The takedown, which is similar to a commission, is typically the biggest component of the underwriter spread in a municipal bond offering, but it’s also something else: A topic that can be divisive and which brings out different philosophies among issuers and municipal advisors.

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Some issuers and MAs see paying a decent takedown as a way to incentivize underwriters to work harder to sell an issuer’s bonds, hopefully resulting in more robust investor demand and better pricing for the issuer, according to Justin Marlowe, a research professor at the University of Chicago Harris School of Public Policy, where he also serves as director of the school’s Center for Municipal Finance.

Others, however, see the situation differently, believing that demand for municipal bonds, especially in the current market, is robust enough that an aggressive sales outreach is less necessary and the job of the issuer and the municipal advisor is to minimize costs, he said. 

“There’s definitely a school of thought there that says that it is possible to pay underwriters too much in the takedown given the work that they actually have to do,” said Marlowe, who addresses the topic of transaction costs in underwriting in an upcoming book, entitled “Public Debt Management: Strategy and Evidence,” which is expected to be published either later this year or in early 2027. 

“This is a big topic,” Nikolai Sklaroff, capital finance director at the San Francisco Public Utilities Commission, said of the debate surrounding the takedown. In addition to his vantage point as an issuer, Sklaroff during his public finance career has also worked as a financial advisor and as an underwriter.

“I think generally there is an over-emphasis placed on the takedown at the expense of considering the overall cost of the transaction,” Sklaroff said. “It’s a little like deciding on buying a car based on how much commission the salesman is getting versus negotiating the price.” 

One reason for that is that in the public sector “there tends to be a desire for low-cost bidding,” and the takedown is “the most tangible, easiest thing for people to measure,” Sklaroff said. 

Other factors that have a significantly larger influence on interest rates are much harder to measure in a request for proposal process relating to underwriter selection, “but I would argue that those are the most important,” he said. 

In its latest RFP, SFPUC provided “a very clear ranking” of the various factors it was weighing, Sklaroff said. 

“And while we don’t dismiss takedown entirely, it’s only 5%,” he said, adding that one reason it has such a small weighting in terms of RFP scoring is because SFPUC is fortunate to have “amazing  competition” among underwriters for its work.

“So even though it’s  such a tiny fraction of the scoring, they’re all bidding at the same level,” Sklaroff said. “It’s very, very competitive.” 

Factors of much more importance to SFPUC when it comes to underwriter selection are “the ability to distribute bonds, willingness to step up with capital and to step up with really good financing ideas,” he said. 

“We think that those influence our interest rate – which is the core of the cost – much more than the takedown, which when you translate it into a 30-year financing is a fraction of the all-in [true interest cost],” Sklaroff said, 

Like Sklaroff, David Erdman, a managing director at Baker Tilly Municipal Advisors, LLC, pointed to the takedown as something that’s easy to measure. 

“Public finance is governments and there are always procurement questions to make sure a good deal is there for citizens,” said Erdman, who referenced a procurement for pencils by way of example.

While a bid for pencils might typically be awarded on the lowest price, whether those pencils are going to last a year or three years is “something you don’t know when you complete the required procurement process,” he said.  

“Apply that now to takedown,” he said. “Due to this procurement mindset, some governments are looking for the lowest takedown. Takedown is a measurable component of underwriting compensation, but it is only one factor in evaluating execution. The ultimate question for issuers is whether the financing achieves the lowest overall cost of capital.” 

That doesn’t mean, however, that the takedown should go “unwatched,” Erdman said, adding that there are probably situations where a government isn’t engaging a municipal advisor or otherwise paying attention and the takedown number is higher than it could be. 

Erdman, who in addition to his current municipal advisor role has also been in the issuer seat having served previously as Wisconsin’s capital finance director, added that the appropriate takedown level can vary on “a case-by-case basis.” 

For instance, he said there might be a negotiated deal for a general obligation bond issuer with good disclosure and that is in the market regularly and the offering doesn’t include a retail order period. 

“Compare this to a lower-rated revenue credit that comes to the market very infrequently that has double exemption and could have some retail interest in it,” Erdman said. “The revenue credit example has more work for the sales and trading teams as the credit is not as familiar and the potential retail component provides more moving parts.”   

Consequently, the takedown for the revenue credit could be higher “as the salesforce has more work and contacts to make in order to get the best deal for the issuer,” Erdman said. 

Marlowe said many issuers see offering a higher takedown as a way not just to encourage underwriters to work harder to generate demand that achieves good rates on a specific offering, but also a way to foster a closer working relationship, making the underwriter  more likely to stay engaged with the issuer’s credit and perhaps come up with new ideas for debt structures or cost savings. 

By contrast, there’s a belief that a strong credit from a well-known issuer is going to have people signing up to buy the bonds without much sales effort, so “a lean and mean” takedown makes more sense, he said.

“There are definitely municipal advisors out there who advocate for that, there’s definitely issuers there who subscribe to that perspective,” Marlowe said. 

So which approach to the takedown translates to a better outcome for issuers? 

“I wish that there was like really serious empirical research that we could point to that says this way or that way is better, or these are the circumstances where one works better than the other,” said Marlowe. “That’s actually a really interesting question that oddly no one has ever really answered.”

While the question of which takedown approach is better may have yet to be answered and Marlowe emphasized that he wasn’t advocating for either approach, a portion of his upcoming book looks at trends in underwriting spreads over time in new municipal issues and what it shows in general isn’t good news for underwriters compensation-wise.

In what the book refers to as the “ALL BONDS category,” underwriter spreads have declined sharply over time. While from 2005 through 2010, the average spread was $5.65 per $1,000 of par value, the average spread from 2021 through 2024 was $3.93, a decrease of more than 30%, according information in the book based on data from The Bond Buyer. 

Marlowe’s book, which also uses data from the California Debt and Investment Advisory Commission, cites three components of the underwriter spread – takedown, management fee and underwriter expenses. He acknowledged in his interview that some in the industry may break out spread components differently. 

For most California municipal issuer types during the 2021-2024 timeframe, takedown accounted for the biggest slice of total underwriting costs, typically representing 75% to 85% of such costs, the book said, citing CDIAC data. However, that can vary depending on the type of credit and the business model of the lead managing underwriter, according to the book. 

Some firms use a model where the underwriter expenses component of the spread is larger than the takedown, the book said. That’s true primarily for “bulge bracket firms” that tend to work on high profile deals for issuers such as the State of California. Underwriting fees on such deals are scrutinized closely, “as a few additional basis points of takedown can lead to millions of additional dollars flowing ‘from taxpayers to Wall Street,'” according to the book.

In the interview, Marlowe also pointed to another strategy some underwriting firms use to compensate for a low takedown. 

“If you’re talking about an underwriter that has a really strong trading desk, they may be able to take advantage of developments in the secondary market in the weeks and months that follow a new bond issuance,” Marlowe said. “Regulators have expressed real concerns about some of the more extreme versions of that, whether you call it flipping or not providing best execution or whatever.”