ShmoopTube

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Principles of finance ah la shmoop selim younis to the

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street you know from maine Teo wall Well much of

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the process of bringing um unibond public works the same

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way as bringing stocks and bonds and corporate america public

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like the underwriting for secular america Communi syndicates make a

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spread that is they buy this billion dollars of par

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value munich bonds for nine hundred eighty seven million two

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hundred fifty thousand box using fancy math The spread then

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is twelve million seven hundred fifty grand Sounds like a

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lot of money that it has to feed a lot

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of mouths In fact municipal underwriting is one of the

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lower margin businesses on wall street for every win like

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this and underwriter can expect to lose between two and

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five maybe even ten deals and each pitch costs um

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riel money lots of expensive lawyer fees and travel And

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we also have to pay the junior investment banking analysts

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and there's filings and all kinds of other crap And

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of the twelve point seven five million the lead manager

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doesn't exactly keep all of it Just like in the

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aipo process A lead deal manager takes her cut first

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That cut's probably something like fifteen Twenty percent or two

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and a half million here Um and maybe call it

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two point seven Five million to make the math easy

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now there's ten million bucks left to split up among

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the other parties involved And it kind of looks like

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this little pyramid thing here Yeah so the big day

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happens and unfortunately tree huggers dot or ge has had

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an angry faction split They do not want to see

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the thirty seven acres at risk of becoming condos at

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city hall They'd staged a peaceful protest but well that

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clearly didn't work So about five minutes after the bonds

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had become owned by the syndicate bomb went off in

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the center of the park It's sacrificed several barbecue pits

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while the market of buyers who were all set to

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pay for those five per cent coupon uni bonds will

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They freaked out They ran in droves And now the

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bondholders with egg and well suit on their faces are

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wondering what to dio the lawyers scurry to open the

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legal document cleverly titled agreement among underwriters or syndicate letter

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which spells out the terms and liabilities of the participating

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Parties to whom this feels like anything but a party

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well there's is a western style account or a divided

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account and kind of like the old west this style

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agreement is more or less every man for himself and

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since there are five equal syndicate partners well each has

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just eighteen twenty million dollars in munich paper on the

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thirty seven acre wood and note this eating doesn't mean

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that they've lost twenty million dollars each Instead it just

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means that they're the proud new owners of twenty million

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dollars worth of these munich bonds like you break it

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you bought it well what other options do they have

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Well they could have formed the syndicate as an eastern

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account arrangement eastern accounts and it gets require that members

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sell not only their allotment but also the allot manar

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amount not sold by other syndicate members riskier but potentially

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more lucrative The more you sell the more you earn

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But the thing to remember about eastern accounts is that

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everybody is liable for everybody else So very different teamwork

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versus the lone gunman style of the wild wild left

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well regardless of eastern or western style accounts the deal

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will get done despite the best efforts of protesters to

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derail it and the lawyers who get paid to make

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sure that their client the issuer the city the city

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selling the bonds raising the cash isn't disadvantaged one iota

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more than necessary The end product to this deal is

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the official statement which immunity speak is the same as

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a prospectus on lee it's much shorter to give it

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a bit more girth it will often be preceded by

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a preliminary official statement Usually the preliminary official statement contains

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everything that'll be in the final official statement except for

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the coupon rate mean the price that they're asking to

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rent the money A common feature of municipal bonds is

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re funding as well Here's the set up a city

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issues long term bonds at the then prevalent interest rate

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Five years later interest rates have declined significantly in the

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city could pay a lot less in interest if it

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issued new bonds on top of those old ones like

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they brought him back and then the issue new paper

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that costs less in rent right Well the problem here

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is that the city might have a limit on how

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much total debt it can have at any one time

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So it can't raise new money with new buns because

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that would put it over its debt maximum or its

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debt covenant Is there a solution here Hey this is

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finance baby So of course there's A solution just comes

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at a price Well as long as the city pays

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off the old bonds with proceeds from the new bonds

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then it's not new debt and presto the city has

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the same amount of debt but at a cheaper interest

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rate this magic has known as re funding right So

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well there's catch here The city must make sure that

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the official statement explicitly states that the bonds that are

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being issued could in fact be called or re funded

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as a rule Investors don't like re funding because well

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when they bought the bonds they took the risk that

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the interest rates could just as easily have fallen if

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interest rates had spiked while the city would have benefited

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So why should the investors lose their high yielding hi

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coupon bonds If all the city is doing is replacing

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them with high coupons for low coupons right Well nonetheless

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As long as them useful issuer reserves the right to

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refund it's bond's well it's perfectly legal to dio and

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the buyers simply don't have to buy the bonds if

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they don't want to write Caveat emptor baby Well basically

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indenture is here it's the intro stuff They set up

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the rail so that even though the building being borrowed

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against is managed by people who earn their living off

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of the people's taxes there are limits as to how

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it can be managed and or abused That is there's

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Often a wide range of covenants which protect bondholders from

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being you know messed with the part must charge admission

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even to politicians No freebies The park must never offer

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free admission period The park must be maintained at a

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minimum standard and we define bob's park restroom appraisal company

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as the arbiter of fairness in determining whether or not

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the park is being maintained finances have to be audited

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And we must receive a detailed report with thes forty

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two items filled in And if god forbid a bomb

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goes off in the middle The park the bonds air

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immediately call abel This is called a catastrophe Call cities

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Often get creative in finding revenue or cash flow Resource

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is against which to raise taxes One of my beer

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after seven p m in a small town in utah

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Well then you pay a big sin tax like right

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there at the bar And you also have to fill

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out this little form It's like a confessional that goes

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to some higher authority Basically only property and income taxes

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are none Special taxes Almost everything else is a special

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tax it's sort of like a car You get the

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engine and wheels in a body is part of the

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base price won a steering wheel Ho Well those are

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expensive sari That will be a big extra And there

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are special assessment bonds as well Special assessment Bond Yeah

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Write that down For example you live in the hills

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in your town Verizon would love to put up a

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booster cellphone tower so that your section would get much

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better cell coverage But a large area of trees must

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be cleared and a few roads must be installed in

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a permit Must be given so that verizon can hire

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crown castle Teo build that tower And then all of

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you hill dwellers can enjoy crystal clear cellphone coverage while

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a special assessment bond can then be raised against that

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clearing you hill People will pay a buck a month

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extra on your phone bills for a few decades and

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that fuck will pay for that booster tower So that's

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All you'll ever need to know when you're bringing public

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bonds sold by palo alto dot coms to back it's

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free flying car and university admission initiative Yep you'll follow

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most of the same rules as the bank's follow in

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bringing stocks public only this time with a little more 00:07:59.234 --> [endTime] immune

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