Our recent item about Arkansas City saving over $2.7 million as a result of a competitive bond sale sparked some conversation among our readers. The question may arise: how much better is a “competitive bond sale” as compared to the old-fashioned “just have one underwriter tell us the interest rate” model?
By way of background, a best practice in today’s world of local government finance is to utilize an independent Municipal Advisor (sometimes still called a “Financial Advisor”) — such as Ranson Financial Group — for municipal financing activities, including conducting a competitive bond sale to take bids from all possible banks and underwriters. Nevertheless, some municipalities still engage an underwriter upfront. As result, with no competition, the underwriter dictates to the governing body what the interest rate and underwriter profit will be.
In the case of Arkansas City’s competitive bond sale, it’s informative to compare the difference in interest cost between the winning bid and the last place bid. The difference was over $780,000! And, because a pre-selected underwriter has no competition, the cost could have been far greater than that. So, if Ark City had pre-selected the wrong underwriter, savings would have been significantly less than $2.7 million.
Email Larry Kleeman and Beth Warren to explore funding options for new projects in your community or for a refunding analysis of your municipal debt. For a better understanding of the parties and process involved in the bond issue process, click here or contact Larry or Beth.