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Six Questions to Ask Before Your Bond Sale
October 5, 2020
Move forward with your bond sale only after answering these questions.
Despite rates being low in the municipal bond market, issuing bonds can be a large challenge for many finance officers. For example, the typical finance director or CFO has to devote the majority of their time and effort to operational needs, like developing budgets, collecting tax revenues, or completing annual audits. A bond sale is a once-per-year event, or even less frequent than that, depending on the size of a government’s capital needs.
So, when it becomes time to sell bonds, finance officers have to quickly change gears and prepare for a whole series of steps leading up to a financing: talking to the rating agencies, developing the bond structure, and preparing a preliminary official statement. Making the bond sale even more challenging is the fact that these financings usually involve large sums of public dollars and occur very quickly – usually completed in a few hours on the day of sale.
In order to be better prepared during this busy period, here are the six questions every issuer should ask their advisor and/or banker:
- How much time do we have to raise investor awareness for the bond sale? Issuers typically know they’ll be issuing bonds months in advance; a bond sale is often discussed or approved publicly by a state board or city council. Issuers should maximize the pre-sale period by alerting the market that bonds are coming. A POS is the typical signal to the market – but it’s usually put together and released very close to the sale, leaving bond investors with little time to prepare. Instead, issuers could publish a press release or post a tentative date on their event calendars or MSRB’s EMMA website. This offers investors enough time to research your offering, understand how it can fit into their current investment strategy, and make a confident purchasing decision.
- How do we alert our current bondholders? The best buyer of your new bonds might be the holder of your old bonds. After providing broad notice to the bond market, issuers should consider working with their advisor to identify as many existing bondholders as possible, and make sure they’re aware of the upcoming sale.
- Who doesn’t own my bonds but should? Asking this question triggers a focus on institutional investors who are either underinvested or not invested in your bonds. It may be a good idea to work with your advisor or banker to compare your current investor base to the investor base of similar or peer issuers.
- How do we get non-traditional investors, like local investors, interested? Alerting local investors might be as simple as a press release, a news story in the local media, or the mayor mentioning it at a chamber of commerce speech. These may not be the biggest buyers of your bonds in the next bond sale, but there’s no downside in my opinion and more transparency around bond sales should always be the default. If you sell negotiated bonds, work with your advisor on developing rules around a retail order period or retail preference for your bonds.
- How do we know the bond structure we developed – the maturities, the coupons, etc. – are what bond investors want right now? All issuers have some sort of restrictions on how their bonds are structured, but most also have a fair amount of flexibility. Instead of guessing what investors might prefer, find ways to get feedback from investors with your advisor or banker. You may get actionable feedback, and I don’t think there’s downside to these efforts that discover where the strongest investor demand resides.
- What can we do before the sale to signal to investors that we’ll be transparent with them after the sale? Every issuer puts their best foot forward when it’s time to sell bonds – kind of like getting dressed up for the prom. Documents are in order, you’re being super transparent, etc. But investors have hundreds of options each week. If you are looking for ways to stand out in a crowded market, work with your finance team to signal your ongoing commitment to transparency to investors after the bonds are issued. Whoever buys the bonds today are going to have to maintain credit surveillance on those bonds for years to come. Make it an easier decision for them today based on your investor transparency program.
I believe the pre-sale process really impacts the ultimate success of a financing, and these are just a few ideas that come to mind as a former issuer. Asking these questions to your finance team can uncover some opportunities that pay meaningful dividends over the long-term.