Issue Price: Notes from the Field
The Hold the Offering Price Rule
1. Some issuers are taking the position that they will never use the hold the offering price rule.
Issuers taking this position likely fall into one of two categories. The first category: those issuers that usually sell their bond issues in a competitive sale meeting the applicable requirements, which allows the issuer to use the initial offering price as the issue price. The second category: those that expect that they will find sufficient buyers for even their “dog” maturities, so that they will always meet the 10% test for all maturities of their negotiated deals. We can see the benefit of this strategy. Underwriters facing the possibility that they will have to hold the offering price for up to five days and risk the market moving away from them during that time might adjust their price to force issuers to pay a penalty in the form of a lower price. An issuer forswearing the hold the offering price rule avoids the possibility of this penalty. However, this strategy might present problems in a situation where neither the private placement, competitive sale, nor 10% test sets the issue price for a maturity and the issuer needs to know the issue price on the sale date or well before the issue date (for example, in an advance refunding).
2. Other issuers are taking the opposite position – insisting on the hold the offering price rule in all cases.
The benefit of this strategy is providing – potentially at a cost – certainty about issue price. These issuers have made a tradeoff, believing that the potential downward pressure on the prices of their bonds is outweighed by the benefit of knowing issue price on the sale date. In addition, this planning certainty blossoms into real economic benefit where it allows an issuer to avoid the negative economic consequences of (in brighter times) an advance refunding no longer in compliance with yield restriction, or a cancelled sale, or delay because an issuer needs to go get more volume cap, etc. However, in cases where the issue price is not a sensitive topic, such as a new money governmental bond issue that is not bank qualified where an issuer expects to spend all the proceeds quickly, the additional certainty provided by the hold the offering price rule might not be worth it.
3. Some underwriters are retaining and not allocating unsold allotments of maturities that are subject to the hold the offering price rule.
One strategy that some underwriters are using to address the prospect of wrangling big syndicates to ensure that all syndicate members abide the hold the offering price rule is the following. A lead underwriter can retain any unsold allotments of maturities that do not meet the 10% test. This way, the lead underwriter need only police itself – so long as it holds the offering price for these maturities until 5 business days or sales of 10% at a particular price.
4. Some underwriters do not see much of a price effect from the hold the offering price rule and would rather use this rule than report sale prices to the issuer, potentially beyond the issuance date.
The premise of points 1 and 2 above, and the premise of much of the speculation about how the new issue price regulations were likely to shape behaviors in the muni finance world, was that underwriters would price in the risk that the market would move away from them while holding bonds during the hold the offering price period. However, reality is always more complicated, and it seems that some underwriters prefer holding the price rather than agreeing to report sale prices to alert the issuer as to when and whether the 10% test has been met, which is what the SIFMA model documents would require.
The hold the offering price rule allows the issuer to use the initial offering price as the issue price for any maturity to which the hold the offering price rule is applied, so the issuer might technically be indifferent to the actual sale prices. Note, however, that because an issuer can choose up until the issue date whether to use the hold the offering price rule or the 10% test, the reporting of sale prices would still be of some benefit to the issuer. For example, if an underwriter held the offering price of a maturity and then the first price at which 10% of that maturity sold to the public was lower than the initial offering price (meaning that the 10% test dictated a lower price and correspondingly higher permitted investment yield than the hold the offering price rule), the issuer might want to choose to use the lower price. But, if the issuer is not receiving up to date pricing information, it wouldn’t have the information needed to capitalize on this opportunity.
5. Reluctance to certify about the reputation of bidders.
An issuer that sells a maturity in a qualified competitive sale can use the reasonably expected initial offering price to the public as the issue price of that maturity. One of the requirements for a competitive sale is that the issuer must receive bids from “at least three underwriters of municipal bonds who have established industry reputations for underwriting new issuances of municipal bonds.” To document that the bidder has an established industry reputation, someone must certify that fact to the issuer and bond counsel. For issuers that have a municipal advisor, some are experiencing resistance from their municipal advisors to making a representation as to the reputation of bidders.
6. Electronic bidding software is still being adjusted to reflect new competitive sale requirements.
These representations should also come from the underwriters who bid to buy the bonds, similar to the way that bidders to provide investment securities for an advance refunding escrow provide these representations when bidding so that the bidding process will satisfy the safe harbor that allows the issuer to conclude that the escrow was bid at fair market value. Underwriters who bid to purchase bonds in a competitive sale typically use an online bidding system that could be configured to facilitate underwriters making the representations that are necessary to conclude that the sale is a qualifying competitive sale, but there are apparently still several kinks to be worked out.