MUNICIPAL BONDS AND BOND COUNSEL

MUNICIPAL BONDS AND BOND COUNSEL

Every municipal security must be reviewed by a lawyer or law firm known as bond counsel. The legal opinion is an authorization of the debt and covers two main issues:

1) It ensures that the bonds are legal, valid and binding obligations of the issuer.

2) It verifies the tax status of the debt; that is, interest on the bonds is exempt from federal income taxes (as well as state and local taxes in some cases).

The practice of including a legal opinion developed after the massive defaults on municipal bonds issued for financing railroads in the late nineteenth century. Issuers who wanted to avoid their debt repayment obligations justified their actions by saying that the bonds had not been properly issued or authorized under existing laws. After the railroad defaults, issuers and underwriters started to include the opinion of bond counsel to restore investor confidence, which later became a requirement as capital markets became more complex.

Valid authorization of debt is one of the most important functions in the process of issuing and managing debt. The opinion of bond counsel is a form of assurance, in theory, for issuers and investors that all legal requirements are met. In reality, there have been cases in which bond counsel has been held liable for authorizing questionable debt. For example, see the River Square Parking Garage case in the Default section.

In the case of the Washington Public Power Supply System's (WPPSS) 1983 default on $2.25 billion in bonds, bond counsel Wood Dawson Smith & Hellman as well as special counsel Houghton Cluck Coughlin & Riley were held liable. A report by the Securities and Exchange Commission found that despite signs of legal difficulties with some of the provisions in the issuance and the lack of legal precedent on the issue, the firms issued an unqualified opinion on the bonds without determining the legality of the agreements.

What also shocked the bond world was that the Wood Dawson agreed to pay bondholders only $500,000 to settle its portion of the massive class action lawsuit. The sum was considerably smaller than the $7.25 million that special counsel Houghton Cluck agreed to pay. The difference in the figures was because Houghton Cluck had malpractice insurance but Wood Dawson did not.

The Role of Bond Counsel

Bond counsel is one of the key participants involved with issuing debt and is usually selected in the very early stages of the process. Issuers will usually choose a law firm that is expert on relevant state and local finance laws.

The role of counsel varies depending on the complexity of the issue. Bond counsel assembles all relevant materials into a Transcript of Proceedings, which is used as a permanent record or reference. The Transcript of Proceedings details all the steps in the issuance and the terms and conditions of the payment and security arrangements.

In addition, bond counsel carries out the following tasks:

Prepares and oversees bond proceedings;
Gets required government approval;
Ensures that the issuer meets all the legal requirements and authorization of the bond offering;
Discloses and analyzes all relevant legal proceedings that may have a bearing on the validity of the offering;
Interprets relevant regulations and laws and assists in structuring the issue;
Writes key financing documents.

Leading Bond Law Firms in 2003

The following table ranks the top ten bond counsels for long-term municipal new issues in 2003:

Bond Counsel	Proceeds	Rank	Market Share	Number of Issues
Orrick Herrington & Sutcliffe LLP	38,596.5	1	10.2	482
Hawkins Delafield & Wood	29,806.9	2	7.9	427
Sidley Austin Brown & Wood	18,368.6	3	4.9	136
Squire Sanders & Dempsey LLP	12,715.6	4	3.4	293
Pugh Jones & Johnson	10,719.8	5	2.8	6
Mayer Brown Rowe & Maw LLP	10,000.0	6	2.6	1
Fulbright & Jaworski	9,531.9	7	2.5	332
Chapman & Cutler LLP	9260.6	8	2.4	520
Kutak Rock LLP	9111.5	9	2.4	259
Preston Gates & Elis	8,840.1	10	2.3	264
Top 10 Totals	156,950.8		41.4	2,720
Industry Total	379,098.2		100.0	14,584

Source: Thomson Financial

Pugh, Jones & Johnson and Mayer, Brown, Rowe and Maw were new entrants in the top 10 list. A $10 billion bond issue by the state of Illinois propelled the two firms into fifth and sixth place, respectively. Before 2003, both firms were not even in the top 50.

Underwriter's Counsel

While bond counsel is supposed to represent the interests of bondholders or investors, underwriter's counsel represents the underwriters in a negotiated issue. The task of underwriter's counsel is to do a due diligence review of the issuer. In other words, underwriter's counsel ensures that the issuer's financial condition and plans and other matters that are important for an investor to know are accurately disclosed. Underwriter's counsel also prepares the bond purchase agreement, which is a contract for selling the debt to the underwriter. At closing, underwriter's counsel gives a 10-b-5 certificate to the underwriter. The 10-b-5 certificate states that everything material to making an investment decision has been included and that nothing material has been omitted from the disclosure process.

Other Counsel

Other counsel in the bond offering process may include special tax counsel, bank counsel, disclosure counsel, outside bond counsel and borrower's counsel. Such special counsel may be necessary for specific issues that are more complex and diverse than standard offerings.