Private Placements and the Cost of Borrowing in the Municipal Debt Market

Abstract

Private placements continue to be issued in the municipal debt market and remain a topic of interest for municipalities, investors, and regulators. Private placements are often sold without an underwriter to relatively sophisticated investors and are typically "buy-to-hold" transactions. Therefore, compared with traditional competitive or negotiated sales, there are fewer financial intermediaries and fewer regulatory disclosure requirements that accompany private placements. Savings on "flotation" costs can be substantial enough to make private placements a less costly method of debt offering. Conditional on selectivity in the method of sale and key market covariates, private placements offer lower arbitrage yields and issuance costs compared to both competitive and negotiated debt offerings.

Capital appreciation bonds and the cost of borrowing

“…The literature on the covariates of issuance and borrowing costs is too numerous to discuss here for reasons of brevity. We refer the reader to research on issuer factors (Benson & Marks, 2005;Bland, 1984Bland, , 1985Grizzle, 2012;Guzman & Moldogaziev, 2012;Harris & Munley, 2011;Simonsen et al, 2001), issue factors and market conditions (Allen & Dudney, 2010;Bland, 1987;Daniels & Vijayakumar, 2007;Forbes et al, 1992;Harris & Munley, 2011;Ivonchyk, 2019;Johnson, 1994;Johnson & Kriz, 2005;Kidwell & Sorensen, 1983;Leonard, 1994Leonard, , 1996Moldogaziev et al, 2017Moldogaziev et al, , 2019Peng & Brucato, 2003;Robbins & Simonsen, 2007Simonsen & Robbins, 1996;Vijayakumar & Daniels, 2006;Yusuf et al, 2010).…”

Municipal bond sectoral risk and information intermediation in uncertain times: Evidence from the Covid‐19 pandemic

“…Is intermediation associated with additional yield reductions for bonds in the high risk-elevation sectors? 5 This also extends to private placement sales, as Moldogaziev et al (2019) show that smaller issues and those with lower credit quality are more likely to be privately placed. They also find that, conditional on the selectivity in the method of sale, private placements are associated with borrowing cost savings, especially following the Great Recession.…”

A review of public water infrastructure financing in the United States

“…Special districts, such as dedicated water districts, may have different risk profiles and a more narrow fiscal base relative to general-purpose governments, which affects the types of bonds they are able to issue and the interest rates they have to pay on those bonds (Greer, 2016). It is commonly assumed that GO bonds will have lower interest rates because they represent safer investments (Peng & Brucato, 2004), but work by Kriz (2003), Moldogaziev, Greer, & Lee (2019), and others suggest that this might not always be the case. Additionally, following the great recession, some investors actually prefer the relatively robust and "recession-proof" revenue streams associated with municipal utilities.…”

“…One of the more resource-intensive requirements is the level of financial disclosure required by MSRB to issue a municipal bond. A growing trend in the bond market has been for local governments to issue Public-Private Bonds, which avoid these specific disclosure rules (Moldogaziev, Greer, & Lee, 2019). show that conditional of selectivity in the method of sale and other market characteristics, private placements offer lower issuance costs compared to both competitive and negotiated bond sales.…”