Bond-Basics

Anatomy of a Public Finance Transaction

The following information is more fully described throughout this Basics Handbook and is set forth here to provide an overview of a public finance transaction, the parties thereto and specific tasks that Novices may undertake. Readers should note that terms used throughout the Basics Handbook are defined in our Bond Basics Hub.

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Basics About Bonds

A Bond is simply the evidence of debt, in the same way that a promissory note is evidence of the obligation to repay a loan. Bonds are issued by a governmental entity, such as a state, county, city or an authority in order to finance or refinance qualifying projects. An Issuer may issue Bonds to finance its own project. In these cases, the Bonds are referred to as Governmental Bonds or Governmental Purpose Bonds. In other cases, the Issuer may issue the Bonds to loan the Bond proceeds to a third party. In these cases, the Bonds are referred to as Conduit Bonds. Bonds are generally considered to be one of two types: (1) General Obligation Bonds, which are typically secured by the full faith and credit and general taxing power of the governmental entity issuing the Bonds; or (2) Revenue Bonds, which are secured by a specific source or sources of revenues that are not Ad Valorem Property Tax Revenues. Bonds are issued either as Tax-Exempt Bonds or Taxable Bonds.

A Basic Process of Issuing Bonds

Typically, Bonds are issued because a determination is made by an Issuer or a Borrower that: (1) current revenue cash flow is not sufficient to fully finance a project on a pay-as-you-go basis; (2) current and future users of a project with a long life should contribute to the cost of the project (intergenerational equity); or (3) other reasons deemed prudent by the Issuer or Borrower requiring the issuance of Bonds. Once the determination is made to issue the Bonds, the Issuer or Borrower will assemble a financing team that often involves the following: Bond Counsel, Issuer’s Counsel and/or Borrower’s Counsel, Disclosure Counsel, a Municipal Advisor, an Underwriter (or Lender) and Underwriter’s Counsel or Lender’s Counsel (if required by the financing plan).

There are a significant number of preliminary tasks to complete prior to Closing the Bond Issue. The following table is an example of certain important preliminary tasks and determinations that the financing team must undertake:

The purpose and authority to undertake the project and the financing;
State and tax law considerations regarding the use of the proceeds of the Bonds;
The source of revenues to be pledged to the repayment of the Bonds;
The Conduit Issuer for the Bonds, if applicable;
Any remaining and unselected members of the financing team;
The timetable for the financing, including dates for Pre-Closing and Closing;
The Useful Life of the project to be financed with the proceeds of the Bonds and the Maturity schedule for the Bonds (this may be limited by the Useful Life of and the type of the project, as well as the revenues pledged to repayment of the Bonds);
Development of the structure of the financing (e.g., Variable or Fixed Interest Rate);
How the Bonds will be sold (e.g., Private Placement or Public Offering) and market conditions (e.g., Interest Rates and Redemption provisions); and
Required covenants for the Bonds (e.g., terms for issuing Additional Bonds secured by the same source of revenues, required coverage of Debt Service of such revenues, etcetera).

After the financing team completes the preliminary tasks, it will complete drafting the documents for the transaction, complete a Due Diligence process (analyzing and mitigating legal issues, credit risk, and factual disclosures set forth in the Offering Document), implement the financing plan (which includes the sale or placement of the Bonds with one or more investors), and execute the documentation. Finally, the Bonds are delivered to the investors, and the Issuer receives the sale proceeds in exchange for the Bonds (and, if Conduit Bonds are issued, loans the proceeds to the Borrower).

Projects for Novices

The specific tasks that may be assigned to Novices depend on their firm’s role in a transaction (e.g., whether the firm is serving as Bond Counsel, Underwriter’s Counsel, Disclosure Counsel, Issuer’s Counsel, Borrower’s Counsel, Lender’s Counsel, or other special counsel). These tasks may be completed in their entirety by the Novice or for final review by a supervising attorney or more experienced and responsible professionals. Regardless of their level of experience or responsibility, Novices should keep the supervising professional informed as to the progress of these assignments. In addition, Novices should consult with the supervising professional about the various projects in which they are involved, particularly when fielding questions from parties outside the firm. Novices should always consult the supervising professional in the case of substantive questions on public finance transactions or firm policies.

The following section contains brief descriptions of tasks which may often be performed by Novices at firms serving as Bond Counsel or at firms serving as Underwriter’s Counsel or Disclosure Counsel.

When your firm is acting as Bond Counsel:

Review records as to the use of the proceeds of the Bonds for tax Due Diligence purposes, prepare a memorandum discussing findings and assist the supervising attorney with tax Due Diligence interviews;
Compile and organize various materials and information relating to the Issuer of the Bonds and/or the Borrower;
Prepare initial drafts and continue to assist in the drafting of all financing documents, certificates, opinions and, if applicable, the review of the related Offering Document;
Handle routine correspondence and telephone calls and consult the supervising attorney whenever a legal judgment, legal opinion or legal advice is required or sought;
Coordinate the distribution of documents, receive comments on documents and transmit comments to the supervising attorney;
Prepare applications and submissions for governmental consent and approvals of the transaction, including authorizing resolutions;
Review the Bond Purchase Agreement, the Indenture, other primary financing documents and the Offering Document to communicate to the supervisory attorney whether conditions to Closing have been satisfied;
Review drafts of all documents for consistent use of defined terms and cross-references;
Prepare an initial draft of the list of Closing documents;
Confirm the Closing documents and other Closing Transcript items fulfill all of the deliverables required by any authorizing resolutions, including the Bond Resolution, the Bond Purchase Agreement, the Indenture, or other documents that contain conditions precedent to the issuance of the Bonds;
Assemble documents for signatures and, with the assistance of the supervising attorney, coordinate their execution and delivery;
Prepare governmental filings, such as IRS Form 8038 and Financing Statements, such as UCC-1s, and coordinate the necessary recordations and filings thereof;
Attend the Pre-Closing and Closing, and coordinate document execution, distribution and recording, if necessary; and
Organize documents for the Closing Transcript (physically or online) and supervise the Closing Transcript preparation.

When the firm is acting as Underwriter’s Counsel or Disclosure Counsel:

Review records as to the use of the proceeds of the Bonds for Due Diligence purposes, prepare a memorandum discussing findings and assist the supervising attorney with Due Diligence interviews;
Prepare initial drafts and continue to assist in the drafting of the Offering Document, Bond Purchase Agreement, Continuing Disclosure Undertaking or Agreement, Agreement Among Underwriters and the Selling Group Agreement for review by the supervising attorney;
Handle routine correspondence and telephone calls and consult the supervising attorney whenever a legal judgment, legal opinion or legal advice is required or sought;
Coordinate the distribution of documents, receive comments on documents, incorporate basic comments into the documents and coordinate the incorporation of the more substantive comments with the supervising attorney;
Assist in finalizing the Offering Document by coordinating comments and corrections with the Printer and/or financing team, confirming distribution and/or posting of the Offering Document with the Printer and/or the financing team and reviewing the final Offering Document prior to printing and/or posting;
To the extent required, prepare initial drafts of the Blue Sky Memorandum and legal investment memorandum, and draft and coordinate Blue Sky Law filings under the attorney’s supervision;
Check the Closing documents against the Bond Purchase Agreement and Offering Document; and
Attend the Pre-Closing and Closing, and coordinate Underwriter document execution and distribution.