WASHINGTON – The Government Finance Officers Association notified its members in an Alert on Friday that the new issue price rules will change the bond offering process as of June 7 and urged them to consult with their finance team to understand how the changes will impact their bond sales.
“Issuers should be aware that various industry groups have created model documents to implement the regulations, some more favorable to issuers, than others,” GFOA said. “The terms in the Notice of Sale, the Bond Purchase Agreement and other documents should be discussed with the finance team, including bond counsel.”
The Alert describes the importance of issue price for tax-exempt bonds. The issue price “determines the arbitrage yield restriction for rebate compliance purposes” as well as “the maximum allowable escrow yield for advance refunding bonds,” the group said.
“Issuers should consult counsel on the application of the issue price when determining other financing conditions, such as whether an issuer has exceeded threshold limits where there are volume caps required for certain private activity bonds, or for determining the cost of issuance limit or bank-qualified or voter-authorized debt,” GFOA said in the Alert. Some lawyers said they have used issue price in the past to determine these factors, but that the new issue price rules do not address them.
The Alert also describes the new rules, which were finalized by the Treasury Department and Internal Revenue Service late last year. In the past issue price was based on reasonable expectations. The new rules say that issue price is based on bonds actually sold. Generally the rules say that the issue price is the price at which the first 10% of a maturity of bonds is actually sold to the public. If 10% of a maturity is not sold, the issue price is the initial offering price as long as underwriters hold the IOP for five business days after the sale date or until 10% of the maturity is sold, if sooner. For private placements, the issue price is the price paid by the buyer.
The rules contain an exemption for competitive sales under which an issuer can treat the reasonably expected IOP of the bonds to be the issue price if the issuer obtains a certification from the winning underwriter as to the reasonably expected IOP upon which it based its bid. But this exemption is conditioned on, among other things, the issuer receiving at least three bids from separate underwriters and awarding the bonds to the bidder who offers the highest price or lowest interest cost.
The Alert said that the Bond Purchase Agreement for a negotiated sale should reflect actual sales on the sale date and may include reporting requirements if 10% of bonds in a maturity are not sold on the sale date. “Expectations of the entire underwriting syndicate should be reflected in the sale and bond purchase documents,” GFOA wrote in the alert.
The Alert also described four possible options for competitive sales of bonds and the Notices of Sale that would accompany each of them. In one, the issuer would agree in the Notice of Sale to wait until 10% of each maturity is sold for the issue price to be determined. In another, the issuer would state that underwriters will be required to “hold the price” for five business days after the sale date or whenever 10% of a maturity is sold. “This option is likely to negative impact the pricing of the bonds,” GFOA said. Under a third option, the issuer would state that underwriters would be required to hold-the-price for up to five business days, but that the winning underwriter can elect to withdraw its bid for the bonds. In a fourth option, the issuer can state that if three bids for the bonds are not obtained, it can reschedule the sale date or consider selling the bonds through a different process.
“Issuers should analyze the relative risks and merits of these options with their municipal advisor and bond counsel and ensure that the preferred option is clearly communicated in the Notice of Sale,” GFOA said. “Factors that may affect this analysis include the type of sale, use of proceeds (new money or refunding), issuer’s history of receiving three or more bids, interest rate sensitivity and the timing of when proceeds are needed.”
The Alert cautioned that, “Small or infrequent issuers who may be less likely to receive three bids, and issuers of advance refunding bonds may weigh the costs and benefits of each approach differently than larger issuers of new money bonds.” GFOA also suggested that, “Issuers may choose to distribute information about each competitive issue widely and build more time in the pre-sale schedule in order to enhance likelihood of receiving at least three bids."