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CDFA Spotlight:
Are Conduit Bond Issues Really Without Risk?
By Stan Provus |
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At the CDFA Annual Conference in San Francisco in May, Jerry Burke, General Manager, California Statewide Communities Development Authority, spoke about the risk of conduit bond issues. This article is a summary of his remarks with further notations.
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This article is intended to provide accurate and authoritative information in regard to the subject matter covered. The author and CDFA are not herein engaged in rendering legal, accounting or other professional services, nor does it intend that the material included herein be relied upon to the exclusion of outside counsel.
Jerry Burke advanced seven principles for conduit bond issuers. These are:
- Satisfy your agency’s public benefit requirement.
- Establish clearly reasoned and conservative issuing guidelines. Vary only with well-documented exceptions or modify your guidelines. Try to never act on an hoc basis.
- Secure errors and omissions insurance.
- Establish a litigation or general reserve fund.
- Be aware that being in the conduit issuance business is to be in the risk management business.
- Charge both an upfront and an ongoing fee equal to work and risk involved. All outstanding bonds have risks!
These are all important principles for conduit issuers. All issues should serve a public purpose, other than generating income to the issuer. In the past some issuers paid substantial legal fees and IRS fines because their conduit issues were solely designed to generate fee income—in many cases, bond proceeds were simply escrowed and the thresholds required to draw funds down were so stringent, there never was any real possibility bond proceeds would be used for a public purpose.
One of the most important points made by Jerry Burke and Sam Balisy, Partner, Kutak Rock LLP, at the annual conference is that when you issue conduit bond issues you are in the risk management business. An issuer must make informed decisions about proposed issues in terms of the likelihood and magnitude of conduit issue risks and the probability of paying substantial IRS fines or legal fees that in many cases will not be reimbursed by conduit borrowers. This is an important subject area for many CDFA members, and one that will be examined further at future CDFA conferences.
This article is intended to provide accurate and authoritative information in regard to the subject matter covered. The author and CDFA are not herein engaged in rendering legal, accounting or other professional services, nor does it intend that the material included herein be relied upon to the exclusion of outside counsel. CDFA is not responsible for the accuracy of the information provided in this fact sheet. The information provided has been collected from a variety of sources. Those seeking to conduct complex financial deals using the tools mentioned in this document are encouraged to seek the advice of a skilled legal/consulting professional.
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