The Corner for April 18, 2014

Underwriting municipal securities (bonds) issues is not without risk. To spread this potential risk, underwriters (investment bankers that bring new issues to market) form an underwriting syndicate. Underwriting syndicates are typically organized as joint ventures rather than partnerships (which further limits the risk of the participants).

Once an issuer’s (municipality such as a city or county) notice of sale has circulated those investment bankers interested in placing a competitive bid for an issue, forms a syndicate. Although the bidding process is competitive, successive offerings of a particular municipality are often handled by the same syndicate, composed of the same members. This is especially true of smaller municipalities.

Participants formalize their relationship by signing a syndicate letter (in a competitive bid) or a syndicate contract or an agreement among underwriters (in a negotiated underwriting). About two weeks before the scheduled sale, the syndicate manager sends the letter to each participating firm for an authorized signature.  The member’s signature indicates its agreement with the terms of the offering. Syndicate letters usually include the following information:

• level participation of each member firm (also know as commitment);

• priority of order allocation;

• duration of the syndicate account;

• appointment of the manager(s) as agent(s) for the account;

• fee for the managing underwriter and breakdown of the spread; and

• other obligations, such as member expenses, good faith deposits, observance of offering terms and liability for unsold bonds.

Once the letter is agreed upon and signed the syndicate is formally formed. The syndicate then begins the process of bringing the issue public for sale to individual and institutional investors. This is the final step of bringing a municipal security public.

Quote of the Week: “The work of an individual still remains the spark that moves mankind ahead even more than teamwork.”—Igor Sikorsky

Bart Ward is the chief executive officer of Ward & Co. Ltd., an Anoka-based registered investment adviser – specializing in the management of stock and bond portfolios in companies which are listed on the NYSE.

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