Underwriting, Sales and Feasibility Analysis
Underwriting
Competitive vs. negotiated
In a competitive sale the issuer publishes a notice of sale, fixes the structure, and awards the issue to the syndicate submitting the lowest cost bid, backed by a good faith deposit (typically 1–2% of par, applied to the purchase price). In a negotiated sale the underwriter is selected in advance, assists with structuring and marketing, and buys under a bond purchase agreement, often after a retail order period. Both paths require a bond counsel opinion and an official statement.
Two bid measures matter. Net interest cost (NIC) is a simple average that ignores the time value of money. True interest cost (TIC) solves for the discount rate that equates the bid's cash flows and is the more accurate measure of the issuer's cost. Many issuers award on lowest TIC.
Syndicate mechanics
The syndicate manager runs the account under an agreement among underwriters; the syndicate letter sets participation. Gross spread = management fee + underwriting fee + selling concession. The takedown is the member's discount from the public offering price; reallowance is the part of the concession passed to non-member dealers. Group net orders earn no takedown. In a western (divided) account each member is liable only for its own allotment; in an eastern (undivided) account members share unsold bonds proportionally.
Rule G-11 governs syndicate practices, including priority of orders - customer orders cannot jump ahead of syndicate orders.
Trap: NIC is not "better" because it is simple or lower; TIC is the accuracy standard. The good faith deposit is not extra compensation to the issuer.
Worked example: Bid A shows lower NIC but higher TIC than Bid B; on a TIC basis the award goes to B.
Sales and Feasibility Analysis
Selling: suitability and disclosure
Rule G-19 requires reasonable grounds to believe a recommendation suits the customer given financial situation, tax status, investment objectives, liquidity needs and risk tolerance - which means the representative must understand the security: call features, credit support, tax status, maturity and yield. Rule G-30 requires fair and reasonable compensation; Rule G-34 requires disclosure of material facts at or before the trade, including callability; confirmations must show price, yield, capacity and compensation.
Feasibility analysis
Revenue bond feasibility asks whether pledged revenues will cover debt service. Core tools:
- Flow of funds: revenues → operations and maintenance → debt service → reserve → renewal and replacement → surplus.
- Rate covenant: the issuer's promise to set rates producing a coverage level, commonly 1.20x–1.25x.
- Additional bonds test: no new parity debt unless historical or projected coverage meets a threshold, protecting existing holders.
- Debt service reserve fund: often funded at average or maximum annual debt service.
Analysts also weigh the engineering/feasibility report, demand and market studies, offtake contracts, construction risk, permitting, competition and management. For GO credits, look at assessed and full valuation, overlapping debt, debt per capita, collection rates and taxpayer concentration.
Rule of thumb / worked example: coverage = net revenues available for debt service ÷ annual debt service. Net revenues of $1.5 million against $1.2 million of debt service gives 1.25x - at a typical covenant.
Trap: coverage is computed on net revenues, after operating expenses, not gross. A moral obligation pledge is not a legal obligation of the state.