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Can a financial advisor help utilities raise capital more efficiently? Respected market observer Joe Mysak claims that “the most important professional involved in the transaction…is the financial advisor.”1 Yet some issuers are confident that they can manage bond transactions alone. Which view is right, and just what do financial advisors actually do? When should utilities employ a financial advisor and how can they select one?

The role of the financial advisor, or FA, is to provide utilities issuing debt with expert, independent advice on all aspects of a transaction, from selecting other professionals to pricing the bonds. The FA should be able to assist an issuer by managing a bond sale from start to finish. In the most comprehensive arrangement, a financial advisor FA might help the issuer:

analyze existing debt, cash flow and construction financing needs;

identify optimal financing, refinancing and creative financing options to meet those needs;

advise on the best market timing for the utility to issue debt;

prepare a rating agency presentation and arrange and accompany the issuer to meetings with rating agencies and large institutional investors;

help determine the precise size and timing of a bond issue;

prepare requests for proposals for and evaluate proposals from attorneys, underwriters and other service providers, including the reasonableness of their fees;

size and structure the issue and arrange for the bidding (for a competitive sale) or work with the underwriter to do so (for a negotiated sale), including pricing and call provisions; and

evaluate the sale when it's completed.

The need for a financial advisor increases with the complexity of the transaction, and decreases with the market experience of the issuer. Negotiated sales of “plain vanilla” revenue bonds by experienced participants in the market can often be handled efficiently by negotiated electronic sale. When issuers are in the market less frequently, have complex credit questions, or can receive benefit from more complicated debt management products, a financial advisor can add value.

Financial advisors may be independent firms that do not trade in the market, or underwriters. In either case, the most important factors in choosing an FA are experience and impartiality. Most critical is that the financial advisors not receive any benefit from the issuer's decision whether to sell bonds or not.

Document Type: Research Article


Publication date: January 1, 2002

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