings are done on a firm commitment basis and the wining syndicate is required to purchase all of the bonds from the issuer, even if they can’t sell them to investors.

Once the syndicate manager has settled with the issuer, the syndicate manager has 2 business days to return the syndicate member’s good faith deposits. The syndicate manager must also:

  • Send a written summary detailing how orders were allocated among members, within 2 business days of the sale date.
  • Register bonds eligible for automated comparison with a registered clearing agency.
  • Provide the clearing agency with the coupon rate and settlement date.
  • Make final settlement of the syndicate account and distribute all profits, within 60 days of the delivery of the securities.
  • Provide all syndicate members with a detailed record of the syndicate account.
  • Ensure that the miscellaneous expenses detailed in the record of the syndicate account are not excessive in relation to other expenses and the size of the offering.

The syndicate manager must also maintain complete books and records relating to all syndicate business. These records include:

  • A description of the securities and the total par value.
  • Syndicate members and their commitment levels.
  • The terms of the syndicate.
  • A list of all orders received.
  • A list of all securities allocated and the price at which they were sold.
  • Settlement date with the issuer.
  • The amount of syndicate member’s good faith deposit and when received.
  • The date the syndicate account was closed out.

 

THE OFFICIAL STATEMENT

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