Good Faith Deposit

The Ridgemont Regional Transit Authority's official notice of sale requires every bidder to enclose a GOOD FAITH DEPOSIT with its sealed bid. Three syndicates bid, the award is made, and the losing syndicates ask about their money. What happens to the deposits?

1. A.The issuer retains all deposits as compensation for the cost of soliciting and evaluating the bids.Wrong. The deposit secures performance; it is not a fee for running the sale.
2. B.All deposits are held until the winning syndicate has fully reoffered the bonds to the public.Wrong. Losing bidders are released at award; the reoffering timetable is irrelevant to them.
3. C.Unsuccessful bidders get their deposits back promptly after the award, and the winner's deposit is applied against the purchase price at settlement or forfeited if it fails to take delivery.Correct. Return, credit at settlement, or forfeiture on default are the three possible outcomes.
4. D.Only the winning syndicate posts a deposit; losing bidders are not required to submit one.Wrong. The notice of sale requires a deposit from every bidder, which is what makes bids credible.

Why: The good faith deposit is security for the bidder's performance, not a fee. It demonstrates that a bidder is serious and gives the issuer a remedy if the winner fails to take delivery and pay for the bonds. Deposits of unsuccessful bidders are returned promptly once the award is made, since those firms have no further obligation. The winning syndicate's deposit is credited against the purchase price at settlement, and it is forfeited to the issuer only if the winner defaults on its commitment to take the bonds.

The Ashfield Regional Sanitary District publishes an OFFICIAL NOTICE OF SALE inviting bids on a new general obligation issue. A syndicate manager preparing a bid would expect that notice to tell her:

1. A.The date, time and place of the sale, the maturity schedule, the good faith deposit required, the basis for determining the winning bid, and the name of bond counselCorrect. The notice of sale sets the rules of the competitive bidding process.
2. B.The issuer's complete audited financial statements and detailed economic dataThat level of disclosure belongs in the official statement.
3. C.The reoffering yields at which the bonds will be sold to the investing publicReoffering yields are set by the winning syndicate after the award, not by the issuer in advance.
4. D.The takedown and selling concession the syndicate members will earnSyndicate economics are set in the syndicate agreement, not in the issuer's notice.

Why: The official notice of sale is the issuer's invitation to bid in a competitive sale. It sets the ground rules: the date, time and place of the sale, the par amount and maturity schedule of the bonds, the good faith deposit required of bidders, any limits on coupon or price, the basis on which the winning bid will be determined, the name of bond counsel, and the expected delivery date. What it does not contain is the syndicate's own economics or the yields at which the bonds will be reoffered, because those are decided by the bidding syndicate, not by the issuer.