What is a negotiated sale?
A negotiated sale is when the issuer and a few buyers negotiate the terms of a transaction (municipal bonds) instead of tender.
Key points to remember
- A negotiated sale is when the issuer and a few buyers negotiate the terms of a transaction (municipal bonds) instead of a tender.
- In a negotiated sale, some of the main points for an issuer to settle are the interest rate, the purchase characteristics and the purchase price of the issue.
- Negotiated sales offer confidentiality, efficiency and do not disrupt operations as much as the bidding process.
Understanding Negotiated Selling
In the fixed income arena, a negotiated sale is a method of offering municipal bondsor similar financial instruments, when the issuing entity and a subscriber negotiate the terms of the issue, rather than having multiple underwriting groups competing on the issue to set the terms. The main advantages of a negotiated sale are:
- provides a layer of privacy not available in competitive bidding
- not as disruptive to operations as a conventional controlled auction process
- the whole process is faster and more efficient
In a negotiated sale, some of the key issues for an issuer are the interest rate, calling features and the purchase price of the show. Selling a new issue of securities in this way is also known as subscription. The main value of a negotiated sale is that, among the limited number of potential buyers, there is usually only one interested party with a high probability of closing the deal. Negotiated sales are generally initiated by:
- logical buyers: entities that would normally be interested in the offer
- brokers: intermediaries who know the potential buyers.
In a negotiated sale, the insurer, selected by the issuing entity before the date of sale, will finance the issue. Lower quality issues generally benefit the most from this type of underwriting technique, as the underwriter works with the company to sell the offering in the market. When the subscriber and the transmitter work together to clearly explain the offer, they will often receive a better market rate for the issuer. Negotiated sales allow more flexibility in when the issue is released so it can be better timed in the market to get the best rate.
Advantages and disadvantages of a negotiated sale
One benefit of a negotiated sale is that it allows the issuer to establish good faith, trust and a relationship with the potential buyer. If the offer meets the purchase price expectations and the issuer’s terms, they don’t have to spend time receiving other offers. In addition, the issuer has no obligation to proceed with the negotiated sale if it does not meet its expectations.
A major disadvantage of negotiated sales is that an issuer’s bargaining power is diminished because buyers know there isn’t much competition. Essentially, a buyer can try to rush the issuer, so it’s up to issuers to make sure they get the best possible price.