This is the second post of a two-part series, you can view the first post here.
Our first post in this series examined the regulatory and contractual considerations for municipal securities issuers and conduit borrowers using shelf registration. Now we examine the equally important considerations for implementation.
- Extended Offering Period Underwriting Agreement or Arrangements with a Financial Advisor
- The parties to the transaction (including hospitals and health care systems) should consider establishing the terms of the program at its onset pursuant to an “extended offering period underwriting, purchase and placement agreement.” Under this agreement, the investment banker would agree to underwrite various series of bonds during the extended offering period pursuant to a separate bond purchase agreement for each series (or for various series to be issued simultaneously), with customary conditions, indemnities, representations and warranties and document delivery requirements to be included in each bond purchase agreement. The agreement may provide that the obligation of the investment banker to underwrite (or place) bonds during the extended offering period is subject to certain conditions.
- As an alternative to structuring a relationship with an investment banker for the duration of an extended offering period, the issuer and borrower may consider an arrangement with a financial advisory firm for the duration of the extended offering period, on many of the same terms described above (eliminating those that are obviously geared toward the underwriting process). Each series of revenue bonds offered and sold during the extended offering period can be purchased on a negotiated basis with the same investment banker or bankers, or perhaps sold through competitive bidding that is supervised and managed by the financial advisor. Investment banks will need to consider whether this arrangement triggers any additional net capital requirements.
- Due Diligence
- At the beginning of the program a “base due diligence review” should be planned and implemented, along with procedures to update that review periodically during the extended offering period. The review of facility use contracts by bond counsel will be completed during the base review for each facility or project that is described in the TEFRA notice. Due diligence updates should occur prior to the date each subsequent offering document will be distributed to investors. Each due diligence update will entail, at a minimum, interviews with senior management, and reviews of corporate minutes of meetings conducted since the immediately preceding due diligence review, amendments to organizational documents, amendments to existing material contracts (including facility use contracts), new material contracts (including those relevant to facilities described in the TEFRA notice), internal financial statements and information, such as budgets, and other material facts that the parties can identify.
- Role of the Accountants
- The process for independent accountant review, consent and delivery of agreed-upon procedures letters to the underwriter should be efficient, yet recognize the necessity of the accounting firm’s internal review processes. Consents should be broad enough to include consent to using the audit opinion in not only the preliminary offering document, but in each supplement to it, or each offering document that is a component of the plan of finance to be entered into during the portion of the extended offering period before new audited financials are issued. To provide clarity and certainty, the consent letters should be drafted to include that broader consent. Consideration should be given to the use of a “bifurcated” procedures letter concept, in which the external auditors perform the “first part” of a traditional procedures letter with the borrower’s CFO certifying the “tie” between financial data in “Appendix A” to internal financial statements and schedules. Additionally, consideration should be given to producing and filing with EMMA comprehensive unaudited quarterly financial statements, including footnotes appropriate to the quarterly nature of the financial information, consistent with pertinent and current accounting industry rules and standards.
- Legal Opinions
- New opinions or “date downs” will be required for each issuance during the extended offering period. The challenge to the financing team will be to streamline the opinion issuance process. Consideration should be given to the use of an “evergreen” corporate (borrower counsel) opinion, with the delivery of confirming opinions on corporate and regulatory matters when each series of bonds is issued during the extended offering period. Corporate counsel will be required to identify the scope of its review to support the 10b-5 opinion. A new unqualified bond counsel opinion would be required for each issuance.
- “Stub Period” Financial Information; “Black-Out” Period
- As a general proposition, financial information is considered current under federal securities laws provided the securities are purchased within 135 days of the last day of the financial reporting period (quarterly stub period or annual). All other information must be current and comply with 10b-5 standards. Consideration should be given to precluding issuance during the “black-out period,” that would commence on the 135thday following the end of the third fiscal quarter and the date on which the annual audited financial statements become available.