Local Government Finance: Capital Facilities Planning and Debt Administration by Alan Walter Steiss

Underwriting Municipal Bonds

Local governments seldom deal with the final investor in the issuance of bonds. Most investors cannot afford to buy whole bond issues, and most local governments do not have the time or resources to market bonds to multiple investors. Municipal bonds are underwritten by large investment syndicates that provide the fund to the issuing jurisdictions and, in turn, reoffer the bonds to individual investors. An underwriter is a firm, or group of firms, that purchases bonds directly from a bond issuer and resells them to investors. Underwriter attempt to make a profit by selling bonds to individual investors at a price higher than the purchase price paid by the investment syndicate. The mark-up in price by the underwriters is known as the spread and represents the compensation for distributing the bonds and for assuming the risk of a change in market value of the bonds--. Underwriters do not always achieve a profit because, in some cases, the bonds can be sold only at a price lower than the purchase price, and therefore, the underwriter takes a loss in the transaction.

Recent Trends in Municipal Bond Underwriting

During the late 1980's and early 1990's, when the underwriting of municipal bonds reached record levels, most Wall Street firms undertook major expansion of their municipal departments. According to the Bond Buyer's Municipal Marketplace, over 15,800 municipal bond underwriters were employed by these firms in 1992. Many of these municipal departments were staffed with bankers from non-Ivy League schools who had an affinity for public policy and the often grubby world of courthouse politics.

Faced with falling profits and growing competition, increased government scrutiny, and the taxpayer rebellion, many Wall Street firms in recent years have closed their municipal departments: CS First Boston; the Donaldson, Lufkin, Jenrette unit of the Equitable Companies; Lazard Freres, and the Chemical Securities unit of the Chemical Banking Corporation. Others, including Prudential Securities; Goldman, Sachs; Morgan Stanley; Lehman Brothers; Merrill Lynch; and some regional firms, have made deep cuts in their municipal departments.

As bond interest rates rose, many local politicians became reluctant to raise taxes or charge the user fees necessary to back new bonds to finance new projects. In the mid-1990s, a shadow was casted over the municipal bond market by the long-shot possibility of a flat tax--which would give all bonds the privileged status that municipal bonds enjoy. The crackdown by the Securities and Exchange Commission on inadequate financial disclosures to investors and political payoffs also took its toll. Lazard Freres, for example, acknowledged that the morass of political scandals was one reason for its departure from the municipal bond market.

Moreover, the cultural differences with their corporate finance departments made it relatively easy for many firms to lop off their the municipal departments when the underwriting margins began to decline. As one company spokesman observed: "Being in municipal finance was a way of being in the private sector but feeding a desire to do public service. All the Democrats are in municipal finance." [1]

With 13,000 municipalities across the country in need of billions of dollars to finance schools, sewage treatment facilities, parks, roads, and other public improvements, the need for underwriters schooled in both financial matters and the labyrinth of government operations will con-tinue to be manifest. As Robert B. Lamb has noted: "There's a huge need for $2 trillion to $3 trillion worth of new infrastructure and renewal for water systems, sewer systems, and bridges that are decades beyond their useful lives and literally falling down." [2] The trend toward the conversion of public assets to private ventures will put a premium on bankers with government skills.

One consequence of this decline in the number of municipal departments is that many Wall Street firms are pursuing deals that were once considered the "bread-and-butter" of the regional brokerage firms. New York firms seldom bid on anything under $50 million until recently. Now it is not unusual to see New York firms to show up on $20 million deals.

Competitive Bidding Versus Negotiated Sales

Municipal bonds may be purchased by underwriters: (a) through a private negotiated purchase, or (b) as the highest bidder at competitive bidding. Most states require local governments to sell general obligation bonds by competitive bidding, usually by submission of sealed bids. The sale of revenue bonds may be negotiated because it often is advantageous to the issuer to have the underwriter participate in setting up the issue from the outset. The risks involved for the underwriter in a negotiated sale are much less than for a competitive one. During a negotiated sale, the underwriter will have received commitments from a large number of investors prior to the issuance, while during competitive bids, most of the marketing and sales efforts occur the day of the sale. [3]

In a competitive bid sale, all of the tasks necessary to offer bonds for sale are carried out by the issuing jurisdiction, including structuring the maturity schedule, preparing the official statement, verifying legal documents, obtaining a bond rating, securing credit enhancement, if advantageous, and timing the sale. These tasks are normally done with the assistance of outside consultants, including a financial advisor and bond counsel. Once the issue is structured, the public sale begins with the publication of an official notice of sale that delineates the size, maturities, purpose, and structure of the proposed issue, along with instructions for submitting bids. [4]

Underwriters use the publication The Daily Bond Buyer as a reference for competitive bidding sales. This publication contains information on proposed new issues, invitations for bids, and results of bond sales. It also carried Official Municipal Bond Notices, and offers a service used by many dealers to obtain notice of coming municipal bond sales and concise data, including a summary financial statement of the issuer and the bidding details. This service covers all issues of $1 million or more. Smaller issues often are covered by regional publications.

In a negotiated sale, the bond issue is not structured before an underwriter is chosen, and the particulars of the issue are more flexible than in a competitive sale. An underwriting syndicate is not chosen through a bidding process, but rather on the basis of other criteria such as expertise, financial resources, compatibility, and experience. After a syndicate is selected, the process of structuring the bond issue and completing the other origination tasks are then undertaken primarily by the senior manager of the syndicate in conjunction with the issuer. The syndicate will engage in pre-sale marketing and then will negotiate interest rates with the issuer. The issuer often employs a financial advisor not associated with the underwriting firm to represent the issuer's interests in the process.

Proponents of competitive bid argue that this type of sale results in lower interest costs since syndicates have an incentive to offer low interest rates in order to increase their chances of being awarded the bonds. Competitive bid issues may also result in lower issuance costs. In 1993, bond issues of $20 million or more sold through negotiated sales had an average underwriter's spread of $6.71 per $1,000 of bonds, whereas, bonds sold through competitive bid had an average cost of $5.92 per $1,000 of bonds.

Proponents of negotiated sales argue that negotiated sales may result in lower interest costs and issuance costs. In a negotiated sale, the syndicate often performs significant premarketing of the bonds. If investors can be found prior to the negotiation of interest rates with the issuer, the syndicate may be less inclined to build a risk factor into the rates. With a negotiated sale, there is also more flexibility in regards to changing the sales date or the structure of the issue in attempts to obtain lower interest rates.

Factors other than costs also may influence the type of sale. The concern for unbiased awards of bids has resulted in many governmental bodies increasing the use of competitive bid sales either voluntarily or requiring it by law. [5] Since a competitive bid sale is open to all underwriting firms and is awarded solely on the basis of lowest cost, allegations of preferential treatment can be avoided. Finally, since the bids submitted are final, any financial loss that a syndicate incurs in marketing the bonds is solely the syndicate's responsibility.

Establishing the Investment Syndicate

A syndicate is a temporary alliance of underwriters formed to purchase bonds from the issuer under the direction of a senior or lead manager who directs the syndicate and coordinates the bond sale. Syndicates vary in size, depending on the amount of the issue and the ease with which it is expected to sell. Syndicates are often made up of both large national underwriters, such as Goldman Sachs or Merrill Lynch, along with smaller underwriters located in the state or region where the bonds are being issued. Syndicates usually consist of firms that specialize in sales to institutional investors, such as pension or mutual funds, as well as firms that sell primarily to individual investors. Most syndicates last about 30 days, although it may be disbanded sooner if the bonds sell quickly (or if it is unsuccessful in winning the bid).

The "syndicate letter" or contract lays out the conditions and obligations of membership and specifies the details of the underwriting, the amount of the bonds, bid and offering terms, names of the mangers and members, and similar information. Following Municipal Securities Rulemaking Board regulations, this letter also describes the priority of orders received by the syndicate, usually as follows:

o Presale Orders: received before the actual bid is submitted

o Group Account Orders: Orders filled for the syndicate as a whole, usually at the net offering prices, and credited to each member according to the member's level of participation.

o Designated Orders: Orders for which specific members receive credit, usually at net prices.

o Member Takedown Orders: Orders from members for sale to the member's own customers, taken from the account at the full takedown price.

Each syndicate (or joint account) member has a share in the account, called participation, and shares in the profits (and losses, if any) of the syndicate according to this participation. Each member is responsible for selling bonds, and when all the bonds are sold, the syndicate profits are then split according to each member's participation. As long as any bonds in the account are still unsold, each member is liable for a proportionate share of the unsold amount. The account is "undivided" in terms of selling and liability.

On occasion, the bonds in the account are distributed at the outset to each member according to participation. Under this arrangement, known as a divided account, a syndicate member is required to sell only its obligated percentage of the issue and is not held responsible for other's unsold bonds. [6] Divided accounts most often involve term bonds since dividing serial bonds would mean that, in some cases, members of the syndicate would have very few bonds from any maturity to work with.

Syndicate accounts usually are established to run for 30 days during which time the offering prices cannot be changed without consent of all or a majority of members. If, at the end of 30 days, the issue has not been sold in its entirety, the account may be renewed and extended by mutual agreement. Or in an undivided account, the remaining bonds may be divided up among members in accordance with their pro-rata share, based upon their original participation. Price restrictions binding members to syndicate reoffering terms are normally removed after all the bonds are sold or the syndicate is disbanded on a particular issue.

Prior to the announced date for the submission of bids, the members of the syndicate must decide on the price at which the bonds will be offered to the public. The bidding process on a particular issue begins with an opinion from the research staff, usually based on an independent evaluation of the offering. The syndicate members hold several price discussions (usually by phone) during which the spread, prices, yields, reofferring scale, and other information are discussed. Based on these discussions, the account manager will suggest a bid scale and profit margin that he/she believes can be underwritten by the account (see Exhibit 5). Those members unwilling to make this bid may withdraw from the account and their share of the participation must be divided among the remaining members.

________________________________________________________________________________________

Source: Alan Rabinowitz, Municipal Bond Finance and Administration (New York: Wiley-Interscience, 1969).

The syndicate that produced the winning bid on the bond issue outlined in Exhibit 5 originally involved 178 firms. 72 of these firms declined to underwrite about $28 million of the $70 million required, because they disliked the price scale, profit spread, or the amount of unsold bond in the market in other accounts.

The overall goal is to reach agreement on a set of yields that balances two objectives: (1) high enough yields to attract investors; and (2) low enough cost to the issuer to wind the bid. Competitive bids are awarded to the syndicate that offers to buy the issue at the lowest interest cost to the issuer. Two different calculation methods are used to measure interest costs to the issuer: net interest cost (NIC) and true interest costs (TIC)

The deadlines in municipal sales are very strictly observed. On the date of the sale, officials of the issuing jurisdiction usually meet in a body at the stipulated time to receive the bids. Often the final scale for a syndicate's bid is calculated only minutes before the submission deadline, and the bid is phoned to the person who is to deliver it to the issuing juisdiction.

It is customary to require a "good faith check" from each bidder, ranging in amount from one to five percent of the par value of the bonds being sold. These checks are held by the issuing jurisdiction until the decision is made on the award. This good faith payment is used to liquidate damages in the rare case when a successful bidder does not take up and pay for the bonds on the prescribed settlement date. It is customary to receive sealed bids at the vast majority of municipal bond sales. On occasion, a municipality may request auction bids, in the hopes of getting a better price due to the various bidders forcing each other up.

If all bids are on the basis of one coupon rate for the entire issue, the bidder naming the lowest rate received the award. If the bid entails more than one rate of interest, the award is determined by the lowest average cost (net interest cost). If more than one bidder names the same rate, then whoever bids the highest premium and lowest rate gets the award. Bids on major issues may be quite close among the bidding syndicates. For example, on the $70 million bond issue shown in Exhibit 5, the second lowest bidder, using a different combination of coupon rates, came within $5,950 of the winning bid.

For the winning bidder, the next step is to reoffer the bonds, usually at the scaled decided upon prior to bidding. Orders are awarded according to the priority stated in the syndicate letter. Since the winning bidder does not actually own the bonds until the issuer has awarded them, all orders are contingent on the actual delivery of the bonds. The offering data is the date on which the bonds are sold to the public, and for competitive offerings, this is also the date of the sale. However, the bonds must be printed (if they will have certificates), arrangements must be made with the Depository Trust Company [7], and legal work must be completed before the bonds can eb delivered. This usually about one month, so until then the bonds are sold and traded on a when, as, and if issued basis. Interest accrues to the seller from the date of sale and up to, but not including, the settlement date.

The Yield Curve

The yield curve provides underwriters, traders, or investors a basis on which to compare the returns on bonds of equal quality but with different maturities. The curve illustrates what is referred to as the term structure of interest rates by plotting bond yield as a function of years to maturity and indicating the average rate of return on a bond if it is held to maturity. [8] Yield curves may be positively sloped, negatively sloped or flat. The typical yield curve is positively sloped, indicating that yield is an increasing function of maturity, that is, the longer the duration of a bond the higher the expected yield.

Three theories describe the shape of the yield curve and the predominance of the upward-sloping yield curve.

(1) The expectation hypothesis states that expectations of future inflation influence the shape of the yield curve. If investors expect inflation to rise in the future, they will require higher interest rates on bonds that extend more years into the future. This requirement accounts for the positive slope of the curve.

(2) The liquidity preference theory holds that investors are willing to accept lower rates for shorter term maturities because they perceive them to be less risky than long term issues. Borrowers are willing to finance long- term debt at higher rates so they can lock in financing for longer periods, avoiding the risks associated with rolling over debt at unknown future rates to obtain further financing.

(3) The market segmentation theory posits that different markets exist for maturities of different lengths. Thus the positive yield curve would be explained by different equilibriums for each segment of the market. The preferred habitat theory is a variation of market segmentation which holds that investors prefer certain maturities but can be induced to switch if premiums are different. [9]

Unfortunately, none of these theories explains completely the shape of the yield curve or is a reliable predictor of future rates. They do contribute useful insights into the market's behavior, however.

Yield curve analysis extends well beyond these theoretical constructs. Professional traders and portfolio managers must understand in considerable detail the complex relationships among price, yield, liquidity, and risk in order to "ride the yield curve," that is, to buy and sell debt securities to obtain the greatest total return.

Net Interest Cost and True Interest Cost

Underwriters of municipal bonds must be cognizant of the general money market and the desired investment yield of potential buyers over different maturities. Failure to take proper account of these factors will result in a smaller "spread" or gross profit for the underwriters. Several calculations must be made on the stated interest rate in order to determine a net interest cost (i.e., the bid that the underwriters will make on the bonds) and the production of the bonds at the posted prices (i.e., the anticipated return on the sale of the bonds). The net interest cost is equal to the gross interest cost over the life of the bond issue less any premiums that must be paid, divided by the total number of "bond years," i.e., the sum of separate calculations for each of the years in which bonds mature.

Consider the following interest costs:

The NIC represents the average annual cost to borrow, expressed as a percent per year, without any allowance for the present value of the payments. No bond in the issue actually has a coupon rate of 5.583%, and no has a reoffering yield of 5.583%.

The NIC calculations for the BART bond issue are illustrated by the data in Exhibits 5. The number of "bond years" represented by the 675 BART bonds (each with $1,000 face amount) issued in 1967 and maturing in 1972 can be determined by multiplying 5 (years to maturity) by 675 (bonds). This process is repeated for each of the years of maturity. The total number of "bond years" for the BART issue is 1,541,000. A total interest cost can be obtained by multiplying the coupon rate (interest rate) times the "bond years" for each maturity period and summing across all maturity periods. This figure for the BART bonds is $6,388,334. Since only a $7,000 premium was established for the BART bonds, the net interest cost can be calculated as follows:

Net Interest Cost = Gross Interest Cost less Premium (divided by) Total "Bond Years"

NIC = ($6,388,344 - $7,000) / 1,541,000 = 4.14103%

The net interest cost included in the winning bid by the underwriting syndicate that purchased the BART bonds was 4.14128%.

The second method for calculating interest cost is the true interest cost (TIC), sometimes called the "Canadian interest cost." This interest cost is the present value, expressed as a nominal annual rate, compounded semiannually, which discounts the future cash flows of the issue to equal thre bid amount for the issue. In financial analysis, this techniques is called the internal rate of return and is widely used in evaluating the desirability of a project. TIC is computed by a mathematical technique called successive approximations. A trial interest cost is selected, and the present value of the future flow of funds is computed. Based on the result, the interest cost is changed, and the present value is recomputed. This process is repeated until an answer is obtained that is close enough to the bid amount of the issue.

Before computers were widely used, true interest cost computations were rarely undertaken. However, with the advent of high-speed computers, the percent of new issues awarded on the basis of TIC rather than NIC has increased, although both methods continue to be used. The TIC is considered to be the better measure by some analysts because it provides for the time value of payments by using present value calculations.

Production

The "production" of a given issue may be calculated by first multiplying the reoffering price (yield or par value) times the face amount of each maturity date. This figure is then multiplied times the amount being offered with a given maturity, and these calculations are then summed for all maturity periods.

For example, the yield for BART bonds maturing in 1972 (i.e., five years after the issue) was 3.60 percent, times the face amount ($1,000) equals $1,108.90, which was the reoffering price per bond. In other words, an investor would have been expected to pay the underwriter $108.90 over par value to secure a bond with a five-year maturity period. When multiplied times the amount being offered ($675,000), a production of $748,507.50 results. This is the amount the underwriters expected to "earn" on the first segment of the bond issue.

The production of the $2,050,000 bonds issues with a 1982 maturity, on the other hand, was $2,050,000 since these bonds were issued at par. The $4 million issued with a 1999 maturity date were at "below par," with a reoffering price per bond of $743.30 and a production of only $2,973,500.

Carrying out all of the appropriate calculations on the BART issue results in a maximum production of $70,842,377.50. Since the part amount of the issue plus premium equaled $70,007,000 (i.e., the amount paid by the underwriters to the BART District), the amount available as "spread" or gross profit to the underwriters before expenses was calculated to be $835,377.50.

Exhibits 6 through 8 illustrate three bidding options that might be developed for a $9 million bond issue. Each of these options produces a net interest cost of 6%. However, different total debt service costs and "spreads" result from the mix of bonds in the proposed offerings.

The data in Exhibit 8 can be used to illustrate the calculation of the net interest cost. The gross interest paid over the life of the bond is $4,318,800. Additional supplemental coupons (a negative premium) in the amount of $1,200 are required. The 6000 bonds scheduled to mature in the year 2002 have a duration of 15 years and therefore, represent 90,000 "bond years" (6000 x 15); the bonds scheduled to mature in the year 2001 have a duration of 14 years and therefore, represent 84,000 bond years; and so forth. The sum of the bond years is 720,000. The gross interest cost plus supplemental coupons equals $4,320,000 divided by 720,000 bond years equals 6.0 percent as the net interest cost.

The $750,000 in bonds that matured in 1991, shown in Exhibit 6, carried a coupon rate of 6.4%. However, since these bonds were priced at a premium ($1,066.66), the yield to the investor was 6%. The production of these bonds (assuming that all were sold at the reoffering price) was 750 times $1,066.66 or $799,995. The total production anticipated for the bond issue of $9 million is $9,081,233. Therefore, the spread (underwriter's profit) would be $81,233.

The total debt service for the 15-year straight serial bond issue with a three-year deferred principal (Exhibit 6) is $14,130,000. Exhibit 7 shows a 15-year annuity serial bond with a three-year deferred principal. The total debt service is $14,501,919 and the spread is only $49,824. Exhibit 8 illustrates a 15-year straight serial bond with no deferral of principal payments. The total debt service for this option is $13,318,800 and the spread is $199,994. However, additional supplemental coupons are required.

Investment Banker's Profits

During the week that the BART bonds were first offered, a total of almost $400 million in municipal bonds were listed in The Bond Buyer's Calendar of Sealed Bid Openings, representing 64 issues, three-quarters of which had face values of less than $5 million. With this volume of sales in a "typical" week, the layman often assumes that tremendous profits are made by investment bankers dealing in municipal bonds. People are surprised, therefore, by the relative small margin of profit sought by investment bankers.

As a rule, underwriters do not charge a commission when they sell municipal bonds, since they are acting as principals, rather than as agents. The profit of an investment banker is the spread between the purchase price paid to the issuer and the sale price to investors. The amount of the spread depends on the a variety of factors, but is primarily based on the size of the issuance and market conditions at the time of the sale. The spread is the difference between the price the underwriter pays the issuer for the bonds and the price the underwriter receives from the resale of those bonds to investors. The spread can be calculated by basis points or "dollars per bond". One percent of the bond issuance equals 100 basis points. In general, the expected profit on a $1,000 bond will vary from around $2.50 to $20 (0.25 to 2.0 percent of face value). In some cases where the market drops significantly while bonds are being offered, the underwriter may sell the bonds for substantially less than the price paid for them, suffering a loss.

For both competitive and negotiated bids, the spread is made up of four separate components: [10]

(1) The management fee compensates the underwriters for their efforts in creating and implementing the financing package. The amount of the management fee depends on the complexity of the issuance. The lead underwriter usually splits the management fee with the other lead or co-managers, usually two or three other underwriters, but not with the entire syndicate.

(2) The underwriting fee, also known as the "risk" component of the spread, is designed to compensate the underwriter for the risk incurred by buying the entire issuance before it has received orders from investors for all the bonds. The fee is provided to protect the underwriter in case the market shifts dramatically and interest rates increase before the underwriter has sold all of the bonds.

(3) The takedown is usually the largest part of the underwriter's spread. It represents the discount at which the members of the syndicate buy or "take down" bonds from the overall underwriting account. The amount of the takedown depends on how difficult the bond issuance is to sell to investors. Easily marketable issuances have minimal takedowns, while hard to sell bonds require a larger takedown in order to attract underwriters.

(4) The issuer must also reimburse the underwriter for expenses incurred during the development of the financing package and the actual sale of the bonds. The expenses portion represents the physical costs of running the syndicate, including travel, printing costs, and the underwriter's legal fees.

The takedown is a subset of the overall underwriter's spread. The spread may be 100 basis points, for example, or $10 for each $1000 of bonds issued. For each $1000 bond, the underwriter pays $990 to the issuer. If the takedown is 50 basis points ($5), each syndicate member buys its bonds at $995 ($1000 - $5, or the face value minus the takedown), and then offers the bonds to the public at par, or $1000. The takedown represents the profit to the underwriter who actually sold the bonds. The net profit over and above the takedown goes into the account and is divided among the various members at the termination of the account according to a pre-determined agreement.

The underwriting of municipal bonds reached record levels in the early 1990's. Low interest rates during this period motivated local governments to refinance their bonds just as homeowners were doing with their mortgages. This was a time to borrow for any municipality needing new money. According to the Securities Data Corporation, more than $231 billion worth of municipal bonds were issues in 1992. This record lasted only until 1993, when $289 billion in municipal bonds were issued. The profit on these issues averaged $11 per $1,000. By 1995, however, the level of new issues dropped by more than 45 percent to $155 billion, as interest rates on municipal bonds rose significantly, dampening the drive to refinance. The average profit for an underwriting firm is now around $8 per $1,000.

Outside dealers or underwriters who are not a member of the syndicate may have clients who want to purchase bonds from the bond issue. The non-member will buy the bonds from the syndicate for its customer. The non-member's profit is known as the dealer's or selling concession, and is taken out of the underwriter's takedown. For example, if the takedown is 50 basis points, and the selling concession is 25 basis points, the member of the syndicate makes 25 basis points ($2.50) and the non-member also makes 25 basis points ($2.50).

Bonds are sold on a plus accrued interest basis from the date of the issue or from the last interest payment date if one has passed. The purchaser is only entitled to interest from the time payment is made, and the previous owner is entitled to interest up to the time payment is received. In the case of a municipality selling an issue, the bonds might be dated July 1, and the purchaser may receive delivery and make payment on August 1. The municipality has not had the use of the money for one month after the date of the issue and, therefore, is paid accrued interest for that period. The underwriters of the bonds, in turn, collect accrued interest from the parties to whom they sell the bonds. The investor received the full amount of the interest payment on the date it becomes due. The investor had previously paid the interest accruing up to the date of delivery.

Termination of a Syndicate Account

For most bond issuances, approximately a month elapses between the time the issue is sold to the underwriters and when the bonds are physically delivered. During this interim period, the senior manager of the syndicate has to close down the operation. A letter is sent out to the members of the syndicate describing the re-offering terms, which include the spread, takedown price, and selling concessions. When the bonds are ready to be delivered, all payments are settled. In order to pay the issuer, the senior manager arranges for a loan from either a commercial bank outside of the syndicate or a member of the syndicate which is also a bank.

The secured loan is used to pay the issuer. The bonds are then distributed to the members, who fill their orders and send the payments to the senior manager. Once the manager has received all the payments from the syndicate members, the loan is retired, and the profits are distributed among the members of the syndicate. The last step for the senior manager is to issue a final statement of participants, expenses, and profits. [11]

The syndicate that bid successfully on the BART bonds was composed of 106 underwriters. On the first day following the award of the issue, about $30 million of the $70 million bonds were sold. Another $3.7 million were sold on the second day, leaving $36.9 million in the account for subsequent disposal. After 21 days of posting at the original prices, during which time other issues were being sold at relatively higher and more attractive yields, the syndicate was "broken up," and the bonds remaining unsold were distributed to the members in proportion to their share of the underwriting liability. With the syndicate restrictions removed, individual underwriters were free to offer their share of the remaining bonds at below list (and perhaps below cost) prices.

During the first few days of the free market, dealers and brokers engaged in a flurry of transactions to clear the market. Some of the syndicate members took losses, while other dealers (including some members of the former syndicate) stockpiled blocks of bonds at the lower price level. Moreover, various investors seeking a bargain entered the market at this point and were rewarded for having foregone the opportunity to buy on the first day of sale at the posted price level. Within a few months, most of the bonds ended up in institutional or bank portfolios, although BART bonds may still be found in the offerings of the secondary market.

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