New York City and Retail Bond Order Periods: Getting to the Core of Big Apple Finance.

• Author: Anders, Alan
• Position: Statistical Data Included

New York City has been one of the most active issuers in utilizing pre-sale retail order periods in city-related bond financings. This article analyzes the extent to which retail order periods can be useful for other issuers in the context of New York City's experience over the past five years.

In an era of budget surpluses, cost-efficiency, and fiscal responsibility, municipal entities are always looking for ways to more effectively conduct their capital borrowing. In this respect, the City of New York, New York (NYC) is no different. In 1994, New York began using retail order periods to sell the debt obligations of the city and NYC-related financing entities. The city was among the first tax-free municipal bond issuers to utilize a retail order period on a regular basis, and over the course of time, NYC has altered the way that retail pre-sale order periods are structured. New York City finance officials often receive inquiries regarding their experience with retail order periods, and this article is an effort to address some of those inquiries.

What is a Retail Order Period?

A retail order period is a period of time before the formal bond pricing with institutional investors when the issuer accepts bond orders only from retail investors. The retail order period is usually one to four days, depending on particular issuer needs. Unlike a traditional order period, retail orders have priority during the retail order period. That is, retail investors can invest during this period with the knowledge that their order will be filled. Like a regular sale, the retail order period is conducted by the book-running senior managing underwriter in cooperation with the issuer and its financial advisor. The specific sales forces of the management and selling groups that have been selected by the issuer utilize their client relationships to sell the bond issue, making it more important to carefully select a group of underwriters that possesses established relationships with retail investors.

Types of Retail Investors

A retail investor is generally an individual making investments ranging from $5,000 to $1 million. Retail investors tend to be individuals and small institutions. By contrast, an institutional investor is a large-scale investor, such as a bank, financial institution, bond fund, or insurance company. The two principal institutional investors in municipal bonds are bond funds and property and casualty insurance companies. They purchase large blocks of bonds, often upwards of $25 million in size. A single institutional investor might purchase entire maturities or more.

A common misperception is that retail investors in municipal bonds are a large but homogeneous group of small investors, investing only a small amount of funds, even amounts less than $5,000. These small investors are commonly referred to as the "mom and pop" investors. From time to time, New York City and other issuers have created special "mini-bond" programs to permit individual orders of $5,000 or less from small investors. However, these mini-bond programs have not proven to be a major factor in raising capital for municipal issuers. In fact, orders of municipal bonds referred to as "round-lot orders" usually require an investment of $25,000 or more. Generally, retail orders from "small" investors average about $25,000, and often range up to $50,000.

This contrasts with retail orders from "high net worth individuals" who typically have liquid assets to invest in excess of $100,000. Some individual orders from such investors can actually exceed $1 million per order, particularly if, for example, the order is on behalf of an entire family with inheritance money or family business proceeds to invest.

Both mom and pop and high net worth retail investors require extra effort by municipal bond sales forces due to the large number of telephone calls to investors required to attract a given volume of orders. This compares, for example, to orders from large institutional investors that can typically range from $10 to $25 million per order. It is also important to note that the sales forces trained to talk to mom-and-pop and those trained to deal with high net worth individuals are typically separate sales forces within securities firms.

An issuer planning to have a retail presale order period should ensure that either the book-running senior manager or key...