Parts 1 & 2 Here -
Now let’s (finally) get to the Wall Street side of bonds.
Underwriting a Bond
Underwriting a bond is the process where an investment bank looks at the financial situation of the issuer (The school district) to determine risks and to set a fair and reasonable price for the bond. Underwriters will examine the issuer's credit rating, cash flows, and the risk of default by the issuer.
The underwriter also represents the issuer on the “road show”. A sales effort to pitch, entice and ultimately sell the bond to various buyers such as bond mutual funds, school endowments, high net worth individuals or other money managers.
The underwriter also agrees to buy up any of the bonds which they cannot sell to customers in order to create liquidity and own some of the financial risks in exchange for a hefty underwriting fee.
To truly understand the ins and outs of the bond issue, I pulled the previous 2022 bond issuance details from the EMMA website to see how the issuance was structured and played out.
From the document (called the prospectus), we can learn all the details about the bond.
PNC Capital Markets LLC is the listed bank underwriting the bond
The County has excellent AAA credit
All the legal and regulatory details are spelled out with sign offs and notarizations
A unique CUSIP ID gets assigned to the bond to track it and identify it properly
The bond ended up “oversubscribed” meaning there was more demand for the bond than supply could handle. Some potential buyers missed out on owning a piece.
Trading the Bond
Once the underwriting bank has gathered a list of interested buyers, it announces the date the bond opens for trading and all the details around the bond’s structure.
On the first day of trading, the bond will “break” meaning each interested buyer submits a bid price and quantity they wish to buy.
Dealers who work with the underwriting team (Ex- Morgan Stanley’s underwriting team work’s with Morgan Stanley’s municipal bond sales and trading desk) to take and execute queued up customer orders at the advertised price.
The trades will post on the TRACE feed, a consolidated feed for fixed income securities, for the world to see. Think of it as a stock ticker tape but for bonds.
Post Trade
Once the bond issuance is complete, the bonds will circulate through the financial system as either a portfolio holding or for secondary market trading.
The underwriting bank’s bond dealing desk will keep some bonds on its book to have an inventory to sell to more customers and to maintain financial exposure for the agreed upon time
Some bonds will sit on the books of institutions for their entire duration and mature as expected
Some bonds will trade as part of a larger bundle of structured products where a bundle of bonds are combined to form a new product to trade
Lastly, at almost no point will anyone on Wall Street particularly care that the bond built a school for children or raised property taxes on a community. They care about inventory to sell and making a profit. However, like it or not, without Wall Street’s help the school bond like this or the 1000s of others issued across the country would never happen so in a weird way when someone says they do “God’s work” on Wall Street, this is perhaps the closest example of it being true.
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