Issuers have various ways they can raise capital. The two primary options for accessing funding includes a public offering by an investor or a private placement at a financial institution. Each of these options has distinct advantages or disadvantages that may affect funding costs and/or the timing of a bond issue.
In a public offering, the issuer publicizes the upcoming bond issue, provides the timeframe and platform for which bids will be accepted, and provides any additional guidelines or details related to the bond issue. Generally, the winning bidder(s) is the one who has offered the lowest total interest costs, including all costs of issuance and underwriter fees. The two methods by which an issuer can sell bonds to the public are a negotiated sale and a competitive sale.
In a competitive sale, the upcoming bond issue is advertised for sale. The advertisement, or notice of sale, includes the terms of the sale and the terms of the bond issue. Any investor, whether it is a broker-dealer, bank, or individual investor, may bid on the bonds at the designated date and time.
This method of sale is known as “negotiate” because the terms of the bonds and the terms of the sale are negotiated by the issuer and the bond purchaser. If the issuer does not have the knowledge or experience to effectively negotiate bond terms, an independent municipal advisor can serve as a third party negotiator.
In a negotiated sale, an issuer or municipal advisor has preliminary discussions with one or more underwriters to determine which underwriter will offer the best terms. Early on in this process, an underwriter will typically talk to investors to get a measure of the level of interest before establishing the final bond pricing. Terms of the bonds are then tailored to meet market demand for the bonds, as well as the needs of the issuer. Once these details have been examined, the issuer selects an underwriter to purchase the bonds. The underwriter, in turn, sells the bonds to investors.
Private placement provides funding through direct negotiation with one or a select number of private financial institutions. The private financial institution is effectively providing a loan to the issuer that must be repaid over time. In general, private placements do not have to be registered with the Securities and Exchange Commission and do not require many of the disclosure requirements found in public offerings. As such, private placement bonds are not publicly issued or publicly traded and typically do not require a rating from a credit rating agency.