In his nearly 20-year career as a bond attorney, Antonio Martini has seen the industry change. But he says the most wrenching changes have taken place in the last four years.
Martini and other bond lawyers say the bond counsel industry has been swept up in the changes wrought by the financial crisis.
There was the collapse of the bond insurance industry beginning in 2008. The introduction of new types of municipal securities under the federal economic stimulus program. Then the collapse in new-issue volume as those bond programs ended and issuers cut back on borrowing.
While 47% of bond issues were insured in 2007, just 6% had coverage in 2010. Bond counsel firms need to document bond issues without insurance differently than those with insurance, according to Bill Rhodes, chairman of the public finance department of Ballard Spahr LLP.
Prior to the most recent recession, many auction-rate and variable-rate demand bonds were insured by bond insurers, said Roger Davis, chairman of the public finance department at Orrick, Herrington & Sutcliffe LLP.
After most of the insurers had their credit ratings downgraded to junk levels in 2008 to 2009, many of those floating-rate bonds got put back.
In the aftermath, bond counsel have done far fewer deals with such securities, said Art McMahon, public finance partner at Nixon Peabody LLP. In 2009 and 2010 bond counsel firms handled an increase in taxable bonds, he said.
Bond lawyers benefited from the American Recovery and Reinvestment Act — in particular, taxable Build America Bonds, Davis said.
Bond attorneys also benefited from newly introduced recovery-zone economic development bonds and qualified-school construction bonds, according to Martini, leader of public finance tax practice at Edwards Wildman Palmer LLP.
With the exception of QSCBs, most of these special bond programs ended by 2011, he explained. BABs offered issuers a 35% interest subsidy from the federal government.
RZEBs offered 45% and became know as “super-BABs.” Many issuers had front-loaded their borrowing to 2010 to get the super-BAB subsidy, Martini said.
Accordingly, early 2011 saw a plunge in issuance and thus business for bond counsel firms, said Cynthia Weed, partner at K&L Gates LLP.
Volume improved in late 2011 and remained roughly at that level in 2012, she said.
There are currently about 2,900 members of the National Association of Bond Lawyers. Some have spoken of a total of 10,000 bond lawyers in the United States; others think that’s substantially too high. But if NABL membership is any indication, that number may be trending down, and is down 5.4% since 2007.
There were about 561,000 employed lawyers in the U.S. in May 2010, the most recent available figure from the U.S. Bureau of Labor Statistics.
Outside of the year-to-year twists and turns, there have been some other longer- term trends that have intensified in the last five years.
The Internal Revenue Service and Securities and Exchange Commission have increased their oversight, enforcement and regulation of bond counsel firms, several attorneys said.
The Municipal Securities Rulemaking Board and the Financial Industry Regulatory Authority also boosting their efforts, Davis noted.
Issuers generally have to pay the bond counsel firms more to handle the additional complexity, he said.
The IRS and SEC are asking bond attorneys to take roles they had not had before, noted Hugh Spitzer, member of Foster Pepper PLLC.
They now have the attorneys police the industry, he said.
“The IRS and SEC have insufficient resources, therefore they do everything they can to enlist others to do their jobs,” Spitzer said.
One of the goals of the new regulations has been to increase disclosure and transparency in the municipal bond market, said Howard Zucker, member of the management committee at Hawkins Delafield & Wood LLP. Market expectations have also contributed to the increased disclosure, he said.
On a related topic, traditionally the underwriters’ counsel has created the securities prospectuses, Rhodes said. Now, the larger and more frequent issuers are saying they do not want the underwriters’ counsel to be in charge of this task. Instead, issuers are hiring disclosure counsel to do the job. The bond attorneys are sometimes the disclosure counsel and sometimes they are not, Rhodes said.
Effectively, bond counsel are becoming more involved with disclosure, he said.
In the last five years federal tax regulations for bonds have become more complex, Zucker said.
While there were some tax credits before the stimulus act, the act added to their number, Rhodes said. This has meant that bond counsel firms have additional areas they need to be knowledgeable about.
On a different topic, in the last few years there have been increases in tax-increment financing and neighborhood-improvement districts in eastern U.S. cities, Rhodes said.
Bond proceeds are used to fund improvements in the area. Neighborhood-improvement districts have been common in the American West for a while, Rhodes noted.
In still another recent trend, in the last three years the industry has been aiding more bank private placements of bonds, according to two attorneys.
All these changing demands on the bond counsel industry have led to changes in the industry’s structure.
Because of the bonds’ increasing complexity, law firms have to be more dedicated to public finance than they used to be, Zucker said. “It’s not something that firms can dabble in these days. I think that trend will continue.”
The changes of the last few years will hinder small firms and favor large ones that have deep knowledge of tax laws and securities, said John Wagner, senior partner at Kutak Rock LLP. The industry is getting “more specialized,” he added.
The percentage of total long-term issuance by par value handled by the top 10 bond counsel firms went up just slightly from 36.1% in 2006 to 36.9% in 2011, according to Thomson-Reuters data.
Rhodes had a different view of the industry’s reaction to recent changes. In response to 2011’s decline in volume, some lawyers have broken away from big firms to form boutique outfits specializing in bond counsel law. With less overhead they can usually be more flexible about pricing, he said.
In reaction to the same decrease in volume, large firms have tried to find ways to recruit lawyers outside of their bond counsel divisions to help them with advice and with recruiting clients, Rhodes said.
Another shift in the industry is that in the past there were parties to bond issues who did not have their own attorneys, Wagner said.
An example might have been bond trustees. In the last three or four years things have developed so that usually all parties now have their own attorney.
This change makes issuing bonds more time-consuming and expensive for the issuers.