THE THREE-RING BOND CIRCUS
by Kevin Pranis

The process of putting together a bond deal is complicated and delicate.  Investors choose from hundreds of options when buying municipal bonds and most seek deals that land somewhere between little risk and no risk at all.  Yet the projects financed by bonds are often massive, involving dozens of risk factors. The task of investment bankers and others who put together bond deals is to assemble a package that not only eliminates or minimizes risk factors, but also minimizes the appearance of risk. 

 

The task is made more difficult because bond issuers are in a “catch-22”: key parties to a bond deal may be unwilling to commit until all of the other pieces are in place.  In many cases, for the deal to happen, all of the pieces must fall into place simultaneously – or at least appear to do so.  As a result, some have compared a new development to a three-ring circus.  It is the task of the investment banker to keep each ring in motion, and often to create the impression that each ring is in motion when inevitable delays arise.

 

Because many or all of the pieces are moving until the moment the bonds are sold, there is no fixed sequence of events leading to a bond issue.  Instead, there is a long list of pieces that investment bankers try to assemble in a coherent package.  Some pieces are required by law or by investors. Other pieces could strengthen the issue but are not required. And some pieces only become essential when a rating agency analyst or public official decides to investigate further and discovers a piece missing that seemed to be in place.

Like a piece of cloth, a strong bond deal will hold together under stress, while a weak deal may unravel as soon as the wrong thread has been pulled.   

 

The following pages cover the key steps in the bonding process:

• Financing I – Financing Team, Capital Requirements
• Financing II – Capital Sources, Revenue Sources
• Financing III – Deal Structure/Terms, Bond Ratings & Insurance
• Financing IV – Authorizations/Reviews, Investors
• Construction Process – Contractors, Construction Plan, Land Title, Utilities, Insurance, Environmental Regulation, Authorizations/Permits
• Key Documents – Official Statement, Financial Statements, Contracts/Agreements, Bond Counsel Opinion, Feasibility Study