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Understanding Municipal Bond Underwriting

A Primer for Physician Investors

By Dr. David Edward Marcinko MBA CMP™


While the underwriting procedures for corporate bonds are almost identical to corporate stock, there are significant differences in the underwriting of municipal securities. Municipal securities – hospitals for example – are exempt from the registration filing requirements or the Securities Act of 1933. A state or local government, in the issuance of municipal securities, is not required to register the offering with the SEC, so there is no filing of a registration statement and there is no prospectus which would otherwise have to be given to investors.

Municipal Underwriting

There are two main methods of financing when it comes to municipal securities. One method is known as negotiated. In the case of a negotiated sale, the municipality looking to borrow money would approach an investment bank and negotiate the terms of the offering directly with the firm. This is really not very different from the equity process.

Competitive Bidding

The other type of municipal underwriting is known as competitive bidding. Under the terms of competitive bidding, an issuer announces that it wishes to borrow money and is looking for syndicates to submit competitive bids. The issue will then be sold to the syndicate which submits the best bid, resulting in the municipality having the lowest net interest cost (lowest expense to the issuer).

If the issue is to be done by a competitive bid, the municipality will use a Notice of Sale to announce that fact. The notice of sale will generally include most or all of the following information.

  • Date, time, and place. This does not mean when the bonds will be sold to the public, but when the issue will be awarded (sold) to the syndicate issuing the bid.
  • Description of the issue and the manner in which the bid is to be made (sealed bid or oral).
  • Type of bond (general obligation, revenue, etc.)
  • Semi-annual interest payment dates and the denominations in which the bonds will be printed.
  • Amount of good faith deposit required, if any.
  • Name of the law firm providing the legal opinion and where to acquire a bid form.
  • The basis upon which the bid will be awarded, generally the lowest net interest cost.

The Bond Attorney

Since municipal securities are not registered with the SEC, the municipality must hire a law firm in order to make sure that they are issuing the securities in compliance with all state, local and federal laws. This is known as the bond attorney, or independent bond counsel. Some functions are included below:

  1. Establishes the exemption from federal income tax by verifying requirements for the exemption.
  2. Determines proper authority for the bond issuance.
  3. Identifies and monitors proper issuance procedures.
  4. Examines the physical bond certificates to make sure that they are proper
  5. Issues the debt and a legal opinion, since municipal bonds are the only securities that require an opinion.
  6. Does not prepare the official statement.

When medical or other investors purchase new issue municipal securities from syndicate or selling group members, there is no prospectus to be delivered to investors, but there is a document which is provided to purchasers very similar in nature to a prospectus. It is known as an Official Statement. The Official Statement contains all of the information an investor needs to make a prudent decision regarding a proposed municipal bond purchase.

Underwriting Syndicate

The formation of a municipal underwriting syndicate is very similar to that for a corporate issue. When there is a negotiated underwriting, an Agreement Among Underwriters (AAU) is used. When the issue is competitive bid, the agreement is known as a Syndicate Letter. In the syndicate letter, the managing underwriter details all of the underwriting agreements among members of the syndicate. Eastern (undivided) and Western (divided) accounts are also used, but there are several different types of orders in a municipal underwriting.

Order Types

The traditional types of orders, in priority order, are:

  • Pre-Sale Order: Made before the syndicate actually offers the bonds. They have first priority over any other order turned in.
  • Syndicate (group net) Order: Made once the offering is under way at the public offering price. The purchase is credited to each syndicate member in proportion to its allotment. An institutional buyer will frequently purchase” group net”, since many of the firms in the syndicate may consider this buyer to be their client and he wishes to please all of them.
  • Designated Order: Sales to medical investors (usually healthcare institutions) at the public offering price where the investor designates which member or members of the syndicate are to be given credit.
  • Member Orders: Purchased by members of the syndicate at the take-down price (spread). The syndicate member keeps the full take-down if the bonds are sold to investors, or earns the take-down less the concession if the sale is made to a member of the selling group. Should the offering be over-subscribed, and the demand for the new bonds exceeds the supply, the first orders to be filled are the pre-sale orders. Those are followed by the syndicate (sometimes called group net) orders, the designated orders, and the last orders filled are the member’s.


Finally, be aware that the term bond scale is a listing of coupon rates, maturity dates, and yield or price at which the syndicate is re-offering the bonds to the public. The scale is usually found in the center of a tombstone ad and on the front cover of the official statement. One of the reasons why the word “scale” is used – is that like the scale on a piano – it normally goes up. A regular or positive scale is one in which the yield to maturity is lowest on the near term maturities and highest on the long term maturities. This is also known as a positive yield curve, since the longer the maturity, the higher the yield. In times of very tight money, such as in 1980-81, one might find a bond offering with a negative scale. A negative (sometimes called inverted) scale is just the opposite of a positive one, with, yields on the short term maturities are higher than those on the long term maturities.



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One Response

  1. Obama May Limit Tax Breaks On Muni Bonds

    Did you know that President Barack Obama just proposed curbing the amount of interest from municipal bonds that top earners [including some doctors and FAs] can exclude from their taxable income – a step that may diminish demand for state and local-government securities?




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