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Abstract: 

The goal of state and local governments when they use competitive bid auctions to sell debt is to allow competing underwriters, or syndicates, to drive down the cost of capital. What are the factors that determine the number of bids received? Public administration doctoral candidate Mikhail Y. Ivonchyk and Professor Tima T. Moldogaziev extend prior work on the topic in substantial ways. They note that issuers gain more bidders through active attention both to the offered product, such as larger size, double-barrel debt, and higher credit quality, as well as to common information factors, such as interest rate environment and market risk premiums. Debt issuers usually measure their cost of capital using true interest cost (TIC), but TIC does not capture refinancing options. Despite the recent elimination of tax-exempt advance refunding, there remain current refunding and taxable advance refunding opportunities. Public affairs professor Marty Luby and quantitative analyst Peter Orr examine the advantages of a refunding adjusted yield calculation over TIC. The results highlight the limitations of TIC while acknowledging the probability aspects of their proposed alternative. Municipal securities with a lien or pledge of special revenues were considered secure in a Chapter 9 bankruptcy filing until that understanding was upended by the bankruptcy court that was assigned to handle the Puerto Rico fiscal crisis under the special federal law that created an oversight board for the island. Bankruptcy expert James Spiotto examines the history and justification for timely payment of statutory lien and pledged special revenue bond financing and the basis for his conclusion that the recent Assured case was erroneously decided. He offers a model state law to address the situation.

Keywords: competitive bid auction, negotiated offerings, borrowing cost, bond refinancing, net and true interest cost, refunding adjusted yield, Chapter 9 municipal debt adjustments

Affiliations:  1: Georgia State University.