More competitive bids lead to better prices for issuers in the primary market
Over the past ten years, the average number of competitive bids increased — regardless of the size of the issuance or population size of the issuer’s state or locality — improving the issuer’s price in the primary market, the Municipal Securities Rulemaking Board said in a report released Monday.
The average number of competitive bids gradually increased to an average of 5.7 competitive bids per issuance in the first half of 2019 from an average of 4.4 competitive bids per issuance in 2009, MSRB Chief Economist Simon Wu wrote in the report.
“Given the scant research on this matter to date, we aimed to explore if higher numbers of competitive bids lead to better pricing terms for issuers,” Wu said in a press release. “Our findings confirmed our expectations. We found that as competitive bidding activity increased, the primary offering spread of the winning bidder declined. In other words, the more competitive bids an issuer received during the primary offering process, the more favorable their selling price and yield cost tended to be.”
More than 90% of the reported muni bond primary offerings were either competitive or negotiated offerings in recent years, Wu wrote in the report.
Wu also presented his findings at the virtual Brookings Institutions Annual Municipal Finance Conference Monday.
The finding of better prices, he said, "holds regardless of the size of an issuance, the population of the state where the issuance originated ... or the per capita income level of an issuance origination state.”
Competitive offerings in states with the largest population or highest per capital income did not necessarily receive more bids than competitive offerings in states with the smallest population or the lowest per capita income, according to the report.
In the first half of 2019, small population states had an average of 6.2 competitive bids, while large population states during that same time had an average of 5.6 competitive bids.
The winning bidder’s primary offering decreased as bids rose. "Therefore, all things being equal, soliciting more competitive bids would indeed improve an issuer’s selling price and reduce the yield cost for the issuer," the report said.
The price competitiveness of bids improved over the past 10 years. Median spreads between winning bid and the second-highest bid as well as the winning bid and lowest bid decreased from January 2009 to June 2019.
In the first half of 2019, the median spread between winning bids and lowest bids was 0.183 down from 0.383 in 2009.
Increased transparency in the municipal market, Wu said, explains this.
“Ten years ago, prices would be all over the place compared to now, and now they tend to be more clustered,” Wu said. “That interested me because we’re finding similar things in the secondary market, as in the request for bids is higher now. I believe the reason is that there is more transparency in the market and people are getting more information, so, therefore, perhaps they are getting more precise on how to value the bond.”
Issuers that worked with a municipal advisor also tended to have more bids, Wu said. Complex issuances do not attract as many bids as more straightforward deals.
“That makes sense, because when the bonds get too complex or complicated, it will take more effort to market the bonds and for them to resell, and [underwriters] can charge a higher spread on that,” Wu said.
Though the coronavirus pandemic was not part of the relevant period, Wu said, during March and April, there was less bidding activity in the secondary market and said it would make sense for there to also be less bidding in the primary market as well.