What is a Bond Purchase Agreement?

If a municipality or company decides to issue bonds, they will need to form an alliance with an underwriting entity to help them price and distribute the bonds, and the Purchase Agreement outlines their contract.

Underwriters on debt issues are normally large investment banks. They help the issuer, which could be a city government or company, structure the bonds and price them in a way that is suitable to their needs, and also agrees to help them distribute them.

The Bond Purchase Agreement is the contract in which the underwriting firm states the price at which they intend to buy the bonds from the municipality, the price at which they intend to sell them to the public, and the degree of commitment they have to selling a set number of shares.

Sometimes, the underwriting firm will not do the marketing or distributing to the public, but will sell the bonds to a dealer firm who will take care of that side of things. Most often the underwriters will form a syndicate to spread the risk of distributing the shares.

Each firm can decide what kind of agreement to sign, whether it will have a firm-commitment to sell a certain amount, or whether it will just be a best-efforts endeavor. In a best-efforts agreement, the distributing firm is not obligated to sell any specific amount, and the issuer has no assurance that they will be able to raise any specific amount of capital.

A firm commitment agreement guarantees the issuer a certain amount of capital, and the risk of shortfall lies with the underwriter. There are other types of selling agreements, including minimum-maximum, all or none, and standby.

Agreements may also have a market-out clause which releases the underwriter from their selling obligation if certain adverse market conditions present themselves.

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