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June 2012


Direct Purchases of Tax Exempt Bonds


As governmental issuers and not-for-profit borrowers continue to pursue alternative sources of capital funding, they are increasingly taking advantage of “Direct Purchase Transactions” where a financial institution (a “Purchaser”) purchases the tax-exempt bonds (the “Direct Purchase Bonds”) rather than initiating a public offering for the bonds. Government issuers, not-for-profit borrowers and borrowers in conduit financings may find these Direct Purchase Transactions appealing for a number of reasons, including:

  • Unrated Transactions. Purchasers typically do not require that the Direct Purchase Bonds be rated, so the time and expense for obtaining ratings may be avoided or reduced. Since ratings are typically not required by Purchasers, Direct Purchase Transactions may be most attractive to those issuers or borrowers with no ratings, lower long term ratings on their other outstanding debt or with factors that may adversely affect their ratings, such as variable operating cash flow, significant capital spending plans, significant swap positions with collateral requirements, significant anticipated contribution requirements (e.g., pension contributions and capital calls on investment commitments), limited staff resources for liquidity facility management, or concerns regarding rating agency restrictions on investments. However, as discussed below, if an issuer or borrower has other rated debt outstanding, there may still be a need to discuss their Direct Purchase Transactions with rating agencies to understand how such Direct Purchase Transactions might affect the ratings assigned to their other debt obligations.
  • Short-Term Interest Costs. Often Direct Purchase Transactions are structured with a rate set for a period of time that is shorter than the nominal maturity of the Direct Purchase Bonds. This permits the issuer or borrower to take advantage of lower short-term borrowing costs, but any tender at the end of the particular interest period does expose the borrower or issuer to “put” risk.
  • Limited Disclosure Documents. In many, but not all, Direct Purchase Transactions, since the Direct Purchase Bonds are not being offered publicly, the Purchaser does not require the issuer or borrower to prepare an offering document. Instead, the Purchaser conducts its own inquiry into the affairs of the issuer or borrower as part of the Direct Purchase Transaction, and the issuer and borrower are able to save the time and expense involved in the preparation of an offering document and obtaining 10b-5 representations and negative assurance letters.

Click here to read more about Direct Purchase Transactions, including the risks and rewards.

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