NATIONAL ASSOCIATION OF BOND LAWYERS

Voice from the Past
Chapter 4

Some time in the early 1960's I worked on one of the most complicated deals I ever experienced. Benton and Moseley of Baton Rouge and Chapman and Cutler were bond counsel for the Sabine River Authority of Louisiana, and McCall, Parkhurst and Horton acted in like capacity for the Sabine River Authority of Texas. The project was a hydroelectric dam across the Sabine River, which separates the two States, and the bonds were to be paid from the sale of electricity on take-or-pay contracts with three different electric utilities. $15,000,000 bonds were to be issued by each State's Authority, an amount that seemed much larger then than now. The lead underwriter was Ira Haupt and Company, a firm that did not survive long afterward, but for reasons unrelated to its municipal bond business. It was represented by the most memorable pair of deal-makers/doers I can recall: one was big, white-haired, handsome, articulate, polished, and oozing with confidence and savoir faire. The other was slight, homely, mostly silent, and avoided eye contact. As you might guess, the former was the one who got the deals without understanding them in detail, and the latter had a very thorough grasp of each item in the transaction yet couldn't sell a life preserver to a man who was drowning.

The chief legal problem confronting the transaction was the loan-of-credit provision of the Constitution of each State. It would not do to let either suffer or enjoy different treatment, not even to the extent of paying or advancing funds except in equal amounts simultaneously.

The bond trustee was Chase Manhattan Bank in New York, and there was a local co-trustee in each of the two States. The Chase was not only in charge of the things bond trustees usually do, but was also given special duties of supervising the payout of bond proceeds and revenues. This was complicated by the fact that two pools of bond proceeds were kept, one for each State, and whenever any construction payment was made, it had to be made equally and simultaneously from each pool. A similar arrangement applied to payment of costs of operation and maintenance. The revenues from the sale of electricity were paid to the Trustee who saw to it that only approved costs of would be paid from the revenues before they went into the debt service and reserve funds. The local banks were disbursing agents, and they started out with modest amounts of money with which to pay construction expenses and O & M costs; they had to provide proper evidence of approval of each such payment before the Chase would reimburse them.

This was in the days before underwriters routinely had their own counsel and sometimes the trustee's counsel did many of the things now done by counsel to the underwriters. Although I had had a little experience with trust indentures before that deal, those indentures had been of the sort that were much like revenue bond resolutions with different faces: the guts were the same. The trustees I had worked with were merely paying agents and sometimes disbursing agents, and they lacked the sophistication of the Chase. They also lacked Horace Robinson of Dewey, Ballantine, Bushby, Palmer and Wood as trustee's counsel. A few years older than I, Robbie had vast experience with corporate indentures, though none with municipal bonds. As I recall, I originally submitted a form of indenture that he rejected, and he sent back a form that was far longer and more detailed but that would not pass muster under Dillon's Rule, State Constitutional loan-of-credit provisions, and various other legal restraints on what municipalities can do. He and one or two of his associates, Fred Benton Jr., Millard Parkhurst, and I spent a week in a Dewey Ballantine conference room hammering out an amalgam that was like nothing any of us had ever seen before. I remember being concerned with the standard defeasance clause because it let the debtor off the hook if it made all payments to the trustee before the due date, even if the trustee embezzled the funds and defaulted; my position was that the debtor should remain liable until principal and interest were available to the bondholders on their respective due dates. (Subsequently I have relaxed on this point). I also doubted that the standard trustee's indemnification language could be enforced against a public body. Robbie was willing to yield a little on this point, but not very far. I do not remember exactly how it was worked out -- possibly in reliance on the severability clause. Eventually we got a document that none of us objected to strongly, partly because we had little strength left. By the end of that week he and I had been frustrated with, and mad at, each other so many times that we developed a warm and respectful friendship.

It may have been in that week that one of Robbie's associates, during a short break, uttered a comment about his firm's best known partner that I still recall: "To really hate Tom Dewey you have to work closely with him."

One feature of the transaction was especially bothersome: how to make sure that neither State's Authority paid more interest than the other's. Such inequality would have violated the parity-of-expenditure rule, yet Texas had a better credit rating than Louisiana, so you might expect the latter Authority's bonds to bear a higher interest rate. Fortunately the underwriters had someone with ingenuity working on the matter. They sold the bonds as units; each unit comprised one Louisiana bond and one Texas bond, both bearing the same rate. How the bonds would trade in the secondary market was a question we didn't have to ask.