Negotiated Sale

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Last Updated:December 10, 2023

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What is Negotiated Sale?

A negotiated sale is a procedure where only a small number of possible purchasers are involved, typically just one interested party with a good chance of closing the deal.

Confidentiality, effectiveness, and quick sales processes are advantages of a negotiated transaction.

They are typically the result of rational bidders making unsolicited offers. However, they may be started by investment bankers who have connections to possible purchasers and see an immediate fit with a company for sale.

Because these sales are more covert than controlled auctions, they don't disturb operations as much.

It is a method of offering municipal bonds or other similar financial instruments in the fixed-income market, where the issuing entity and a chosen underwriter negotiate the terms of the issue.

The interest rate, call features, and the issue purchase price is some key issues that an issuer needs to discuss in this process. This method of selling a new issuance of securities is referred to as negotiated underwriting.

The main benefit of this sale is out of the small number of prospective purchasers. There is typically just one interested party with a good chance of closing the deal.

They are usually started by logical buyers, which are businesses that would typically be interested in the offering, and brokers, which are middlemen familiar with potential purchasers.

In a negotiated process, the financing for the issuance will be handled by the underwriter, which the issuing organization will choose before the sale date.

As the underwriter collaborates with the business to market the offering, lower-quality concerns typically gain the most from this underwriting strategy.

The issuer frequently receives a better rate in the market when the underwriter and issuer collaborate to make the offer transparent.

The timing of the issue's release is more flexible with negotiated sales, allowing for better market timing and the highest possible price.

Key Takeaways

A negotiated sale is a process where just one interested party with a strong probability of finishing the deal is normally engaged, as opposed to a larger pool of potential buyers.
They don't disrupt operations as much as controlled auctions because they are more discreet.
It is a process where the issuing entity and a selected underwriter discuss the terms of the issue to provide municipal bonds or other comparable financial instruments in the fixed-income market.
It offers the advantage of allowing the issuer to establish a bond of loyalty, good faith, and trust with the potential buyer.
If the offer meets the issuer's requirements for the acquisition price and the terms, they are not required to waste time exploring alternative bids. The issuer is not required to proceed with the sale if it does not meet their expectations.
It is not always appropriate. Therefore, if it is not preferred in the circumstance you find yourself in, it may have a bad effect. Having a good understanding of your situation is always important.

Pros and Cons of a Negotiated Sale

If a logical buyer who will gain from operational synergies approaches you, a negotiated sale demonstrates good faith and trust while fostering a connection with the prospective acquirer.

Without considering many other offers, the offer can satisfy your expectations for the buying price and the terms. If you decide not to proceed with a negotiated transaction, you are free to reject the offer.

This sale can enable the issuer to develop a relationship of good faith, trust, and loyalty with the prospective purchaser.

They can save time considering alternative offers if they satisfy the issuer's expectations for the acquisition price and the terms.

In addition, if the sale falls short of the issuer's expectations, they are not obligated to move forward.

One benefit of negotiated sales is that the issuer can get an offer that fits their terms and pricing requirements without engaging in the time-consuming process of competitive bidding.

A list of prospective buyers is presented to some issuers, who then engage in competitive bidding to select the best offer.

However, the procedure can be streamlined, and the two parties can complete the sale quickly if the issuer receives unsolicited offers from rational bidders.

It also provides a good working connection based on trust with the prospective underwriter. They enable the underwriter to determine the bond's optimal price, which benefits the issuer and the investors.

On the other hand, it has downsides as well.

You won't have comparable bids to compare to determine whether you are getting fair market value. Can you rest at night without being convinced that you got the greatest deal for your company?

Because the buyer knows they are the only party at the table, you will have less negotiation leverage. Although the original offer in the LOI could seem fantastic, the buyer may reduce the price through due diligence if you have no other options.

The absence of other rivals may constrain the issuer's ability to negotiate the best conditions. For example, when the issuing entity negotiates a deal with just one potential buyer, it can receive a bid lower than the dealer's fair market value.

The issuer will have less negotiation leverage once the deal is closed with a single seller, which is another drawback.

The first offer made by the buyer may be acceptable to the issuer, but during the talks, the offer may be reduced.

The buyer can feel pressured to lessen their offer from what they had previously made to the issuing entity since they know that the issuer has no other options.

As purchasers are aware that there is little competition, negotiated transactions have the significant drawback of reducing the issuer's negotiating leverage.

In essence, a buyer might try to squeeze the issuer. Thus, issuers must make sure they are getting the best deal available.

How a negotiated sale works

When underwriters make unsolicited offers to the issuer for consideration, a negotiated transaction may be started from their end.

As an alternative, investment bankers with strong connections to potential buyers who would be the ideal match for the issuing business could start the sale process, aiming to ensure the efficiency and success rate of the sale process.

Although there may be numerous prospective bidders in a negotiated sale, the most typical characteristic is having one buyer with a high likelihood of sealing the contract.

The main bargaining chips in a negotiated deal are purchase price, call features, and interest rates.

The parties must agree on the three key factors since the issuer wants the best bond price.

Before the bond sale date, the issuing entity must choose an underwriter to buy the bonds. In turn, the underwriter offers the bonds to its investor clients following their needs and the issuer's interests.

Before starting a final price, the underwriter may conduct a pre-sale to gauge client interest in the sale, which is usually beneficial for later adjustment.

In addition to a negotiated sale, underwriters may buy bonds from an issuing corporation through a competitive bidding process.

A public notice of sale that details the terms of the sale and the bond issue precedes the selling of the bonds in a competitive manner.

Brokers and investment banks interested in the bond then express their interest by providing the issuer their bid quotes that include the purchase price, interest rate, and other bond features.

Before the time and date specified by the issuer, the bid must be filed. The issuer gives the bonds to the bidder with the best price and the lowest interest cost when the bidding period has ended.

When a negotiated sale may be preferred

It is only sometimes that this sale is appropriate, which means that it can bring about a negative influence if it is not preferable in the situation you face. Here are some situations in which negotiation is preferred:

1. Extra-large issues

Some underwriters might decide to pass on unusually large issues because the sheer volume of issues might overwhelm them.

Large sums of money are needed to get such huge issues through the market, and an underwriter might be unable to raise them.

Certain underwriters may organize bid syndicates by pooling their resources to limit competition.

In these situations, a bond issuer might prefer to engage with a group of underwriters who have pooled their resources and ensured the issue's success.

2. Unique financing terms

If a bond offering is aimed toward particular classes of underwriters, the issuer can prefer a negotiated sale to open bidding.

The terms of the issue may restrict eligibility for the underwriting service to a particular category of underwriters who meet the requirements, for instance, if the issuer has intended the bond issue to appeal to women-owned underwriting firms.

The issuer wants to find an underwriter who can sell the bonds profitably yet competitively, and finding one who satisfies the necessary criteria can assist in achieving this goal.

3. Market turbulence

Most underwriters may bid cautiously in a market where bond interest rates fluctuate quickly to avoid suffering losses.

The issuer may choose to arrange a sale with an interested party and schedule the sale date following market circumstances.

The issuer may negotiate the bond issue terms with an underwriter with a track record of success with issuances in erratic markets.

4. New Entity

Getting underwriters interested in its bond issue might be challenging for a new firm. The bond issue could be impacted if new firms lack the credit history that underwriters need.

However, a pre-sale may be part of this process and be used to pique investors' interest before the real bond issue is floated on the market.

Pricing bonds in a negotiated sale

One of the most significant results of the sale of bonds is the cost of borrowing, which is determined through the pricing procedure. Therefore, the bond price in a negotiated sale necessitates more issuer involvement than in a competitive sale.

The underwriters' pay, also known as the underwriter discount or gross spread, which comprises the takeout or sales commission, management fee, underwriting risk, and expenditures, is negotiated by the issuer with the bond yield.

The ability and desire of the issuer to invest the necessary time in learning about the market and the past performance of its bonds will determine how successfully the issuer negotiates the price of its bonds.

To attain the lowest overall cost of borrowing, Government Finance Officers Association (GFOA) advises state and local government issuers to aim for a balance between the yield for each maturity and the takedown.

It is advised that issuers take the following steps to enhance the pricing procedure:

Step 1: Announce the aim

Inform the underwriter of the precise objectives to be met in bond pricing and the expected contributions from each finance team member, including the issuer and the independent municipal advisor hired to help with strategy, structuring, and pricing.

Step 2: Choose the issuer representative

Choose the issuer representative who will be accessible during the pricing process and has the power to make important choices.

Step 3: Set requests

Include a clause in the proposal request requiring respondents to indicate the range of costs for each compensation component and specify an expected maximum for capping fees and expenses.

Step 4: Gather relative data

Gather and review data on each component of underwriters' compensation for other recent similar sales. Then you can take steps to manage the compensation to underwriters during the underwriter selection process and before final pricing.

Step 5: Do a market research

Learn about current market conditions, examine important financial and economic data, and determine how these factors are likely to influence the timing and result of the pricing.

Step 6: Obtain a price book

Obtain a price book with the following details from the underwriter and/or the Municipal Advisor:

Municipal bond supply and anticipated demand.
Key economic indicator releases, actual or anticipated regulatory or political actions, and other factors that could impact the capital markets.
Interest rates and current market yields of recently priced and outstanding bonds with comparable features, preferably from nearby issuers.
Interest rates and interest rate indices for bonds with comparable features provided by independent services that monitor pricing performance and the historical benchmark index.

Negotiated Sale Best practices

Issuers should be aware that if there is a syndicate, they will significantly influence how bonds will be distributed among the participants.

Before the sale, Issuers should evaluate the preliminary price wire and the Agreement Among Underwriters and consider order priority and designation policies.

The designation policy mostly governs the assignment of underwriter compensation to the syndicate members.

Develop a suitable pre-marketing strategy with the underwriter to determine and heighten investor interest.

For example, consider including provisions for retail orders by designating specific maturities as retail priorities or by creating a separate retail order period in cooperation with other experts, such as the Municipal Advisor, the underwriter, and the price consultant.

Issuers should take precautions to verify the legality of retail orders when conducting a retail order period, such as restricting order size and disclosing zip code identification.

On the day before pricing, request that the senior managing underwriter produce a consensus pricing scale that reflects the diverse opinions of the underwriting syndicate members and collect many interest rate scales from syndicate members.

Consider including provisions for retail orders by designating specific maturities as retail priorities or by creating a separate retail order period in cooperation with other experts, such as the Municipal Advisor, the underwriter, and the price consultant.

Issuers should take precautions to verify the legality of retail orders when conducting a retail order period, such as restricting order size and disclosing zip code identification.

Issuers should be aware that they play a significant part in deciding how investors will be divided among bonds.

Discuss with the underwriter and municipal adviser accounts the differences between long-term "flippers" and buy-and-hold investors and how these accounts will affect bond pricing.

To guarantee that the issuer's goals are met, the issuer should carefully examine the proposed bond allotments.

After the bond sale is over, evaluate it to determine the upfront expenses of issuance and the price of the bonds, both in terms of the entire TIC and on a maturity-by-maturity basis.

Create a database that details every issue regarding pricing performance, such as the bond types sold, credit rating, maturity dates, yield, takedown by maturity, and the TIC.