3.3.1.3. Negotiated Sale Authorization (Revenue Bonds)
Revenue bonds do not require a public vote of approval, and therefore, issuers do not need to demonstrate through a competitive bidding process that they are being underwritten at the lowest possible cost. The issuer of a revenue bond, therefore, may select an underwriter earlier in the process through a negotiated bid. With a negotiated offering, an underwriter may be selected before the bond issue has been structured. Part of the underwriter’s role will be to be to come up with the bond’s structure. For example, the underwriter may help decide the maturity of the bond and whether it will be a term or serial bond. The underwriter may serve as an issuer’s de facto financial advisor, as long as its primary role as underwriter is clearly understood. Sometimes, an independent financial advisor will also be selected solely to assess the work of the underwriter. The issuer will choose an underwriter based on its expertise, financial resources, and experience.
Since the underwriter is involved in the preparation of the issue, it will employ its own legal counsel, known as the underwriter’s counsel. The underwriter’s counsel performs a due diligence review of the issuer to ensure that its financial condition and plans are accurately disclosed. The underwriter’s counsel also helps prepare the bond purchase agreement, the contract between the issuer and the underwriter.
When the governing body of the issuer approves the proposal, it signs a trust indenture. This is the issuing document for a revenue bond. Where a general obligation bond carries the full faith and credit of the taxing authority, a revenue bond has no such guarantee, and so a trustee is employed to look out for the interests of the investor. A trust indenture is a contract that establishes the rights and responsibilities of the issuer and the trustee. It also describes the source of the pledged revenue