Current municipal market rules do not require underwriters to disclose markups on bonds traded in the secondary market, but savvy hospitals can now go on EMMA to review trades and determine if their bonds priced on market, or if they left money on the table.

Hospitals often fixate on fees charged by underwriters for selling municipal bonds.

But the yields underwriters price bonds at can have a much bigger impact on the hospital’s cost of funds.

To help determine if underwriters priced bonds at the lowest possible yields, hospitals turn to the primary and secondary bond markets.

The primary market is where bonds are initially offered and where implied credit spreads over benchmarks can be compared to other similar offerings. A hospital’s underwriter or financial advisor will typically show how the bonds were priced relative to an index such as the MMD yield, and then compare it to recent pricings of similar credits to demonstrate a successful pricing.

When there aren’t enough comparables, a look at secondary market trading is another way to validate underwriter performance.

The secondary market is where bonds trade after their initial offering. If trades show a pattern of higher prices (markups) in the days following the initial offering, the hospital likely left money on the table because investors could have paid higher prices (accept lower yields) on the day of pricing. The higher the markups, the more money the hospital left on the table.

It used to be that only underwriters had access to trading data. Some would cherry pick trades reported to clients, ignoring those with larger markups.

Underwriting syndicate members are typically required to sell bonds at the initial offering prices negotiated with the issuer on the day of pricing, before secondary begins.

According to a 2015 SEC enforcement case, the prospect of juicy markups was too much for one firm to resist. As co-manager between 2009 and 2012, the SEC says Edward Jones took bonds from initial offerings into inventory and sold them to customers later at heavy markups.

Secondary market trades are now available at no cost from the MSRB’s EMMA website, so hospitals can calculate markups in the days following a new bond offering and no longer have to rely on what underwriters are telling them.

EMMA reports trades without adjusting for changes in underlying rates. Since bond prices move inversely with rates, each trade price must be recalculated based on rates in effect on the day bonds were offered.

HFA Partners analyzed 54,000 “Customer Bought” trades reported by EMMA for 142 hospital revenue bond issues priced in calendar 2015.

After adjusting for changes in rates, the average markup during the first 30 days of trading was $317,000 or 0.28% of issue par ($2.80 per $1,000 bond).

Since hospital bond underwriting fees are around $6 per $1,000 bond, the average markup increased this cost by almost 50%.

15% of hospital bonds sold in 2015 had markups greater than 0.50%, with a few over 1.00%.


Markups were relatively consistent across the AA, A and BBB rating categories.

Given that markups represent money left on the table, how can hospitals minimize or even eliminate them?

Markups cannot be estimated until after bonds have been priced by underwriters and have traded in the secondary markets for a few weeks, yet hospitals can put in place some best practices to ensure bonds are priced on market:

  • Develop an understanding of credit spreads and yields;
  • Make past performance in the primary and secondary markets part of the underwriter selection process;
  • Make it clear to the underwriter that secondary market trading will be scrutinized;
  • Get involved in pre-pricing and pricing calls;
  • Get an independent post-pricing report which includes an analysis of secondary trading.

Rather than reinvent the wheel, more hospital CFOs hire a third party to perform the secondary trade analysis, preferably someone with the capability to process what could be thousands of trades, which requires customized software. 

Having a knowledgeable third party monitor bond pricing and secondary trading can have a significant impact on keeping yields low and minimizing the cost of funds.