After many years of status quo, IRS new issue pricing regulation for municipal issuers is changing significantly on June 7.
The current pricing rule specifies the issue price of each publicly offered maturity of bonds as the fist price at which 10% of the bonds is reasonably expected to be sold to the public.
Under the new rule, the issue price will be the actual price at which the first 10% of a maturity of bonds is sold to the public. If 10% of a maturity is not sold, the issue price will be the initial offering price (IOP), as long as the underwriter holds the IOP for five business dates after the sale date. This five-day hold is designed to prevent abuses like “flipping” in which the dealer sells bond almost immediately to another dealer or institutional investor, causing prices to continually rise before they are sold to retail investors.
An exception from the 10% threshold applies for competitive sales which meet certain conditions. The issue price can continue as the reasonably expected initial offering price in the winning bid, but only if:
- issuers make the notice of sale widely available to underwriters;
- all bidders have equal opportunity to bid;
- the sale is awarded to the bidder with the highest price (lowest cost of funds); and
- at least three underwriters submit bids.
The pricing of new issues is critical to muni issuers because the issue price determines the yields on bonds, and also whether the issues is in compliance with arbitrage rebate or yield restriction requirements.
Series 50,52 and 53 exams may include questions on these reforms. Check back for regular updates from Knopman Marks to keep you up-to-date with the latest rule changes.