In 2018, Congress took away municipal bond issuers right to advance refund bonds. Municipal issuers used to “pre-refund” bonds to their nearest call date. The bond holder then knew that their bonds would be called on the call date and not the maturity date of the bonds.
Some issuers have been turning to tender offers to redeem their bonds prior to maturity. It is an invitation “to tender your Bonds for purchase for cash (the “Tender Offer”).”[i] You may have been the recipient of one of these offers.
For example, Florida Board of Education recently issued a tender offer to redeem about 100 bond issues, sporting 3 percent and 4 percent coupons. Each bond issue has its own CUSIP – the fingerprint of a bond consisting of nine numbers or letters.
In this transaction, redemption prices are set based on market conditions, plus a premium to entice you to part with your bonds. Below is the wording from the Division of Bond Finance of the State Board of Administration of Florida (the “Division”), on behalf of the State of Florida (the “State”)[ii]
The purchase price of each of the Bonds has been determined by taking the average of the market values provided by two pricing services generally used in the municipal market for each CUSIP number on October 8, 2024, plus a premium. The premium to the market value has been added to encourage Bondholders to participate in the Tender Offer. Bondholders should consult with their broker, account executive, financial advisor, tax advisor, attorney, or other professional regarding the attractiveness of the Tender Offer and how to participate.
In addition to the Purchase Price, Bondholders tendering Bonds that are validly tendered and accepted for purchase will also receive accrued and unpaid interest on such Bonds from the applicable last interest payment date up to, but not including, the Settlement Date, as applicable.
The tender period for these bonds started on October 8 and terminates on October 23rd, though the issuer retains the option to close prior to the announced date.
Where to Read the Disclosure Documents
If you receive paper statements, then you will likely receive an announcement in the mail detailing the particulars of the tender. Otherwise, documents will be delivered to you electronically. They will state where you can read the full documents for the tender.
In addition, a description of the offer can be found at www.emma.msrb.org, including the offering tender price for each CUSIP. Type in the CUSIP in the search box after you accept all their disclosure documents. One Florida bond CUSIP is 34153QDG8. Under that bond description, chose “Disclosure Documents.” Then look under “Continuing Disclosures” for the release.
How to Tender Your Bonds
If you had an account at Fidelity, on the Fidelity.com website you would select “Corporate Actions” to begin the tender process. Then enter the CUSIP number of the bonds you own. A screen appears that would allow you to tender your bonds. Once you go through the steps and approve the tender, you cannot retract it.
You will know your bonds have been accepted for the tender, by checking the Account History of your account. You will see that your bonds have been assigned a new CUSIP.
Factors to Consider in Deciding to Tender Your Bonds
Here are some possible factors to consider in making your decision as to whether to accept a Tender Offer:
- Price fixed weeks ahead of settlement: In the Florida case, the price of your bonds was fixed on October 8. Between October 8 and the tender is exercised on October 23rd, the price of your bonds may vary either up or down. What was a good price on October 8, even with the additional premium, may or may not be a good price on the October 23rd when your tender is accepted and you have good funds in your account.
- Price may be left open until closing: We have seen some Tender Offers that don’t state what the price will receive if you tender. Some bond offers give you a formula for computing what the price will be for your bonds.
- Swap low percent coupon for higher coupon: If your bonds have a 3 percent coupon and you would prefer a 4 percent or 5 percent coupon to increase your long-term cash flow, the tender offer may be a good opportunity.
- Transaction costs: Although there is no fee payable when you tender your Florida bonds, you will pay fees when you purchase additional bonds.
- Raise cash: If you want to raise cash, this may be a good opportunity to sell your bonds without fees. You will receive any accrued and unpaid interest on the bond, in addition to the face value.
©Hildy Richelson and Stan Richelson, October 17, 2024
Read our book: BONDS: The Unbeaten Path to Secure Investment Growth, 2nd edition, John Wiley and Sons 2011.
[i] Letter. State of Florida Division of Bond Finance, October 9. 2024.
[ii] Ibid.