LOS ANGELES -- Issuers in Oregon generally stand to save more by selling bonds on a competitive rather than negotiated basis, a report from a University of Oregon faculty member suggests.
The study, focusing on 210 general obligation bond issues sold in Oregon during 1992 and 1993, found that competitive bids resulted on average in a true interest cost about 29 basis points lower than negotiated sales.
In addition, "the advantage of competitive sale is particularly compelling when a large number of bids is expected," the report concluded.
Bill Simonsen, an assistant professor in the University of Oregon's department of planning, public policy and management, prepared the study with the assistance of Mark Robbins, a graduate student.
The researchers started with a hypothesis that there "is no longer a difference in interest cost between competitive and negotiated sales," largely because of market developments over the last two decades.
They noted that previous research on a national basis, conducted during the 1970s and 1980s, suggested that competitive sales result in lower interest costs to issuers, all else being equal.
But market changes since that time mean the earlier findings may no longer apply, Simonsen's report noted. "In the intervening years the narrowing of the difference between negotiated and competitive spreads suggests that competitive sales may no longer result in systematically lower interest costs," the report said.
Accordingly, the "decline in gross underwriter spreads over the past 10 years has led us to return again to question the relationship between bond sale type and interest cost," the report said.
However, after using various statistical regression models to test the data, the researchers found that competitive sales consistently produced interest cost savings.
In instances where only two or three bids are received, on average and all else being equal, there is about a 10-basis-point savings on the true interest cost over negotiated sales.
"This result is not statistically significant," the report said. However, the advantage of competitive sales increases as more bidders join the fray, the report said.
The report also compared results for sales of all types of obligations in Oregon, including GOs, revenue bonds, and certificates of participation. The results are essentially the same, with competitive sales resulting in "significantly lower interest costs" compared to negotiation.
"In sum, the results are robust: similar patterns emerge whether revenue and other obligations are included, or when underwriter spread is entered as an independent variable," the report noted.
Simonsen and Robbins concluded that a 15-year-old recommendation by researchers Michael Joehnk and David Kidwell -- which was summarized in a 1979 Journal of Finance article -- still appears justified: "Where municipalities have a choice, they should sell their new bond issues by competitive means."
But Simonsen and Robbins also cautioned that a competitive sale is not always preferable.
"Negotiation may provide additional timing flexibility during unsettled markets, and the better developed pre-sale marketing activities may provide advantages, for bonds with unusual structures or other atypical features."
Issuers also must factor in that they have greater responsibility in originating a competitive sale. "These costs also need to be recognized," including the potential involvement of an outside financial adviser, the report observed.
"The key question may be: Does the savings in origination cost to the issuer, or other timing and pre-sale advantages of negotiation, outweigh its potentially higher interest cost?" the report asked.
Competitive sales also may offer another advantage by helping to "avoid the appearance of impropriety," given recent controversy in the municipal market about the way certain negotiated underwriting teams were assembled, the report concluded.
Simonsen can be reached at (503) 346-3859 to answer questions about his research on the topic.
