What is a Negotiated Sale
A negotiated sale is a method of offering municipal bonds or similar financial instruments in which 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. Because it is more discreet, a negotiated sale is not as disruptive to operations as a conventional controlled auction process.
BREAKING DOWN Negotiated Sale
In a negotiated sale, some of the primary points of negotiation 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. A negotiated sale is a process that usually only involves a limited number of potential buyers, and often includes one interested party with a high probability to close the transaction. The benefits of a negotiated sale are confidential, efficiency, and the speed of the sales process. Negotiated sales usually come about from unsolicited offers by logical buyers or are initiated by investment bankers who already have a relationship with potential buyers and see an immediate fit with a company for sale.
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 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’
One 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, and moving ahead with the negotiated sale does not preclude the issuer from declining the deal if the proposal does not make sense.
That said, the issuer will have less negotiating power because the buyer knows they have no competition from other buyers, which can lead to the buyer lowering the price later in the negotiation process. Because there are no competitive offers, it is incumbent upon issuers to make sure they are getting the best possible price.