State and local governments and agencies expect to be treated fairly when they access the municipal bond market to finance or refinance capital projects. Underwriters should charge a fair price for services provided and the bonds they sell should be priced to sell to buy-and-hold investors. Unfortunately, some underwriters sell primary offerings to investors who then quickly resell or “flip” the bonds for a profit.
This practice of flipping is a major indicator that the initial offering is underpriced, resulting in the bond issuer incurring higher yields than are necessary to sell the bonds to longer-term investors. A September 2019 Wall Street Journal article found that, from 2013 to 2017, approximately $60 billion in new-issue bonds were sold to customers who resold their positions within a single day.
Fortunately, there are measures issuers can take to reduce the likelihood their bonds will be flipped.
Bond flipping is the result of inefficient pricing that allows investors to profit at the expense of issuers. Taking prudent steps to verify your pricing is on market will help deter flipping and improve your odds of achieving cost-effective bond financings.
For more information on this topic, or to learn how Baker Tilly municipal advisory specialists can help, contact our team.