Purchaser’s counsel can increase safety in high-yield offers

In late August, when a $561 million unrated borrowing for an upstate New York on line casino was reportedly delayed to herald legal professionals to barter on behalf of the buyers, the transfer illuminated the long-standing however little-talked-about apply of hiring purchaser’s counsel to ease a deal’s sale within the high-yield municipal bond market.

“The on line casino deal seems like an ideal instance of what occurs pretty repeatedly,” mentioned Thomas Longino, founding father of Longino Public Finance, LLC, who serves as purchaser’s counsel amongst different roles. “The challenge proponents tried to do it with out purchaser’s counsel, however the market pushed again and required counsel earlier than shifting ahead.”

Whereas debtors are protected by bond counsel and underwriters usually have their very own authorized crew, buyers usually stay unrepresented in municipal bond transactions. That is usually not a difficulty within the investment-grade market, however bringing in purchaser’s counsel can increase acceptance for the kind of “story” bond offers frequent within the high-yield market. That is very true when market situations favor consumers over issuers, as is the case now, members mentioned.

Some sellers choose to make purchaser’s counsel a part of the deal within the early levels, however the determination usually comes from consumers requesting and even requiring it as a part of the method, market members mentioned.

There’s a combined consensus on whether or not debtors and underwriters embrace purchaser’s counsel, which might shift relying on market and financial situations.

“Oftentimes, from the challenge aspect, there is a normal resistance to having purchaser’s counsel available in the market,” Longino mentioned. “Funding bankers can enhance market acceptance of their offers by bringing in purchaser’s counsel at first.”

With little knowledge on using purchaser’s counsel — who usually usually are not included by title within the official assertion — it is troublesome to trace the proportion of offers that embrace them.

Authorized counsel for the buyers are paid from bond proceeds, and may value tons of of hundreds of {dollars} relying on the extent of negotiation with the opposite aspect of the desk, mentioned a supply aware of the market. Funding bankers usually resist utilizing them as a result of they’re perceived as doubtlessly slowing down a deal, mentioned one other supply.

Purchaser’s counsel are mostly introduced in when buyers are shopping for substantial quantities of a deal, $100 million or extra, or after they’re shopping for your complete financing reminiscent of in a personal placement, mentioned the primary supply. “At a sure scale, individuals will care, or if somebody [is] taking up important stability sheet danger, that triggers their nerves,” the supply mentioned.

Attorneys usually evaluation covenant packages to make sure investor-friendly phrases, for instance, debt service protection ratios and carve-outs, and analyze collateral packages to ensure they tilt towards the good thing about the bondholders.

After delaying the unique pricing date of Aug. 27, the New York on line casino deal, introduced by KeyBanc Capital Markets, is now tentatively set to cost Sept. 8, in response to the highway present. The providing paperwork have been “stickered” with 25 extra pages that embrace detailed info on phrases just like the lockbox mechanism and money move. It is unsure whether or not purchaser’s counsel requested the modifications, as KeyBanc didn’t reply by press time.

Purchaser’s counsel had been utilized in essentially the most outstanding high-yield offers to return to market this 12 months, together with Brightline Florida, one of many high-yield muni market’s most complicated “story” credit that just lately has raised pink flags for holders.

The Brightline deal that the majority just lately had a purchaser’s counsel was the Aug.13 refinancing of its commuter bonds, which is a typical prevalence for the issuer, mentioned John Miller, head and chief funding officer of First Eagle’s municipal credit score crew.

A purchaser’s counsel “with one other set of eyes helps enhance the deal for everyone, together with the borrower, as a result of the borrower goes to need a profitable enterprise too,” Miller mentioned.

“Generally when there are too many {dollars} chasing too few offers, then an underwriter might simply say, ‘I do not need to cope with purchaser’s counsel proper now,’ however we’re within the reverse situation,” Miller mentioned. “It is simply regular, and it is simply anticipated, and if they do not need to do it, then we need not spend time on the deal, however then it most likely will not get completed.”

Purchasers’ counsel would not all the time clean market entry. A $1.15 billion unrated public income bond deal introduced by the Salina Financial Improvement Authority to function a tire manufacturing unit managed by American Tire Works, slated to cost within the spring, has but to return to market.

And purchasers’ counsel would not all the time defend buyers from default. Regardless of the presence of purchasers’ counsel on a $284 million unrated borrowing for an Arizona sports activities park known as Legacy Cares, buyers face large losses after the park shortly fell out of business and noticed costs introduced in opposition to the homeowners for defrauding buyers, together with by creating phony letters of intent and “pre-contracts” from sports activities organizations that had been introduced to buyers as proof of demand for the park’s services.

Attaching stricter covenants will not in the end defend buyers within the occasion of a failing credit score, mentioned a high-yield purchaser who requested to stay nameless.

“It is the viability of the entity. Put in as many covenants as you need, but when it is not being profitable, it will not work,” the investor mentioned.

An extreme variety of covenants can even crush a credit score, the investor added.

“Be careful what you want for,” the client mentioned. “Some individuals get covenant heavy, and it is too restrictive and never useful for the credit score. It’s totally simple to journey a few of these issues, after which it is not nice to have your credit score tripping covenants on a regular basis as a result of it turns into distressed.”

The most important drivers of using purchasers’ counsel will not be the person credit score or safety package deal however total market situations, members mentioned.

“If the market may be very, extremely popular and an underwriter and a borrower are going to simply get their deal completed, it doesn’t matter what, your purchaser’s counsel request might or will not be acknowledged or fulfilled,” Miller mentioned.

Nonetheless, “we’re not in that type of market proper now,” Miller added. “We’re in a ‘Can this deal get completed underneath what phrases and situations?'”