3.1.3. Negotiated Sale Authorization
Negotiated sales are usually (but not always) associated with revenue bonds. Revenue bonds generally do not require a public vote of approval, so it is often unnecessary to demonstrate through a competitive bidding process that they are being sold at the lowest possible cost.
The issuer of a revenue bond, therefore, may select an underwriter earlier in the process through a negotiated sale. With a negotiated sale, an underwriter may even be selected before the bond issue has been structured.
As mentioned before, the MSRB doesn’t allow a firm to act as both financial advisor and underwriter for the same bond issue. But an underwriter chosen through a negotiated sale is often involved early enough that its advice can influence decisions and evaluations that are normally part of the financial advisor’s role. An underwriter in this situation must be careful not to cross the line between underwriter and financial advisor. The MSRB allows the underwriter to provide advice about the issue’s “structure, timing, terms and other similar matters” in a manner consistent with “an arm’s-length relationship with the issuer.”
The issuer will choose an underwriter based on the underwriter’s reputation, which usually reflects its knowledge of the market, financial resources, and experience.
When the state or municipality has no specific laws in place regarding when to use a negotiated sale, the GFOA recommends negotiated sales for the following types of bonds:
- • Bonds rated below A
- • Bonds that cannot be insured or for which insurance is not cost-effective
- • Bonds whose structure contains features like variable-rate debt or deferred interest
Since in a negotiated sale the underwriter is involved in the preparation of the issue, it will often employ its own legal counsel, known as the underwriter’s counsel. The underwriter’s counsel performs a due diligence review of the issue