A key part of issuing new debt is to assemble a team that works for the state or local government. Generally, the bond offering process is a coordinated effort among various professionals to finance a state or local government’s capital projects. A municipal government can benefit from an understanding of the roles and responsibilities of its deal team.
Once a state or local government decides to finance a capital project by issuing bonds, it would hire a financing team to finalize the financing plan, develop offering documents, prepare for any rating agency and investor presentations, market the bond offering to investors, price the bonds and close the transaction.
The roles and responsibilities of an issuer’s team may vary depending upon the bond offering method of sale — competitive bid, negotiated sale or private placement.
Negotiated Sale
In a negotiated sale, an initial bond offering by an issuer is directly sold to an underwriter or underwriting syndicate selected by the issuer.1 In addition to the underwriter or underwriting syndicate, the professionals involved in a negotiated municipal bond financing transaction may include municipal advisors, underwriter’s counsel, bond counsel, feasibility consultants, credit enhancers, selling group members, auditors, rating agencies, trustees, disclosure counsel and others. View a chart of the professionals involved in a negotiated transaction.
Competitive Sale
A competitive sale is a transaction in which potential underwriters submit bids for the purchase of a new issue of municipal securities, and the securities are awarded to the underwriter or underwriting syndicate presenting the lowest interest cost according to stipulated criteria set forth in the notice of sale. The underwriting of securities in this manner may also be referred to as a “public sale” or “competitive sale.” The professionals that may be involved in competitive transactions include underwriters, municipal advisors, bond counsel, credit enhancers, auditors, rating agencies, trustees and others. View a chart of the professionals involved in a competitive transaction.
Private Placement
A private placement, which is far less common, is a transaction in which municipal securities are sold directly to one or a limited number of qualified investors, such as institutional investors, rather than through a public offering. The professionals involved will vary depending on the nature of the transaction.
Financing Team Members
The following provides a general overview and members of a bond financing team and their roles in an initial bond offering. Activities conducted by these professionals will depend on the particular type of transaction, the presence of additional financing team members and any restricted role they perform as the issuer may determine.
State or Local Government
Manages the bond pricing process, which includes, among other things:
- Selecting and managing the financing team, including their compensation;
- Determining the method of sale;
- Executing the bond purchase agreement;
- Complying with tax and other covenants included in the bond financing documents;
- Submitting continuing disclosures to the MSRB’s Electronic Municipal Market Access (EMMA®) system under the issuer’s continuing disclosure agreement.
Municipal Advisor
- Acts in a fiduciary capacity for the state or local government.
- Performs activities as outlined in their contract with the issuer, which may include:
- Developing a plan of finance
- Assisting in preparation for rating agency presentations
- Identifying and analyzing financing solutions, among other things.
Bond Counsel
- Reviews applicable laws and legal requirements regarding the bond issue
- Drafts bond resolution, indenture, loan agreement and/or other bond financing documents
Underwriter (also known as Senior Manager, Lead Manager or Bookrunner)
- Has an “arm’s-length” relationship with the municipal government.
- Manages the process of any sole underwriting or underwriting syndicate in connection with a new issue, which may include, among other things:
- Executing the bond purchase agreement
- Marketing and allocating bonds to investors
- Providing proceeds at closing and obtaining funds from investors
Underwriting Syndicate (also known as Co-Managers)
- Has an “arm’s-length” relationship with the state or local government.
- Shares the risks of underwriting the issue with the senior manager and aids in the distribution of the bonds to investors
Underwriter’s Counsel
- Advises underwriters on state and federal securities laws
- Assists underwriters in undertaking due diligence review, provides legal opinion and may draft certain documents.
Trustee (also known as Paying Agent, or Registrar)
- Acts in a fiduciary role for the benefit of bondholders in enforcing the terms of the trust indenture
- Transmits principal and interest payments from an issuer of municipal securities to the bondholders
Other Deal Participants
Depending upon the type of transaction, other deal participants may be retained as required including:
- Other counsel – disclosure counsel, special tax counsel, bank counsel and borrower’s counsel, some or all of whom may be necessary for more complex issues
- Feasibility consultant – for revenue bond sales
- Credit enhancers – provide bond insurance or letters of credit to support an issuer’s credit
- Selling group members – assist in the distribution of a new issue of municipal securities but do not participate in residual syndicate profits or share in any liability for unsold bonds.
- Verification agent – verifies cash flow sufficiency to the call date of the escrow securities to pay principal and interest on refunded bonds
- Escrow agent – serves as custodian of funds and holds securities to pay debt service on refunded bonds
- Auditor – compiles and examines the municipal government’s financial statements upon which the auditor expresses or disclaims an opinion
