- Reports and Resources
Direct Purchase of State or Local Obligations by Commercial Banks and Other Financial Institutions
Paper exploring the differences between the traditional municipal market debt structure and traditional commercial lending structure.
Most bond lawyers are familiar with bank placements (frequently referred to in this paper as “direct purchase transactions”), whether in the form of a bond placement with a single bank or in a loan and note structure, depending on the prevailing state law requirements. Since 2008, however, there has been a marked increase in the frequency and prevalence of direct purchase or bank loan transactions in the municipal market, which has highlighted some of the cultural differences between the traditional municipal market debt structure and the traditional commercial lending structure.
This paper is intended to bridge this cultural gap by exploring some of the typical provisions commonly encountered when negotiating direct purchase transactions. Part I of this paper describes structures and terms common in direct purchase term sheets and examines basic documentation and interest rate mechanics, as well as maturity, prepayment and amortization provisions. Part II explores the typical representations, warranties, and covenants frequently negotiated in such agreements. Part III examines provisions that are often requested by banks in a direct purchase transaction, and not typically included in municipal bond public offerings, such as increased costs, tax gross-up, break funding indemnity, most favored nations clauses, waiver of sovereign immunity, indemnification, waiver of jury trial, choice of law, and transfer.