Purchasing Municipal Bonds
How to Purchase Municipal Bonds
Municipal bonds are offered in two markets, the primary market and secondary market. “Primary market” refers to the initial issuance and sale of bonds by an issuer. “Secondary market” refers to the subsequent purchase and sale of bonds by bondholders after the bonds have already been issued. When the County Board approves the issuance on bonds, it is approving an issuance of new bonds in the primary market. These bonds are sold on either a competitive or negotiated basis.
In a competitive sale, underwriters submit a sealed bid for purchasing the bonds to the issuer at a specific time on a specified date. Typically there are numerous bidders on the bonds, with the bidder being the one offering the lowest true interest cost (TIC) to the issuer.
If the competitive bid involves a syndicate, the syndicate’s bid must meet all the published requirements of the issue and arrange for a good faith deposit if that is required. The winning bid becomes the contract of sale for the offering. After the syndicate purchases the bonds, it resells them to retail investors. The underwriter essentially acts as the intermediary between the issuer and the initial investor. Under this process, the underwriters that will purchase the bonds from the County will not be known until after the competitive sale has concluded.
In a negotiated sale, the issuer selects the underwriter (or underwriters in the case of a syndicate) prior to the public sale date. The issuer may select co-managers from competing firms to work as part of a syndicate. The lead underwriter or manager coordinates the deal. The underwriter selected in a negotiated sale has the exclusive right to purchase the bonds at agreed upon prices.
The managers in a negotiated sale will make an offer to purchase the bonds from the issuer at a price that will incur the lowest interest cost for the issuer but at the same time be salable to investors. Negotiated sales may be more cost effective if the issuer has the necessary expertise to negotiate with underwriters. A negotiated sale can be a cooperative effort between the issuer and the underwriter for structuring a deal with reasonable terms.
As part of a negotiated sale, a retail order period may be included prior to the sale to institutional customers. During this period, non-institutional customers receive priority in placing orders. The County, when conducting a retail sale targeted to Arlington residents, will update the website www.buyarlingtonvabonds.com. Market conditions at the time of financing will generally determine when a retail order period will be included as part of any bond issuance.
How to Purchase Bonds in the Primary Market
1. Determine the Method of Sale Being Conducted by the County
The method of sale being undertaken by the County will determine when the process to purchase any bonds will begin. When the County Board approves the sale of bonds, the Board Report will indicate which method of sale is being pursued. Below is a brief description of a competitive vs. negotiated sale:
Competitive Sale – On the issuance date of the bonds, the underwriter (or underwriting syndicate) who submits a winning bid will receive the County’s allotment of bonds. At the conclusion of the sale, the County will issue a press release noting the details of the sale, along with the winning firm or firms. Anyone wishing to purchase bonds can contact the winning underwriter(s) who may have bonds available for sale to retail investors. The County will not be able to provide a list of winning firms until after the sale has concluded.
Negotiated Sale – In a negotiated sale, an underwriter or group of underwriters will be selected in advance of the issuance date. These firms will be able to take orders from county residents on the date of sale. You will need to have an account either with one of the participating brokerage firms or with another firm that can place an order through a participating brokerage firm.
2. Open a Brokerage Account
If you do not have a brokerage account, you will need to open one in order to purchase bonds. You will need to have an account with one of the firms participating in the sale of bonds (see competitive and retail sale descriptions above), or with a firm that can place an order through a participating brokerage firm.
The new account process may take some time to complete. Investors are encouraged to begin the process well in advance of the bond sale date. Each brokerage firm has its own requirements for opening an account. The County does not endorse any particular brokerage firm, and the County does not guarantee that any particular firm will open an account for an investor.
3. Learn About the Bonds
The preliminary official statement (POS) or final official statement (OS), are the primary documents that describe the bonds being offered and disclose material information on the offering, including a complete description of the security for the bonds, the principal repayment (maturity) dates, the interest payment dates, the credit ratings and the use of the bond proceeds. A thorough review of the complete document is essential to making an informed investment decision. If you are interested in purchasing Arlington County bonds, please visit MuniOS or the Municipal Securities Rulemaking Board’s EMMA website to obtain the preliminary official statement or final official statement, and detailed information related to outstanding Arlington County municipal bonds.
4. Place an Order for Bonds
The method of sale described in step 1 will determine when and with who an order for bonds can be placed. Contact your brokerage firm, or a brokerage firm participating in the County’s current bond issuance, for more information about how to buy bonds during an initial offering. You may wish to discuss with your brokerage firm or investment advisor the amount you want to invest, when you would like your investment returned to you, and the interest that you would like to earn on your investment, as well as any questions you may have after examining the official statement, preliminary or final.
For more information please contact Jason Friess in the Department of Management and Finance at 703-228-3422.