Stern Brothers University - The Financing Team
A tax-exempt revenue bond
transaction is one of the more complex issues a chief financial officer
and/or chief executive officer will be involved in during his or her career.
The bond issue will require a considerable amount of legal and financial
documentation. The team of experts required for the issue will vary
according to the type of financing under consideration (i.e., rated,
non-rated or credit enhanced issue). Typically, the investment banker will
quarterback and coordinate the finance team. Stern Brothers & Co. has
prepared the following list of participants to give the Borrower an
indication of the complexity of the issue and the roles individual
participants play in the financing transaction. The participants can be
broken down into the following groupings: Borrower Bond Counsel Issuer
Rating Agencies or Credit Enhancer Investment Banker/Underwriter Trustee
Financial Consultants Other Participants
THE BORROWER
The borrower is typically a
501(c)3 non-for-profit organization or governmental unit. The borrower
should define the purpose of the financing; that is, the goals and needs of
the financing, such as new construction, capital equipment acquisition or
refinancing. A Board Resolution should be the document that specifies the
purpose and the means of the financing. The borrower’s team of participants
may include some or all of the following individuals:
Chief Financial Officer (CFO)
Chief Executive Officer (CEO)
Board Chairman
Finance Committee Chairman
Organization’s Legal Counsel
Selected Staff Members
The CFO and CEO together with the Organization’s Legal Counsel typically
represent the Borrower at all document drafting sessions, rating
presentations and negotiation sessions. Heavy involvement of the Borrower’s
staff including secretarial support should be expected during the financing
process since data collection and copying of documents require a substantial
effort. The Borrower’s Counsel will assist in drafting sections of the
Official Statement pertaining to litigation matters. In addition, they may
negotiate construction contracts for the Borrower, negotiate on behalf of
the Borrower all covenants in the debt documents, review zoning, property
and title matters; and deliver an opinion that the debt is a binding
obligation upon the Borrower.
THE ISSUER
Depending on State laws, the
Issuer of tax-exempt bonds on behalf of a Borrower is usually a State
Authority, a local authority or a city or county industrial development
authority. Stern Brothers has compiled a list of applicable statutes for
each of the fifty states, the District of Columbia and the United States
Territories in order to determine potential issuers. The Issuer may have a
permanently designated executive who acts on behalf of the Issuer. However,
for some city and county Issuers , the role may be assigned to a member of
the city staff such as City Manager, City Finance Officer or Economic
Development Officer. In addition, the Issuer will be represented by legal
counsel who reviews all legal documents to protect the Issuer’s legal
interests and who gives an opinion that the bonds are properly authorized by
the Issuer. Some large issuers have a permanent full time staff and a
financial advisor to review the transactions and to assist the Borrower in
negotiating fees and reviewing interest rates.
FINANCIAL CONSULTANTS
Because any major financial
borrowing or debt incurrence will have a major impact on the Borrower’s
financial condition, several types of financial consultants may be required
to be involved in the transaction. Foremost in involvement will be the
Borrower's auditing firm. The auditor will provide up-to-date audited
financials including unaudited comparable stub periods, five year financial
history and input into the financial section of the offering document
(Official Statement). The auditor may provide a review of the financial
impact of debt financing on revenues and expenses.
A feasibility consultant
(typically nationally recognized in the respective industry) may perform a
financial feasibility study that will include a demand analysis, financial
projection and sensitivity analysis. The feasibility consultant may also
be the Borrower’s auditor; however, unless the auditor is nationally
recognized in the area of feasibility studies, use of a non-recognized
auditor could impact upon the rating and/or ability to attract credit
enhancement.
Other financial consultants might involve special legal counsel to aid in developing a new corporate structure such as the creation of an obligated group of borrowers or the use of special financial consultants to review the impact of new equipment and service on Borrower staffing and revenue patterns.
RATING AGENCIES/CREDIT
ENHANCEMENT
One of the lowest costs of
borrowing is obtained in a transaction that is rated by one or more of the
major credit rating agencies. The three most recognized in the market are
Standard and Poor’s Corporation, Fitch Investors Service and Moody’s
Investor Service. Depending on the size of the bond issue and the market for
bonds, Stern Brothers recommends obtaining a bond rating from one or more
agencies. Rating agencies will assign a rating officer and a rating analyst
to compare the Borrower’s financial condition, the legal structure of the
financing and other factors to comparable issues and assess the Borrower’s
ability to pay the debt service on the bonds. Due to interest rate savings
and the “spread” in credit quality, municipal bond insurance (“AAA”, “AA” or
“A” rated) or bank letters of credit (“A” or better) may be secured to
credit enhance the bond issue. In those cases where credit enhancement is
being utilized, the credit enhancer will review the credit quality of the
Borrower in lieu of the rating agency or as happens in some cases,
simultaneously with the rating agency review. The credit enhancer will have
its legal counsel review documents and terms and conditions of the credit
enhancement to insure the interests of the credit enhancer are properly
incorporated in the transaction.
BOND COUNSEL
A key legal person involved
in the transaction is an approved and recognized bond counsel. The firm
acting as bond counsel need not be a national firm. However, they should be
listed in the Red Book (The Directory of Municipal Bond Dealers) and have
experience within the state of issue. Bond Counsel will draft all of the
basic documents in accordance with the plan of finance provided by the
investment banker. The basic documents generally are:
Loan or Lease Agreement
Trust Agreement
Mortgage (if needed)
Other documents as the complexity of the transaction dictate may include:
Guaranty Agreement
Supplemental Indenture
Escrow Agreement
Master Trust Indenture
In addition, Bond Counsel
renders a legal opinion that the bonds are duly authorized and exempt from
federal taxation under applicable federal tax laws and in cases where state
laws permit, exempt from any applicable state income or intangible taxation.
Bond Counsel is an independent authority who is retained by the issuer and
the Borrower and consequently works on their behalf as well as potential
bondholders.
THE INVESTMENT BANKER/UNDERWRITER
The investment
Banker/Underwriter is the team leader or quarterback for the transaction and
responsible for:
Structuring and
Developing the Plan of Finance.
Working closely with the Borrower, the Investment Banker/Underwriter will
evaluate the various financing options available, and recommend a Plan of
Finance that achieves the institutions goals. In general, an Investment
Banker that focuses in a particular industry will bring their experience
and knowledge from similar transactions providing the Borrower with the
most innovative and appropriate structure available.
Coordinating Rating
Presentations or securing Credit Enhancement.
The key to any financing is the ability to obtain the lowest possible
costs. A qualified underwriter will have had extensive experience in
making presentations to rating agencies, banks and bond insurers. An
experienced underwriter should have a current database of key questions,
financial ratios and other data the Borrower should expect to be asked by
the rating agencies and credit enhancers.
Preparation of the Official
Statement.
A key function of the underwriter is to prepare an offering document
(“Official Statement”). In a public sale, this document will include
information regarding the plan of finance, the project, the bonds, the
legal documents, the rating and/or credit enhancer, the Borrower and other
information deemed to be pertinent by the underwriter.
Marketing and Syndication of the Bonds. Once the bond transaction has been rated or credit enhanced, structured and all documents drafted in final form, the key job of the investment banker is to develop and implement a successful marketing and syndication of the bond issue leading to the successful sale of the bonds.
Since bonds are generally
marketed to a broad range of investors, an underwriter must have access to a
large retail sales network as well as have a significant institutional
capability.
THE TRUSTEE
A bond trustee is required in
bond transactions except where the borrower is a governmental unit in which
case only a paying agent, bond registrar and transfer agent are required.
The trustee administers the provisions of the Trust Indenture, ensures
collection of debt service payment and maintains various accounts and
investments of monies. In addition, the Trustee may also act as the paying
agent, registrar and transfer agent. The Bond Trustee will act to protect
the interests of bondholders and therefore, receives audit reports and other
data on the Borrower as stipulated in the documents. Trustee’s counsel will
review all legal documents to insure compliance with various state law
requirements and Bank’s policies regarding administration as Trustee.
OTHER PARTICIPANTS
In complex bond transactions
a variety of other parties can become involved. Among these are firms that
verify the sufficiency of escrows in the case of an advance refunding;
Guarantor’s Counsel for third party guarantee arrangements; System Counsel
for review of legal implications for parent corporation; and various
agencies of the government (such as in an FHA insured bond transaction). In
addition, architects, engineers, contractors and equipment vendors will
become involved through the supply of goods and services.