NATIONAL ASSOCIATION OF STATE TREASURERS

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NATIONAL ASSOCIATIONOF STATE TREASURERS

• The Latest in Sales Practices and Policies
• December 5, 2004

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Agenda

• Competitive versus Negotiated Sales
• Premium Bonds

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Competitive versus Negotiated Sales

• Statistics
• Long-term municipal new issues in 2003
  379,311.9 million
• 303,444.6 million negotiated
• 75,867.3 million competitive
• Long-term municipal new issues in 2002
  355,937.7 million
• 284,060.1 million negotiated
• 71,877.6 million competitive
• General Obligation Bonds
• 2002 125,520.4 million
• 2003 142,424.8 million
• Source Thomson Financial, 2003

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Competitive versus Negotiated Sales (Contd)
Source Thomson Financial 11/29/04
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Competitive versus Negotiated Sales (Contd)

• Goal The lowest borrowing cost
• Framework A debt issue should be sold at a
  competitive sale unless certain factors are
  present that would require a negotiated sale

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Competitive versus Negotiated Sales (Contd)

• Negotiated sales are recommended when
• The debt issue is very large and there may be
  problems of market saturation.
• The credit for the debt issue is extremely
  complex and a story is required in order to
  explain the credit structure of the debt issue (a
  story bond).
• The debt issue is rated in the lowest investment
  grade rating category (Baa/BBB) or is unrated.
• The capital markets are volatile with wide
  shifts in interest rates and investor demand.
• The use of floating rate products or certain
  derivatives (such as swaps, tender option bonds
  and similar products) would provide substantial
  interest rate savings to the issuer.
• Retail is an important factor in the market.

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Competitive versus Negotiated Sales (Contd)
Competitive Sales

• Focus Notice of Sale
• Bid parameters
• Bid price
• Coupons
• Individual prices
• Adjustments of principal amounts
• Flexibility to change the date of sale

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Competitive versus Negotiated Sales (Contd)
Negotiated Sales

• Focus Pricing

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Competitive versus Negotiated Sales (Contd)

• The negotiated process gave the issuer the
  opportunity to evaluate and capitalize on
  additional refundings in a volatile market

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Taxation of Market Discount on Tax-Exempt Bonds

• Market discount on a tax-exempt bond can arise
  if
• The bond is issued at par or at a premium and is
  later purchased in the secondary market for less
  than par
• The bond is issued at a discount and is later
  purchased in the secondary market at a price that
  is less than the original issue price plus
  accrued original issue discount though the date
  of purchase
• Market discount, unlike original issue discount,
  is not treated as tax-exempt interest to the
  holder when recognized because it arises from
  circumstances other than the actions of an issuer
• The investor that purchases a tax-exempt bond
  after its original issuance at a price less than
  par or the bonds accreted value and subsequently
  recognizes a gain on the disposition of that bond
  will have all or a portion of the gain taxed as
  ordinary income

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Market Discount Taxation Example
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Callable Premium Bonds

• Callable premium bonds are priced to the call
  date or the maturity date which produces the
  lowest price.
• If the bond is not priced to maturity, the yield
  to maturity is higher than the stated yield.
• Example
• A conservative approach for issuers is to require
  that the yield to maturity on callable premium
  bonds be no higher than the yield to maturity on
  bonds that are priced at about par.
• An additional level of analysis includes call
  option value.
• Example for 10/15/2024 maturity, delivery
  11/10/2004

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Premium Coupons in the Market

• Competitive Sales
• If bid parameters allow, marketplace uses premium
  coupons extensively
• Negotiated Sales
• Retail order period will allow issuer to tap full
  extent of par bond appetite
• Opportunity to uncover significant institutional
  par bond demand