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How Issuers Can Avoid the “Issuer Dead Zone”
February 19, 2019
“The Dead Zone” is an excellent book written by Stephen King that was adapted into a movie in the early 1980’s. During my time on the issuer side, the title of this book (and movie) occurred to me often when I was about to launch a public bond sale.
I’m convinced that I was not alone in thinking of this phrase as a future bond sale goes on the radar screen. I think most issuers in the bond market are explicitly or implicitly aware of the anxious period of time when you know you are about to issue bonds, but no one in the bond market – or at least no one on the buy-side – is aware of the upcoming sale. The POS or NOS is not yet public and bond ratings are not back from the rating agencies’ meaning the underwriter you’ve chosen can’t release a wire announcing the sale. So, what happens? Generally speaking, nothing happens. Nothing. In their own minds, the issuer is on the clock. They start really focusing on market conditions. But no matter the level of preparation, the issuer knows they are taking market risk everyday: the risk is that new-issue supply will build and interest rates will significantly move higher as the financing date approaches.
In talking with other issuers around the country, it’s standard practice for bond sales to be approved internally two or three months (or more) in advance of the actual sale. The public announcement of the sale typically occurs with the release of the POS, however, which in most situations occurs only about a week prior to the sale.
Issuers always have flexibility to move dates around for a future financing, but in reality they are actually pretty limited. Too many steps have to occur in sequence on the issuer side – like lining up a bond counsel, preparing a POS, updating disclosure, etc. – that makes it difficult to indiscriminately move a sale date around on the calendar. Generally, when a decision to issue bonds has been made, issuers target a certain week on the calendar when they are expecting to price. The sale might slide sooner or later by a week, but typically not by more. Another consideration that also could bind issuers: often-times bonds are issued to reimburse the government for capital spending that has already occurred. This means that bond proceeds are really needed. For all of these reasons, issuers can be locked in to their sale dates months in advance of the sale.
You are locked in as the issuer, taking market risk every day, yet it’s too early for the underwriting team to market the bonds. This period is the Issuer Dead Zone.
Based on feedback from bond investors, however, it’s also a missed opportunity to stand out as an issuer. Consider the average weekly volume of bonds sold (by par) in the primary and number of transactions over the last five years: over $7.5 billion in 226 different transactions per week. It’s a firehose of bond sale activity. The solution is to market your own bond sale.
Issuers can avoid the so-called Dead Zone by announcing their own bond sale via press release and on their investor website as soon as the bond sale is authorized. Even if the exact dates or even the exact week of the sale has not yet been identified, issuers can signal to the market that they expect to issue bonds in a future month or in a future fiscal quarter (with a caveat like ‘subject to change’). By announcing the sale publicly and well in advance, an issuer raises awareness of the sale for both traditional and non-traditional investors including local buyers. Non-traditional investors who are not plugged into the muni bond market calendar need to be aware of the sale and they need more time to prepare in order to make a decision to place an order for bonds.
For traditional investors, early announcement of the bond sale gives the credit analyst covering the issuer more time to dig into the details in order to complete a full evaluation. The more details he or she has as an analyst, the more comfortable they are in the credit (whether the story is good or bad). Comfort leads to larger and better orders in the primary market, and enhanced liquidity for similar bonds that may be available in the secondary market. For the portfolio manager, the early awareness of the bond sale allows them to prepare their portfolio – like freeing up cash – for the new-issue bonds.
For issuers, the best practice is this: don’t hide the ball. In fact, do the opposite and let the market know well in advance of the sale. Announcing the upcoming sale a week in advance with the release of a POS is not optimal for your investors. It’s your bond sale and you are responsible for the outcome: so avoid the Dead Zone and market the bonds yourself.
By the way, this is also point #6 on the list of 10 Muni IR Fundamentals – Communicate Your Bond sale. We’ll have more to say on this topic soon.