Geopolitical risks and the municipal bond investment opportunities (Part 5 of 10)
Municipal bond issuance in terms of negotiated sales and private placements
In the last section, we discussed issuance in terms of competitive bids and the competitive bid process. In this section, we will discuss municipal bond issuance in terms of negotiated sales and private placements.
Issuance through negotiated sales
Municipal bond (BABS) issuance through negotiated sales declined in Q1 2014 compared to Q1 2013, slumping by 25% to $46.1 billion. In a negotiated sale, the state or local government issuer, invites Request for Proposals (or RFPs) from selected underwriters, for example, investment banks like Goldman Sachs (GS) and J.P. Morgan (JPM).
An RFP is basically a document prepared by the bidding underwriting firm mentioning details about their industry credentials and how they would go about underwriting the debt issue under consideration, if selected as the debt underwriter. If selected, the underwriter has the exclusive right to purchase and market the debt issue. Sometimes the issuing entity may ask that joint RFPs be submitted, via a consortium of underwriters. While the purchase price of the bonds would be agreed-upon at the time of issue, sale prices to investors are usually preliminary and the underwriter may revise the sale price right up to the date of the issue.
A $3.5 billion Puerto Rico debt issue sets new high-yield muni offering record
The largest negotiated sale offering during the first quarter of 2014, was the record $3.5 billion tax-exempt, General Obligation (or GO) bonds issued by the Commonwealth of Puerto Rico. The issue was underwritten by Barclays Capital. Puerto Rico had its debt downgraded to junk in February 2014, plans to use the proceeds from the debt sale to finance its budget deficit and refinance its debt. The $3.5 billion bonds carry a coupon of 8% and will mature in July 2035. The bond issue was priced to yield ~8.73% at the time of the offer.
Insured debt protects investors from default risk
ETFs with exposure to older issues of Puerto Rico debt include the PowerShares Insured National Municipal Bond Portfolio (PZA). Puerto Rico Commonwealth Public Impt 5% is the top holding in PZA at 5.69% of assets. Unlike most debt issued by the island of Puerto Rico, the issue is insured which should protect investors.
For more on the Puerto Rico debt downgrade, read A Puerto Rican default: Its effect on the municipal bond market.
Private placements are direct sales by the issuer to the investor without using the services of the underwriter. Instead, placement agents may be used to market the issue to potential investors. Unlike underwriters, these agents will not purchase the remaining unsold portion of the debt issue. Sometimes, issuers place bonds directly with investors. These sales are termed direct sales. Private placements volume in Q1 2014 came in at $2.2 billion compared to $3 billion in the comparable period last year, following the generally lower issuance trend seen this year.
To read about other issuance trends in the municipal bond market in Q1 2014, move on to Part 6.
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