Media Center

Anatomy of a Bond Issue: The Participants and The Steps

March 12, 2014


This article was published in the Winter 2014 edition of the Municipal Law Section Newsletter of the Pennsylvania Bar Association.

For many local government officials and solicitors in Pennsylvania, a bond issue is a rare occurrence perceived to be shrouded in mystery.  Like most things in life, it is only mysterious because it is unfamiliar.  Once you understand the participants and the steps, the process makes more sense.

In recent years, the securities and tax regulations governing municipal bonds have grown increasingly complex.  More so than ever before, it is important for the issuer to understand what it is getting into and what its responsibilities are when it undertakes a bond issue.

A.     The Participants.

Issuer.  The most important participant in a bond issue is the municipal issuer of the bonds.  The issuer is undertaking the financing for the purpose of financing capital projects or for the purpose of refunding existing debt.  All of the other participants are there to assist the issuer in the process of raising the money.

Solicitor.  The issuer’s regular lawyer is referred to as the solicitor.  The solicitor represents the issuer in the financing and delivers a legal opinion at the closing.  The solicitor’s opinion usually covers the following matters: that the issuer is validly existing, that the issuer’s officers validly hold their offices, that the public meeting at which the bond issue is approved was properly called and held and that there is no material litigation pending against the issuer which would adversely impact upon the bond issue.

In many cases, the solicitor is not an expert in public finance.  But the solicitor is usually an experienced lawyer who understands the issuer’s operations better than any of the other professionals involved in the bond issue.  Therefore, the solicitor should be diligent in protecting the interests of the issuer by asking questions.  If the solicitor and the issuer are not comfortable with anything related to the bond issue, then the solicitor should slow down the process until he or she is comfortable.  It is particularly important that the solicitor reviews the description of the issuer in the disclosure document for the bonds (commonly called the official statement, or “OS”), and that the solicitor makes sure the issuer is prepared to comply with the issuer’s post-issuance responsibilities (described below).

Bond Counsel.  Because the solicitor is often not an expert in public finance, the issuer usually also retains a law firm which specializes in public finance to work with the solicitor on the legal aspects of the bond issue.  This lawyer is commonly referred to as bond counsel.  The issuer should make sure that bond counsel identifies the issuer as its client in its engagement latter.

Bond counsel cooperates with the issuer and the financial advisor or underwriter in structuring the transaction, with particular emphasis on legal matters related to state law approvals and compliance with the federal tax and securities laws. Bond counsel also delivers an opinion at the closing which covers the following points:  the issuer has properly authorized and issued the bonds; the bonds are enforceable under the law; and interest on the bonds is exempt from federal income tax and certain state taxes (to the extent applicable).  Bond purchasers rely on the bond counsel opinion when they buy the bonds.

Financial advisor and/or underwriter.  There are two financial functions that take place in a bond issue.  First, the issuer may hire a financial firm to advise it on the structuring of the bond issue.  Second, the issuer may hire a financial firm to buy the bonds with the intent to sell them to purchasers.

The rules governing what types of firms can perform these two functions are currently in flux.

Traditionally, the issuer could hire an underwriter (also called an investment banker) to perform both of these functions in a negotiated offering.  The underwriter would provide structuring advice and then market the bonds to purchasers.   Or, the issuer could hire a financial advisor solely to advise the issuer on structuring the bond issue. (The financial advisor would not sell the bonds.)  The issuer would then, with the advice of the financial advisor, sell the bonds either through a competitive sale in which multiple underwriters bid, or through a negotiated offering in which a selected underwriter agrees to buy the bonds and then sell them to purchasers.

Financial advisors were seen as having a fiduciary duty to the issuer, but financial advisors were largely unregulated.  Underwriters did not have a fiduciary duty to the issuer (just an obligation to deal fairly), but underwriters were heavily regulated.

In response to the financial crisis of 2008, Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act.  Dodd-Frank created a new category of “municipal advisors” and invested the Securities and Exchange Commission (the SEC) and the Municipal Securities Rulemaking Board (the MSRB) with jurisdiction over financial advisors and other participants in municipal bond transactions.

In 2010, the SEC required municipal advisors to register with it.  On September 20, 2013, the SEC published final regulations which are over 700 pages long and are very confusing.  Suffice it to say that underwriter groups and financial advisor groups are debating with each other and with the SEC and the MSRB over who can provide what structuring advice to issuers.  Stay tuned for further developments in this area.

Paying agent or trustee.  Once the bond issue has closed, debt service payments are made by the issuer to the bondholders through a paying agent or trustee, which is a commercial bank chosen by the issuer.  Depending on the structure of the bond issue, the paying agent or trustee may also hold certain moneys of the issuer in a reserve fund or other funds.   If the bond issue ever goes into default, the paying agent or trustee often represents the bondholders in remedial proceedings against the issuer.

Credit Enhancers.  It sometimes makes economic sense for the issuer to utilize a third party to guarantee the bond issue — this is called credit enhancement. For instance, a municipality may agree to guarantee the bonds of a municipal authority; an insurance company may issue an insurance policy guaranteeing payment of debt service on the bonds; or a bank may issue a letter of credit to guarantee the bonds.

B.     The Steps.

Selection of participants and structuring the transaction.  The first step is for the issuer to select bond counsel and the financial advisor or underwriter.  This selection should be undertaken almost immediately after the issuer has identified a project to be financed by a bond issue.

The issuer and the solicitor work with these participants to structure the financing.  Some basic questions need to be answered: (1) what is the purpose of the issue — to fund a capital project, to refund prior debt, or a combination of both? (2) what are the legal parameters involved — does the capital project serve a proper legal purpose, can the debt be refunded under the federal tax rules? (3) how should the bonds be sold — through negotiation with one underwriter or through a bidding procedure with multiple underwriters? (4) does credit enhancement make economic sense (that is, is the cost of the insurance or letter of credit less than the resulting debt service savings to the issuer)?

Once the structure is formulated, the issuer needs to select the paying agent or trustee and the credit enhancer, if any, and all the participants begin to prepare the required documentation.  The underwriter or financial advisor and the issuer prepare the disclosure document which is usually called the preliminary official statement.  Bond counsel drafts the ordinance, resolution or indenture and other legal documents.

Marketing the bonds and the bond sale.  When the preliminary official statement is in proper form, it is distributed by the underwriter to potential purchasers. The marketing period usually lasts about one week.

At the end of the marketing period, the issuer holds a public meeting at which time the bond sale is held. If the issuer has chosen a negotiated offering with one underwriter, then the underwriter comes to the public meeting with a firm purchase proposal.  If the issuer has chosen an offering with bids from multiple underwriters, then the financial advisor collects the bids on the day of the public meeting usually utilizing an internet bidding process. The issuer then accepts the purchase proposal at the public meeting by adopting the ordinance or resolution prepared by bond counsel.

The purchase proposal contains the specific terms of the bond issue:  principal amount of the bonds, interest rates, amortization schedule and prepayment provisions.  If also sets forth the conditions of closing.  Once the deal is “cut” at the bond sale, a final official statement is prepared and sent by the underwriter to the purchasers, and the participants proceed toward the closing.

DCED approval and the closing.  If the issuer is a municipality or school district, bond counsel will prepare a package to be filed with the Pennsylvania Department of Community and Economic Development (DCED) in accordance with the requirements of the Local Government Unit Debt Act (LGUDA).  DCED has 20 days to approve the bond issue.   Other issuers of debt in Pennsylvania may have different statutory approval requirements.

Usually the closing takes place about one month after the bond sale.  Prior to the closing, the bond counsel will distribute for review drafts of various agreements, certificates and legal opinions.  At the closing, the participants execute the various closing documents.  The underwriter wires the purchase price for the bonds to the paying agent or trustee.  The paying agent or trustee, at the direction of the issuer, pays the costs of issuance and applies the balance to fund a construction or project fund or to refund the prior debt.  After the closing, bond counsel distributes a complete set of the closing documents to each participant (often on a CD).

Post-issuance compliance.   After a bond issue closes, there are requirements under the tax code and under the securities laws that continue to apply to the bonds.  On the tax side, there are regulations governing the investment and spending of bond proceeds and the use of the bond-financed facilities.  On the securities law side, there are requirements to make annual financial disclosures and special event disclosures with the MSRB.

Both the Internal Revenue Service and the SEC strongly encourage issuers to adopt and follow written post-issuance compliance policies.  And all of the regulators are becoming more and more aggressive in supervising the post-issuance requirements.  Before the bond issue closes, the issuer and solicitor should work closely with bond counsel and the financial advisor or underwriter to help the issuer develop these post-issuance compliance policies.  After the closing, the issuer and its solicitor should make sure the issuer takes these policies seriously and follows them.

C.         Miscellaneous Points

Now that we have reviewed the participants and the steps, here are a few miscellaneous points to consider:

Sometimes the issuer is acting as a “conduit” issuer.  In such a case, the issuer issues the bonds and loans the proceeds to a third-party borrower, which is often a nonprofit corporation such as a hospital or university.  The borrower is responsible for paying the debt service on the bonds.  Both the issuer and the borrower need to be concerned with the procedural, tax and securities law aspects of the bond issue.

Although the financial advisor or underwriter usually prepares the draft of the preliminary official statement and the final official statement, it is really the issuer’s disclosure document. The issuer and its solicitor should carefully review its contents. The official statement should contain no misstatement of a material fact, and no material fact about the issuer should be omitted from the official statement.

If the issuer plans to issue bank-qualified bonds at some point during the year, this consideration should be communicated to bond counsel during the structuring process.

If the bonds are being issued to finance a capital project, the issuer should focus well before the closing on the investment strategy for the bond proceeds.

Sometimes an issuer may want to adopt an ordinance or resolution, as applicable, which approves “parameters” and delegates approval of the final pricing of the bonds to a specific municipal official or to the borrower.  In such a case, the bond sale occurs after the governing body takes its official action.

If the issuer plans to enter into an interest rate swap agreement in connection with a bond issue, the issuer should retain an experienced financial advisor to advise it on the swap, and the issuer should make sure it understands the risks involved in the transaction.

Good luck on your bond issues!

Donna Kreiser ( and David Unkovic ( are public finance lawyers with McNees Wallace & Nurick LLC with offices in Harrisburg, Lancaster, Scranton and State College, Pennsylvania.  The firm regularly serves as bond counsel for state agencies, local governments, authorities and school districts.  Donna Kreiser formerly served as deputy general counsel to the Pennsylvania Governor’s Office of General Counsel, and David Unkovic formerly served as the first state appointed receiver for the City of Harrisburg.