Top Ten Things That Drive the Buy Side Crazy

As the tax-exempt bond market continues to evolve, it is important that analysts stay on top of the legal provisions in bond documents that can dramatically affect the value and marketability of investments or that can be used by the issuer to frustrate the expectations of the investor. This article focuses on provisions that can come back to haunt investors if care is not taken to close legal loopholes or strengthen bondholders’ rights. The ten issues to be addressed include: purchases in lieu of redemption, early calls of escrowed bonds, defeasance requirements, amendments to documents without bondholders’ consent, notice of IRS determinations of taxability, obligations of issuers to address such IRS determinations, changes in control of a borrower without bondholder consent, float agreements and other suboptimal investment vehicles for the debt service reserve fund, responsibility to maintain perfected collateral rights, and getting fund balance and payment information from trustees. The authors examine these issues with the goal of explaining exactly what the controversies are all about, what is at stake, and how investors can avoid making themselves crazy.