NATIONAL ASSOCIATION OF BOND LAWYERS

Voice from the Past
Chapter 21

In Chapter 14 of this series I mentioned that bond counsel in the past spent too much time on the printed bonds themselves, and related some of the problems we had with them. In every issue there was one bond that used up an exceptionally large amount of time, and that was bond number one. Our opinion on an issue of bonds issued in bearer form recited that we had examined bond number one of that issue and found the same in due form of law.

To include that recital in an opinion required a lawyer in our firm to hold that bond in his or her hands and read every word and number on it while someone else read aloud the text of the pertinent portion of the bond resolution, ordinance, or indenture. This lawyer had to read at least one of the coupons under similar conditions; we did not consider that every coupon had to be so compared as to text, trusting the printer to make the text the same on all coupons as we trusted him to make the text of all of the bonds the same as that on bond number one. Then the lawyer had to make sure that the blanks that were left in the source document were properly completed in bond number one. These included the maturity date (or at least the year), the interest rate, and of course the bond number itself.

The coupons were all checked to make sure that each bore the correct interest payment date, bond number, coupon number, and amount of interest due on each interest payment date. For all coupons except, sometimes, the first, it was simple enough to multiply the face amount of the bond by the interest rate and divide by two, since each such coupon represented six months interest. It was assumed that this period represented half a year exactly, even though the number of days varies slightly (for example the period from January 1, 2001, to July 1, 2001, is 181 days and the period from July 1, 2001, to January 1, 2002, is 184 days). For convenience, municipal and corporate bond interest calculations assume a 360-day year of 12 thirty-day months (interest on U.S. government obligations is calculated differently). Sometimes the first interest payment date was more or less than six months from the date of the bonds; in such cases a different calculation must be made, assuming that each month of the odd period is a twelfth of a year and each day of a partial month is a thirtieth of a month. It often happened, when the interest rate of a bond was expressed in an odd number of eighths of a percent (4-3/8% for example), that each coupon on a $5,000 bond might be for an amount expressed in half-cents ($109.375 for example). Again, according to convention, odd numbered coupons would show the next full cent higher and even numbered coupons the next full cent lower; except that in Arizona the calculations were reversed so that the first and subsequent odd numbered coupons would show $109.37 and even numbered coupons $109.38. If the odd amount due on an irregular interest payment date was more or less than half a cent, the difference between it and the next closest full cent was ignored.

It may seem that such minute calculations are beneath the dignity of an experienced municipal bond lawyer, considering that on a hundred million dollar bond issue comprising twenty thousand $5,000 bonds, half a cent on each of these would amount to only a hundred dollars. Nevertheless, such a lawyer should not disregard this financial practice when his opinion recites that he has examined the bond and found it correct.

When we were not going to attend the closing, but were escrowing our opinion for release when an issue was delivered and paid for, we would get executed bond number one and a signature identification certificate in advance, and examine both, making sure that the signatures on the bonds and coupons were the same as those identified on the certificate. When attending the closing, we generally examined the bond at the pre-closing. It occasionally happened that one of the signers of the bonds used different forms of his signature on the bonds, the coupons, and the signature identification certificate. For example, the coupons would bear the facsimile signature of "John W. Smith," the faces of the bonds would bear the signature, "J.W. Smith," and the signature identification certificate would bear "John Willam Smith." Often we had to prepare, on the spot, a special signature adoption certificate for the official to use in certifying that each of these signatures was his true and genuine signature, that he used them interchangeably, and that he adopted the forms of signature actually appearing on the bonds and coupons.

Reading the bond was not difficult when I was dealing with general obligation bonds, as the text was relatively short and printed in large type. As bonds got more complicated, the text grew much longer, expressing redemption features, sources of payment, the possibility of amendment of the underlying documents, etc. Then, of course, the type grew smaller. I recall bringing a jeweler's loupe to a pre-closing to make the text easier to read. Mostly, however, when I considered such assistance necessary, I used a pair of magnifying glasses set in a frame attached to a headband.

One of the many benefits I looked forward to in retirement was not having to read bond number one any more. But now, of course, we have book entry bonds and there is no bond number one to read.

Manly W. Mumford