In late August, when a $561 million unrated borrowing for an upstate New York casino was reportedly delayed to bring in lawyers to negotiate on behalf of the investors, the move illuminated the long-standing but little-talked-about practice of hiring purchaser's counsel to ease a deal's sale in the high-yield municipal bond market.
"The casino deal sounds like a perfect example of what happens fairly regularly," said Thomas Longino, founder of Longino Public Finance, LLC, who serves as purchaser's counsel among other roles. "The project proponents tried to do it without purchaser's counsel, but the market pushed back and required counsel before moving forward."
While borrowers are protected by bond counsel and underwriters often have their own legal team, investors often remain unrepresented in municipal bond transactions. That's typically not an issue in the investment-grade market, but bringing in purchaser's counsel can boost acceptance for the type of "story" bond deals common in the high-yield market. That's especially true when market conditions favor buyers over issuers, as is the case now, participants said.
Some dealers opt to make purchaser's counsel part of the deal in the early stages, but the decision often comes from buyers requesting or even requiring it as part of the process, market participants said.
There is a mixed consensus on whether borrowers and underwriters embrace purchaser's counsel, which can shift depending on market and economic conditions.
"Oftentimes, from the project side, there's a general resistance to having purchaser's counsel in the market," Longino said. "Investment bankers can increase market acceptance of their deals by bringing in purchaser's counsel at the beginning."
With little data on the use of purchaser's counsel — who often are not included by title in the official statement — it's difficult to track the percentage of deals that include them.
Legal counsel for the investors are paid from bond proceeds, and can cost hundreds of thousands of dollars depending on the level of negotiation with the other side of the table, said a source familiar with the market. Investment bankers often resist using them because they're perceived as potentially slowing down a deal, said another source.
Purchaser's counsel are most commonly brought in when investors are buying substantial amounts of a deal, $100 million or more, or when they're buying the entire financing such as in a private placement, said the first source. "At a certain scale, people will care, or if someone [is] taking on significant balance sheet risk, that triggers their nerves," the source said.
Attorneys typically review covenant packages to ensure investor-friendly terms, for example, debt service coverage ratios and carve-outs, and analyze collateral packages to make sure they tilt toward the benefit of the bondholders.
After delaying the
Purchaser's counsel were used in the most prominent high-yield deals to come to market this year, including Brightline Florida, one of the high-yield muni market's most complex "story" credits that
The Brightline deal that most recently had a purchaser's counsel was the
A purchaser's counsel "with another set of eyes helps improve the deal for everybody, including the borrower, because the borrower is going to want a successful venture too," Miller said.
"Sometimes when there are too many dollars chasing too few deals, then an underwriter could just say, 'I don't want to deal with purchaser's counsel right now,' but we're in the opposite condition," Miller said. "It's just normal, and it's just expected, and if they don't want to do it, then we don't need to spend time on the deal, but then it probably won't get done."
Purchasers' counsel doesn't always smooth market access. A $1.15 billion unrated public revenue bond deal brought by the Salina Economic Development Authority to operate a tire factory managed by American Tire Works,
And purchasers' counsel doesn't always protect investors from default. Despite the presence of purchasers' counsel on a $284 million unrated borrowing for an Arizona sports park called Legacy Cares, investors face massive losses after the park quickly fell into bankruptcy and saw
Attaching stricter covenants won't ultimately protect investors in the event of a failing credit, said a high-yield buyer who asked to remain anonymous.
"It's the viability of the entity. Put in as many covenants as you want, but if it's not making money, it won't work," the investor said.
An excessive number of covenants can also weigh down a credit, the investor added.
"Watch out what you wish for," the buyer said. "Some people get covenant heavy, and it's too restrictive and not helpful for the credit. It's very easy to trip some of these things, and then it's not great to have your credit tripping covenants all the time because it becomes distressed."
The biggest drivers of the use of purchasers' counsel may not be the individual credit or security package but overall market conditions, participants said.
"If the market is very, very hot and an underwriter and a borrower are going to easily get their deal done, no matter what, your purchaser's counsel request may or may not be recognized or fulfilled," Miller said.
However, "we're not in that kind of market right now," Miller added. "We're in a 'Can this deal get done under what terms and conditions?'"
