COVID-19 related disruptions caused investors to flee competitive offerings, driving up prices and forcing investors to dive into private placements and negotiated offerings.
That's according to the Municipal Securities Rulemaking Board's new research report titled Primary Offerings of Municipal Securities: Impact of COVID-19 Crisis on Competitive and Negotiated Offerings. The analysis shows how the number of competitive bids has evolved in recent years, making a point of analyzing the COVID period specifically, identifying it as the period from March to May 2020.
"Prior to 2020, more than 90% of the reported municipal bond primary offerings were either competitive offerings or negotiated offerings, including more than 92% in 2019," the report said. "However, the market disruption in 2020 appeared to temporarily increase the number of private placements, peaking at 13.4% during the COVID period in 2020, before reverting back to 8% in 2021."
"When compared to the non-COVID period, the total number of primary offerings as well as the average number of competitive bids received per competitive issuance dropped significantly during the COVID period," the report said. "In addition, competitive bid prices were more dispersed during the COVID period and primary offering spread for winning bidders (winning underwriter or underwriter syndicate) were much wider."
The MSRB released its previous research report in 2020 which analyzed the number of competitive bids from 2009 to 2019 and found that more bids per issuance decreases the borrowing costs for the issuer. This new paper serves as an indicator to what may happen as a result of increased interest rates and general market volatility experienced this year.
"We think this will be a good indicator for future events that have similar market volatility," said Simon Wu, chief economist at the MSRB and co-author of the report. "In 2022, we're experiencing more market volatility throughout the year, mostly because interest rates are going up quickly."
"No two market crises are exactly the same," Wu said. "The COVID crisis was really different. It was quicker, everything quickly dried up, then quickly rebounded a few months later," he said. "But for the current crisis, it looks to me that it's likely much longer."
According to data the MSRB used from Refinitiv's municipal market primary offering database, in 2019, competitive offerings accounted for 43.1% of primary offerings, negotiated offerings accounted for 49.3% and private placement just 7.7%.
That changed in 2020 as competitive offerings dropped to 39.6% of primary offerings, but negotiated offerings jumped up to 50.3% and private placements also jumped to 10.1%. The total number of primary offerings also jumped from 13,866 in 2019 to 15,591 in 2020 before dropping slightly to 14,930 in 2021.
Of all the offerings from 2019-2021, 847 were competitive offerings and 632 were competitive offerings. In some instances, investors also fled the negotiated offering pool in favor of private placements.
"The majority of the increase in market share for private placement comes from the negotiated offering pool," Wu said. "Negotiated sales lost a lot of market share to private placement, but gained slightly from competitive offerings."
"Competitive offerings during the COVID period were very volatile so I can see why some issuers would prefer going the negotiated route during COVID," Wu said.
The number of competitive bids received was consistently between five and six for bonds and around 4.5 bids for notes, while during COVID it was 4.7 for bonds and 3.9 for notes. But the drop in the number of competitive bids has other implications for prices.
"Therefore, all things being equal, soliciting and receiving more competitive bids from underwriters does indeed improve an issuer selling price and reduce the yield cost for the issuer," the report said.
"In addition, when comparing the initial reoffering yield with the weighted-average secondary market traded yield in the first 30 days, the median trade spread was marginally negative for competitive offerings, but was substantially positive for negotiated offerings," the report said, noting that negotiated offerings tend to trade at a higher level in the secondary market.
While the report notes that more research may be needed to provide further analysis as they didn't analyze the secondary market, the MSRB's findings indicate "that the Spring 2020 market distortion, likely caused by the increased difficulty for some issuers to access the market and uncertainty regarding the credit risk of issuers, impacted the primary market for municipal securities along with the secondary market," the report said.
