Tender Option Bonds: Chapman and Cutler LLP

Overview

Chapman attorneys helped develop tender option bond (TOB) programs for both US and foreign banks and since that time have contributed to significant advancements in the TOB market.

Driving Innovation in the TOB Market

We provide comprehensive legal guidance and innovative solutions that address the complex market demands and the evolving needs of TOB market participants. The Chapman team has played a pivotal role in helping shape the TOB industry from the ground up, including:

Market Firsts: Leading the development of new structures, including pooled TOBs, APS and VMTP TOBs, third party TOB architecture for bank programs, credit enhanced TOBs, taxable TOBs, securities lending programs, term A/B structures, and the use of income sharing as a partial substitute for gain sharing.
Documentation Development: Developing and implementing new documentation used broadly in the market for total return swaps, credit enhanced TOBs, muni strips, and post-Volcker net liquidity.
Volcker-Compliant TOB Programs: Designing TOB programs structured to satisfy Rule 3a-7 of the Investment Company Act while falling outside the definition of “covered fund.”
Risk-Sharing Arrangements: Establishing bilateral contractual arrangements that replicate TOB economics without triggering Volcker compliance requirements.

Program Design and Compliance

We assist banks with both proprietary and third-party TOB programs, offering guidance from initial design through ongoing compliance. Our thorough understanding of regulatory frameworks ensures our clients remain compliant with respect to securities and bank regulations.

Municipal Derivatives Applications

Our team has worked extensively on pioneering transactions involving a range of derivative products, including interest rate swaps, total return swaps, and forward delivery agreements. We also support clients in implementing securities lending structures and TOB-related arrangements.

Leaders in Tax-Exempt Finance

Chapman is a leading law firm for tax-exempt transactions. We deploy our legal knowledge and market insight to structure effective tax-exempt financing solutions, such as DBF tax-exempt “gap” financings and draw-down bonds and revolving credit facilities backed by TOB trusts.

Taxation Authorities

Chapman attorneys provide a deep understanding of securities law with extensive tax insights. Our tax team is led by one of the nation’s leading authorities on the taxation of TOBs and municipal derivatives. Our tax attorneys were the lead counsel for the dealer community in negotiating with the IRS in the development of Revenue Procedure 2003‑84, the authority under which TOBs are issued.

Representative Matters

Members of Chapman’s TOB team have contributed significantly to the development of the industry, including:

Tender Option Bonds: Developed the first TOB transactions.
VRDP and VMTP: Developed the first VRDP and VMTP transactions.
Net Liquidity: Developed and implemented the technology of initial programs post-Volcker.
Total Return Swaps (TRS): Developed the technology and worked on the first transactions involving TRS with municipal bonds in issuer transactions and with TOBs.
SEC Lending: Developed securities lending program and executed the first transactions.
TOB Risk Retention Compliance (including with TRS): Represented industry leaders in discussions with Federal regulators and led the first deals in the industry to implement such risk retention solutions.
3a-7 TOBs: Developed the current industry 3a-7 structure, including template documents that are the basis for all current programs.
3rd Party TOB Architecture: Led the development of current industry structure for 3rd party deals for bank programs.
Pooled TOBs: Led the first pooled transactions in the industry.
Pooled TOBs with Municipal Lease Portfolios: Developed a TOB platform to pool municipal leases and package into TOBs.
Credit Enhanced TOBs: Developed the approach used for Custody Receipts exempt from ’33 Act and ’40 Act Registration (a technology used regularly in Credit Enhanced TOBs).
Muni Strips: Developed the technology to strip the coupons off municipal bonds and sell pieces exempt from ’33 Act and ’40 Act registration.
APS and VMTP TOBs: Developed the structure to place both APS and VMTP securities (preferred shares in regulated investment companies that pay exempt-interest dividends) into TOB trusts.
Term A/B Structures: Developed the structure allowing banks to finance municipal bonds for clients on a term basis (i.e., bank clients holds residual and bank owns the floating interests).
Taxable TOBs: Developed structures to place taxable assets into TOB trusts.