Most problems coming out of a bond issue arise from a lack of loyalty to you, the local government issuer. Our friend Webster defines loyalty as "faithfulness to a person to whom fidelity is due."
As the issuer, you have three goals in a bond issue: (i) to raise money for a project or a refunding, (ii) to minimize the cost of the money raised, and (iii) to minimize the legal and financial risks inherent in the financing structure. All of the participants in the bond issue must be committed to these three goals.
Let us review the various parties involved in a bond issue and their loyalty to the issuer based on two factors. The first factor is money: how much is the party making and how is the party being paid. The second factor is diligence: how much attention and care is the party giving to the bond issue.
The Issuer. Money should not be a factor for the issuer - no bribery please! But diligence is very important. The issuer should identify which of its representatives is responsible for the bond issue. That representative must critically analyze the entire bond issuance process. Kick the tires. Ask questions if something is confusing. Above all, never rely completely on the professionals. Be a skeptic.
The Solicitor. Pay your solicitor enough so that he or she is diligent on your behalf. Ask the solicitor to read everything. Even though the solicitor may not be an expert on bond issues, he or she is the professional with whom you have the closest ongoing relationship. Make sure the solicitor is also being skeptical and kicking tires.
Bond Counsel. Be sure you know how much your bond counsel and solicitor are being paid - if they present a joint invoice, find out how they are splitting the fee. Make sure that bond counsel is not receiving payments from anyone else such as the underwriter or an investment party.
The bond counsel normally identifies the issuer as his client. You should push bond counsel to circulate document drafts in a timely manner so that you can review them. Ask bond counsel to tell you what the difficult legal issues are in the financing. You have the right to know if there are significant tax or securities law questions involved. Those questions may lead you to go in a different direction with the financing.
Underwriter/Financial Advisor. Once again, make sure you know exactly how much your underwriter or financial advisor is earning and from what sources. The "yield burning" cases involved an underwriter or financial advisor earning huge mark-ups on securities being sold to the issuer for a refunding escrow. In many of those situations, the issuer had no idea what was going on. Nevertheless, the issuer could be liable for tax penalties.
Make sure your underwriter or financial advisor reviews with you all of your financing options. Compare fixed versus variable rates, short-term versus long-term borrowing, public issues versus bond pools versus bank loans. Does your advisor have a pecuniary interest in one of these financing options?
In conclusion, insist on loyalty to you, the issuer. Do your best to understand what is going on in your bond issue. Try to flush out any hidden time bombs by asking questions and by frowning a lot. It may spare you a great deal of heartache later.
Best of luck on your bond issues!
These materials are intended to furnish general information and should not be relied upon as advice in specific situations.
David Unkovic
Saul Ewing LLP
Centre Square West
1500 Market Street, 38th Floor
Philadelphia, PA 19102
(215) 972-7750 fax: (215) 972-1928
e-mail: dunkovic@saul.com
web: www.saul.com