ISSUING MUNICIPAL SECURITIES Roles and Responsibilities: The Financing Team in an Initial Municipal Offering

A key part of issuing new 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 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 as well as covenants or other key terms of to finance a capital project by issuing the bond documents viewed as important bonds, it would hire a financing team to in marketing the new issue. finalize the financing plan, develop offering documents, prepare for any rating agency A competitive bid is a transaction in which and presentations, the potential underwriters submit proposals for bond offering to , the bonds the purchase of a new issue of municipal and close the transaction. securities and the securities are awarded to The bond offering the underwriter or syndicate The roles and responsibilities of an issuer’s presenting the best bid according to process is a team may vary depending upon the bond stipulated criteria set forth in the notice coordinated effort offering method of sale — competitive bid, of sale. The underwriting of securities among various negotiated sale or . in this manner may also be referred professionals to to as a “public sale” or “competitive In a negotiated sale, an initial bond finance a state or sale.” The professionals that may be offering by an issuer is directly sold to involved in competitive transactions local government’s an underwriter or underwriting syndicate include underwriters, municipal advisors, 1 capital projects. selected by the issuer. In addition to the underwriter’s counsel, bond counsel, underwriter or underwriting syndicate, feasibility consultants, enhancers, the professionals involved in a negotiated auditors, rating agencies and trustees. financing transaction may include municipal advisors, underwriter’s View a chart of the counsel, bond counsel, feasibility professionals involved in a consultants, credit enhancers, selling competitive transaction. group members, auditors, rating agencies, trustees, disclosure counsel and other The following provides general descriptions counsel. of the role, activities and responsibilities of members of a bond financing team in View a chart of the an initial bond offering. Other activities professionals involved in a conducted by these professionals negotiated transaction. will depend on the particular type of transaction, the presence of additional Among the primary points of negotiation financing team members and any restricted for an issuer are the rate, call role they perform as the issuer may features and purchase price of the issue, determine.

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© Municipal Securities Rulemaking Board 2018.1 1 The State or Local Government Municipal Advisor • Defines the financing requirements • Acts in a fiduciary capacity for the state 5 • Determines the method of sale or local government

• Sets and implements debt management • Develops requests for proposals and policies and procedures of the qualifications for underwriters, bond or municipality disclosure counsel, facilities and products • Determines available resources for payment of principal and interest of new • Assists in developing the plan of finance and related transaction timetable The state or local debt issue • Identifies and analyzes financing government selects • Selects and manages the financing team solutions and alternatives for funding and manages the • Prepares offering documents in capital improvement plan consultation with the financing team financing team. • Advises on the method of sale, taking • Works with the senior manager to into account market conditions and determine how orders are filled or near-term activity in the municipal 2 allotted to investors from the pricing order period • Assists in preparation of any rating 3 • Determines participation of the senior agency strategies and presentations manager’s and syndicate members’ liability in a negotiated bond issuance • Coordinates internal/external accountants, feasibility consultants • Determines the compensation of and escrow agents financing team • Assists with the selection of • Negotiates with the underwriter the final underwriters, underwriter compensation purchase price of the bonds issues, syndicate structure and bond • Executes the bond purchase agreement4 allocations with the senior manager • Assists with negotiated sales, including • Adopts bond resolution and/or executes advice regarding retail order periods any trust , agreement or and institutional marketing, analysis other bond financing documents of comparable bonds and secondary • Pays principal and interest on the bonds market data as they become due • Assists with competitive bond sales, • Complies with tax and other covenants including preparation of notice of sale included in the bond financing and preliminary official statement, documents bid verification, true interest cost (TIC) calculations and reconciliations/ • Submits continuing disclosures to the verifications of bidding platform MSRB’s Electronic Municipal Market calculations, preparation of notice of Access (EMMA®) system under the sale, obtaining CUSIP numbers issuer’s continuing disclosure agreement • Prepares preliminary flows/ preliminary refunding analysis

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Roles and Responsibilities: The Financing Team in an Initial Municipal Bond Offering 2 • Analyzes whether to use SLGS,6 open Underwriter (also known as markets and/or agency securities Senior Manager, Lead Manager or for purposes of investment of bond ) proceeds • Has an “arm’s-length” relationship with • Manages the escrow bids or reviewing the municipal government7 SLGS applications for structuring • Provides proceeds at closing and advance refunding escrow obtains funds from investors • Assists in procuring printers, verification • Manages the affairs of any underwriting agents, etc. syndicate formed in connection with a • Verifies cash flow calculations new issue • Plans and coordinates bond closings • In a negotiated offering: • Prepares any required post-sale reports –– Works with state or local of bond sales government and municipal advisor • Evaluates market conditions and pricing to design the plan of finance performance of senior manager and co- –– Develops the bond structure managers’ distribution of bonds –– Assists in determining timing to sell The underwriter Bond Counsel bonds based on market conditions has an “arm’s- –– Assists in the development of the • Drafts bond resolution, indenture, loan bond documents length” relationship agreement and/or other bond financing with the municipal documents –– Assists in preparing any rating agency strategy and presentation government. • Reviews applicable law to confirm the issuer’s authority to issue the bonds –– “Runs numbers” providing and its conformity with other legal quantitative analysis of financing requirements structure • Affirms issuer’s authorization of the bond –– Manages the pricing process offering –– Executes pre-sale marketing • Discloses and examines litigation that –– Solicits price views from syndicate may jeopardize the validity of the bond members, which provides issue preliminary pricing indications • Interprets regulations and tax among underwriters and customers law about the offering range of a new issue • Attests to the validity and enforceability of the bonds • Prepares distribution analysis • Provides guidance in structuring issues –– Works with the state or local related to tax law government to determine how orders are filled from the bond • Confirms tax-exempt status pricing order period • Drafts tax certificate –– Executes the bond purchase agreement with the municipal government on behalf of the syndicate

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Roles and Responsibilities: The Financing Team in an Initial Municipal Bond Offering 3 • Submits bid in a competitive sale Rating Agencies following evaluation of pricing of • Assess the credit quality of the bonds comparable issues, discussions with potential investors, accessing supply of • Assigns rating to the bond issue

bonds in the market or bonds scheduled • Updates ratings periodically while to come to market, weighing possible debt is outstanding competition from other firms Trustee (also known as Paying Underwriting Syndicate Agent, or Registrar) (also known as Co-Manager(s)) • Acts in a fiduciary role for the benefit of • Has an “arm’s-length” relationship bondholders in enforcing the terms of with the state or local government the trust indenture • Under the direction of the senior • Transmits principal and interest manager, purchases an initial bond payments from an issuer of municipal issue from state or local government The trustee acts securities to the bondholders and offers it for resale to investors in a fiduciary role • Holds and invests moneys held in a • Provides sufficient capital to purchase construction fund, reserve fund or other for the benefit an issue funds that serve as for payment of bondholders • Shares the risks of underwriting the of debt service on the bonds and represents issue with the senior manager • Maintains records on behalf of the issuer the of • Distributes the bonds to investors that identify the registered owners of the bondholders in the bonds and related matters event of a . Underwriter’s Counsel • Represents the interests of bondholders • Drafts bond purchase agreement, blue in the event of a default sky memorandum8 and agreement Depending upon the type of transaction, among underwriters9 other deal participants may be retained as • Advises underwriters regarding their required including: legal positions with respect to the issue • Advises underwriters on state and Other Counsel federal securities laws Other counsel in the bond issuance process • Assists underwriters in undertaking due may include disclosure counsel, special diligence review and provides legal tax counsel, counsel, and borrower’s opinion that, based on such review, counsel. Such special counsel may be official statement does not contain necessary for specific issues that are more misleading information or omit materials complex or have particular characteristics. information Feasibility Consultant • Writes the feasibility report prepared for sales (such as in airport and water and sewer revenue bond offerings) and included in the official statements.

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Roles and Responsibilities: The Financing Team in an Initial Municipal Bond Offering 4 The report may evaluate the economic Printer viability, or the adequacy of revenues • Prints, or creates the electronic version generated by a capital project or program of, the preliminary and final official to repay debt. The report generally statements for distribution to the describes historic and projected demand marketplace for the services, economic trends, user base, user fees and rates that generate Auditor revenues pledged to cover debt service. • Compiles and examines the municipal government’s financial statements upon Credit Enhancers which the auditor has expressed or • Support an issuer’s credit in exchange disclaimed an opinion for a fee or a premium, in the form of enhancement such as bond • Reports, audits or investigates a or a municipal government’s financial and results of operations Selling Group Members for a set period of time • Assist in the distribution of a new issue Generally, the audit includes: (a) a of municipal securities statement of the scope of the audit; • Acquire new issue securities from the (b) explanatory comments concerning underwriting syndicate but do not exceptions from generally accepted participate in residual syndicate profits accounting principles and auditing nor any liability for unsold bonds standards; (c) expression or disclaimer of opinions; (d) explanatory comments Verification Agent concerning verification procedures; (e) financial statements and schedules; and • Verifies cash flow sufficiency to the call (f) statistical tables, supplementary date of the escrow securities to pay comments and recommendations. principal and interest on refunded bonds

Escrow Agent • Serves as custodian of funds and holds securities to pay debt service on refunded bonds

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Roles and Responsibilities: The Financing Team in an Initial Municipal Bond Offering 5 4 1 Private placements also are sold by negotiation and Bond purchase agreement is the contract between involve the sale by a placement agent directly to an underwriter and issuer setting forth final terms, institutional or private investors rather than through and any other relevant conditions upon which an offering to the general investing public. Investors underwriter purchases a new municipal bond issue. purchasing privately placed securities often must meet 5 MSRB Rule G-42 sets forth the core elements of certain standards of sophistication and also are often the fiduciary duty standard as consistent with the required to agree to restrictions as to resale and are mandates of the Dodd-Frank Act and the federal sometimes required to provide a private placement fiduciary duty imposed on municipal advisors in their letter to that effect. relationship with municipal entity clients under Section 2 Allotments are the number of bonds that are actually 15B(c)(1) of the Securities Exchange Act of 1934. sold by an underwriter to an investor. 6 SLGS are U.S. Treasury securities issued under its State 3 Participation is the portion of a new municipal bond and Local Government Series program for purposes issue, expressed as a percentage of the number of of complying with arbitrage rules under the federal tax bonds, for which the senior manager and syndicate code. members have a legal liability, regardless of whether 7 MSRB Rule G-17 requires dealers to deal fairly they sell that many bonds. There are two major types with issuers in connection with the underwriting of of syndication agreements: municipal securities and to disclose to the issuer that Undivided or Eastern Account — A method for its primary role is to purchases securities with a view to determining liability stated in the agreement distribution in an arm’s-length commercial transaction. among underwriters in which each member of the 8 Blue sky memorandum specifies the way a specific underwriting syndicate is liable for any unsold portion issue will be treated under state securities laws, usually of the issue according to each member’s percentage including all 50 states and U.S. Territories, as well as participation in the syndicate. Syndicates most the steps that must be undertaken to qualify the issue frequently are structured as undivided accounts. for sale in those jurisdictions.

Divided or Western Account — A method for 9 Agreement among underwriters is a contract among determining liability stated in the agreement syndicate group members setting forth their rights, among underwriters in which each member of an duties and underwriter’s commitments to each other underwriting syndicate is liable only for the amount with respect to a new issue of securities. of its participation in the issue, and not for any unsold portion of the participation amounts allocated to the other underwriters.

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Roles and Responsibilities: The Financing Team in an Initial Municipal Bond Offering 6