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What is the Role of the Verification Agent?

What is the Role of the Verification Agent?


For a complex transaction such as an advance refunding, the verification agent’s job is to ensure all the cash flows are calculated correctly to meet Treasury rules. 

Certain types of bond transactions, such as current refundings, have to be accurate to the penny in order for the transaction to meet Treasury rules. In order to make sure all the transaction calculations are accurate the financing numbers are reviewed by a verification firm. The verification agent checks all the calculations to make sure they are accurate; for example, if the transaction includes buying a Treasury security, they check the cash flow of that security for accuracy and any gains or losses due to the purchase/sale of the security. The official Bond Purchase Agreement cannot be executed until the verification agent completes their responsibility. 

The US Tax Code requires a verification agent to oversee and account for all refunding bond transactions, especially if the transaction involves a profit.

In the updated accounting code for refunding transactions, verification agents must report all Net Present Value (NPV) savings, a function that was added to reduce the use of debt instruments for arbitrage in governmental organizations.

The verification agent is to monitor, calculate, verify, and report specific cash flows within the organization to ensure that they align with the laws and regulations. The calculations a verification agent handles include:

  • Escrow security cash flows
  • Escrow securities reinvestment rate
  • Refunded bonds principal and interest cash flows
  • Refunded bonds arbitrage yield, if executing a taxable refunding
  • Refunding bonds principal and interest cash flows
  • Any unique calculation, if applicable, for any specific issuer constraints

An issuer decides to issue Series 2023 bonds to refinance its Series 2014 bonds through a taxable advance refunding. To ensure the cash flows produced on the sale date of the bonds are accurate, the verification agent may verify the sufficiency of the securities purchased for the escrow account, the bond statistics of the Series 2023 bonds, and the annual NPV savings achieved when comparing the debt service on the refunded Series 2014 bonds to the debt services on the new Series 2023 bonds.

What’s important here?

The verification agent plays a necessary role in ensuring that all key cash flow calculations are accurate, unbiased, and performed in a timely manner before the investors receive the bonds. If during the verification of a bond issue errors are found, the verification agent explains what the errors are and how to correct them.