A public sale is the process of selling securities to the community in general (public). Public buyers include investment banks, retail buyers, bond funds, and private equity firms.
The two common methods for a public sale of fixed-income securities are a negotiated sale and a competitive sale. In a negotiated sale, the bond’s issuer negotiates the terms of a bond sale with a few buyers. In a competitive sale, the issuer advertises the bonds for sale. Any public buyer may submit a bid. Typically, the winning bid is the one with the lowest interest cost.
In the case of a negotiated sale…
A municipal advisor appoints an investment bank or group of investment banks as underwriters for the public sale. The bank’s underwriters inform potential bond buyers of the date of sale, maturity dates, and face amounts of the bonds, the coupons, and the yields.
Potential buyers have a limited period to let the investment bank know if they’d like to submit orders. At the end of the period, the investment bank selects the buyer or buyers. Typically, the delivery date of the financial instruments is 7 to 14 days after the sale date.
In the case of a competitive sale…
A municipal advisor advertises the public sale of the bonds on a specific sale date. The municipal advisor also sets the maturity dates and face amounts of the bonds, and the coupons.
Investment banks and other potential buyers submit bids on the yields based on market conditions, and determine the price they’re willing to pay for the bonds.
The municipal advisor selects the bid with the highest price that a buyer is willing to pay. The winning buyer (or buyers) usually receives the securities 7 to 14 days after the sale date.
The City and County of San Francisco sold $80,715,000 in general obligation bonds for Earthquake Safety and Emergency Response, 2020 Series 2021B-1 and 2021B-2.
First, the government agency advertised the competitive sale on March 8, 2021. The sale date of the bond was March 16, 2021.
Hilltop Securities won the bid for the 2021B-1 bonds and Wells Fargo Bank, National Association won the bid for the 2021B-2 bonds. By using a competitive sale, the City and County of San Francisco were able to sell both bond series at a premium.
What’s important here?
When looking for funding through a public sale of bonds, bond issuers, such as municipalities, have options. Each type of public sale has its pros and cons.
The major benefit of a competitive sale is that you can bring multiple bidders to the table who will compete against each other to purchase the bonds, which can lead to a lower interest rate and/or better terms for the issuer.
However, sometimes an issuer may believe that a competitive sale won’t be successful for some reason. For example, they may feel there won’t be enough interest in their offering. In this case, approaching potential buyers for a negotiated sale can make more sense.