Negotiated Sale

What is Negotiated Sale?

A negotiated sale is when the issuer and a few buyers negotiate the terms of a transaction (municipal bonds) in lieu of competitive bidding.

Key Takeaways

  • A negotiated sale is when the issuer and a few buyers negotiate the terms of a transaction (municipal bonds) in lieu of competitive bidding.
  • In a negotiated sale, some of the primary points to work out for an issuer are the interest rate, call features and purchase price of the issue.
  • Negotiated sales offer confidentiality, efficiency, and are not as disruptive to operations as compared with the competitive bidding process.

Understanding Negotiated Sale

In the fixed-income arena, a negotiated sale is a method of offering municipal bonds, or similar financial instruments, where the issuing entity and a selected underwriter negotiate the terms of the issue, as opposed to having multiple underwriting groups competitively bidding on the issue to establish its terms. The main benefits of a negotiated sale are:

  • offers a layer of confidentiality that is not available in competitive bidding
  • not as disruptive to operations as a conventional controlled auction process
  • entire process is faster and more efficient ​​​​​​​

In a negotiated sale, some of the primary points to work out for an issuer are the interest rate, call features and purchase price of the issue. The sale of a new issue of securities in this manner is also known as a negotiated underwriting. The primary value of a negotiated sale is that, of the limited pool potential buyers, there is usually only one interested party with a high probability of consummating the deal. Negotiated sales are usually initiated by:

  • logical buyers: entities that would normally be interested in the offering
  • brokers: intermediaries who know potential buyers.

In a negotiated sale, the underwriter, selected by the issuing entity before the sale date, will perform the financing for the issue. Lower quality issues generally reap the most significant benefit from this type of underwriting technique as the underwriter works with the company to sell the offering to the marketplace. When the underwriter and the issuer work together to explain the offer clearly, they will often receive a better rate in the market for the issuer. Negotiated sales allow for greater flexibility as to when the issue is released so that it can be better timed in the market to get the best rate.

Pros and Cons of a Negotiated Sale

An advantage of a negotiated sale is that it allows the issuer to build good faith, trust and a relationship with the potential buyer. If the offer meets the purchase price expectations and terms of the issuer, they don't have to spend time entertaining other offers. Additionally, the issuer is under no obligation to proceed with the negotiated sale if it does not meet their expectations.

A major disadvantage of negotiated sales is that an issuer's negotiating power is diminished as the buyers know that there isn't much in the way of competition. Essentially, a buyer may try squeeze the issuer, which is why it is is incumbent upon issuers to make sure they are getting the best possible price.

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