A municipality or school district that is issuing debt (referred to herein as an “issuer”) needs to employ legal counsel to assist it with the debt issuance process. There are several legal roles in a bond issuance, two of which involve representing the issuer. To begin with, the issuer already has its regular solicitor who serves as the issuer’s general counsel on a wide range of legal issues, such as labor matters, bidding and contracts, land development, and litigation. When an issuer decides to issue debt to finance or refinance a capital project, it should also retain a special counsel, known as bond counsel, to assist both the issuer and its solicitor with the debt issuance process. Bond counsel firms specialize in the legal aspects of debt issuance, including tax law, securities law, and state statutory law.
Here are some basic issues that arise in the course of a bond issue and which involve the solicitor and the bond counsel:
- Make sure the issuer understands the roles of the entities involved in the bond issue. The solicitor’s role is clear: it represents its client, the issuer. The bond counsel usually considers the issuer to be its client too. Review the bond counsel’s engagement letter to confirm that the bond counsel has identified the issuer as its client. As the specialist on debt issuance, the bond counsel will take the quarterback role on legal issues. But the solicitor should make sure bond counsel understands that the solicitor expects to be kept in the loop if there are any problems that could negatively affect the issuer. The level of anticipated communication required of the bond counsel with the issuer and the solicitor may be confirmed in the bond counsel’s engagement letter. The financial advisor to the municipal issuer has a fiduciary duty to the issuer, but underwriters, bank lenders, investment providers and swap providers may have limited or no duties to the issuer. Bond counsel and the solicitor should make sure the issuer understands the duties and roles of these other parties.
- Bond Counsel takes the lead; the solicitor kicks tires and asks questions. The bond counsel will consult with the issuer and the entire financing team in developing the structure for the debt issuance. There are state laws, tax laws, and securities laws with which the bond counsel is familiar which have an effect on the ultimate debt structure. The solicitor is generally not an expert in public finance like bond counsel, but is an experienced attorney with a better understanding of the issuer’s day-to-day needs and expectations. As the transaction moves forward, the solicitor should ask questions if it does not understand something – there are no “stupid” questions whether one dollar or millions of dollars of public funds are involved. The odds are, if the solicitor doesn’t understand something, the issuer probably doesn’t understand it either. The issuer and the solicitor should not accept “that’s just the way it’s done” as an answer. The issuer and the solicitor deserve clear answers to their questions. Here are a few examples of good general questions: to bond counsel – are there any thorny tax issues you are analyzing? To the financial advisor: do you think the issuer’s disclosure is appropriate? If at any point the issuer or the solicitor feel uncertain or uncomfortable regarding the transaction, they should stop the train until they get comfortable.
- The Official Statement is the issuer’s document, no matter who prepares it – make sure it is accurate. The prospectus in a bond issue is called an official statement (or “OS”). In many transactions, the financial advisor or the underwriter’s counsel will draft the OS, but no matter who drafts the OS, it is considered to be the issuer’s disclosure. The bond counsel typically provides certain portions of the OS (the description of the bonds; the tax section). Because the solicitor represents and interacts with the issuer on a regular basis, the solicitor knows more about the issuer than any of the other professionals involved in the financing. The solicitor should carefully read the draft OS and make sure the issuer carefully reviews it too. The OS usually contains a description of the local area and economy – make sure all of that information is accurate. Pension liabilities, OPEB (other post-employment benefits) liabilities, litigation and swap liabilities are areas of specific concern to regulators and investors.
- Formal approval of the debt. The bond counsel prepares the resolution or ordinance authorizing the issuance of the debt adopted by the issuer’s governing body. The solicitor should make sure the official action to approve the debt taken by the governing body of the issuer is in conformity with the issuer’s required procedures for resolutions or ordinances, including the Sunshine Law.
- Delivery of legal opinions. Bond counsel delivers an opinion on which the investors rely to the effect that the debt has been properly issued and is enforceable, and the interest on the bonds is exempt from federal and state income taxes (if applicable). In many cases, the bond counsel will prepare a draft of the solicitor’s opinion to be delivered at closing. The solicitor should ask bond counsel to give the solicitor a draft of the opinion very early on in the course of the transaction. The solicitor should review its proposed opinion carefully and make sure it is comfortable with the opinions it is being asked to render. The solicitor should pay particular attention to opinions regarding outstanding or potential litigation. If there are any complicated litigation matters, the solicitor should be sure to review them with the other parties before the Preliminary OS is distributed.
- Post-issuance compliance is more important than ever – make sure the issuer is prepared to undertake its post-issuance responsibilities. 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 Municipal Securities Rulemaking Board. Both the Internal Revenue Service and the Securities and Exchange Commission strongly encourage issuers to adopt and follow written post-issuance compliance policies. If the issuer does not have post-issuance policies and procedures in place, the bond counsel can help the issuer develop such policies during the course of the bond issue. The solicitor should participate in reviewing the policies and procedures before they are adopted by the issuer’s governing body. After closing, the solicitor should work with the issuer to make sure it takes these policies seriously and follows them.
- One firm or two? Because the solicitor and the bond counsel have the same client – the issuer – it is possible that both functions can be undertaken by one law firm. This may result in lower total legal fees on the bond issue. The advantage of having two separate firms in these roles is that there are two sets of legal eyes reviewing what is happening in the financing. For example, in the review of the OS, you may have a solicitor who brings the specific knowledge of the issuer to the table and a separate bond counsel who has seen the OSs of many other issuers – both sets of eyes may result in improved disclosure. In a bond issue, the stakes for the issuer are very high. The success of the financing is often integral to the issuer’s economic well-being. The solicitor and the bond counsel working together can be an effective team in protecting the issuer and helping it reach its financial goals.