Key Highlights this Week!
VRDO’s – we will highlight the Bond Buyer article on VRDO’s and the highly informative follow-up conversation I had with one of the principals of Clarity Bidrate last week…
MCDC Training – Check out the FREE training from the Bond Buyer/Lumesis on Tuesday!
GO Holders secured in Bankruptcy? Check out what CA is doing…
Chapter 9s – Do you know which State has the most filings?
So…here goes…today’s Monday Muni Minutes!
Enjoy and have a great week! Deb
CURRENT EVENTS
Clarity & VRDO’s – Are They Right for Your Bond Portfolio?
Last Monday, the Bond Buyer featured an interview with the CEO of Clarity Bidrate Alternative Trading Systems (“Clarity”), Robert Novembre – to discuss their new platform and plans for reviving the VRDO market – with transparency and clarity.
VRDOs are long term bonds with floating rates that reset typically weekly. VRDOs, along with auction rate securities, historically provided lower overall interest cost as they used lower short-term interest rates.
For years, they were a valuable tool in our bond portfolio to help diversify and lower the cost of borrowing…
But, many of us still remember the crash.
The crash in 2008 that led to changes in our portfolio, our liquidity and our risk tolerances. Those feelings led to VRDOs falling from $120 billion in 2008 to $11 billion in 2014 – largely triggered by the collapse of Lehman Brothers.
The founders of Clarity were there too and said many lessons were learned.
“Our goals include deepening and broadening the market, a high degree of transparency, centralizing the market and using competitive pricing,” Novembre said. The trading system “will give us a healthier, more honest market, with increased liquidity, much greater pre-trading/execution information and transparency.”
So…what are a few pros and cons of VRDOs?
- Pro – typically lower rates overall
- Pro – diversification of portfolio
- Con – fear of liquidity issues
- Con – compressed market
Banks offering private placements and direct loans are competing in this space, but supply is limited as banks have caps on how they can invest under the Volker Rule.
My experience with VRDOs and ARCs was that, yes, we did save a boatload of money over traditional fixed rate debt for many years. We also had significant challenges when the market froze and our bondholders were screaming to my board about lack of liquidity.
Clarity’s three-proned system is designed to help providers assess risk and market depth, while allowing issuers access to a more diverse, competitive market and giving investors a better array of products to buy.
In my conversation with Ken Kollar from Clarity last week, we openly discussed their VRDO model concept as well as both the pros and cons listed above – with a focus on the issuer perspective, history and fears.
Note: While I am not endorsing any particular bank product or bond structure, as your issuer advocate, it’s important to share and analyze what’s out there. This is timely information you should be aware of and discuss with your finance team if you are either in the market or planning to be in the market with a bond deal.
Click here to check out the full free Bond Buyer article on Clarity.
In closing, Ken from Clarity has graciously provided information for your review and is willing to set up either private or an issuer2issuer group demonstration of their platform at our convenience in the next couple of weeks. You can also check out their website here.
[Editor’s Note: E-mail me if you are interested in an issuer group “no-obligation” session and I will set something up, OK?]
OUT & ABOUT
Conferences:
There are about 30 conferences and regional events for the second half of 2015…
You can go to this Bond Buyer link to review what coming up and register!
Resources:
THIS WEEK Webinar: MCDC – What Comes Next for Muni Underwriters
Date: Tuesday, July 21, 2015
Time: 12:00 PM Eastern Daylight Time
By: DIVER by Lumesis and sponsored by the Bond Buyer
Check out the “muni deal of the week”…try if for FREE and look at it from the bondholder’s perspective.
On-Demand Post Issuance Compliance Training for Issuers
“Compliance Basics” – a FREE, 3-part video Compliance Framework training, plus the Monday Muni Minutes.
Just Released – with a valuable and amazingly cost-effective “team learning” option! NEW In-Depth Training, PIC Essentials: The Audit-Proven Blueprint – covering, The IDR – Form 4564, Project Accounting Boot Camp and our hot-button friend, PBU!
On-Demand Webinar
Resource: On Demand Replay of Continuing Disclosure after MCDC
Slides: Final Slide Deck for Continuing Disclosure after MCDC
Muni Market Minute Updates
(Quick news bits on topics we’ve covered in earlier MMM editions!)
Which State is Leading the Way with Chapter 9s?
Hold on to your hats – or maybe I should say husks…do you know which state has had the most bankruptcies?
It’s not who you might think…or why.
My immediate reaction was California and pensions. I was close, but wrong – on both accounts.
The State with the most bankruptcies is Nebraska – the Cornhusker state. Why? – Every case has been a sanitation improvement district. A special district with small bond issuances, often levied as LIDS or SIDs.
However, here is an important point to note – these bankruptcies have been small in comparison to Detroit, Orange County and possibly pending Puerto Rico.
Here are the stats since 1980:
- Nebraska – 62 filings
- California – 45 filings
- Texas – 38 filings
Here are a couple more interesting facts about Nebraska:
- They do not issue GO Bonds,
- Per capita debt is $21 (yes that is $21)
- Debt service to government spending is .1%
Bankruptcies are allowed in 28 of the 50 states with Illinois and Puerto Rico looking to join the list.
[Editor’s Note: Did you guess who it was? This was quite a surprise to me. What are your thoughts?]
GOs Get More Clout in Bankruptcy? Yes, per New CA Law…
As we know, recent bankruptcies have largely left bondholders out in the cold – falling well short of pension obligations and other secured creditors.
SB 222, signed into Law by Governor Jerry Brown is set to give bondholders in that state a little bit more breathing room…and possibly less of a closed grip on their investment wallet.
At stake is really clearing up the ambiguity of whether GO bondholders were “secured” creditors. SB 222 takes care of that.
“Many have argued that the taxes levied to pay California GO bonds are ‘special revenues’ under the bankruptcy code, but this analysis has never been certain,” per Orrick, Herrington & Sutcliffe attorney John Palmer, who drafted SB 222.
Palmer continued, “This is the first time we have been able to say that GO bondholders are secured creditors in a municipal bankruptcy. Being a secured creditor in bankruptcy dramatically decreases the risk of nonpayment. This newfound certainty should permit investors and rating agencies to focus more narrowly on the tax-base as the credit for California GO bonds, and less heavily on issuers’ general funds .”
Moody’s was upbeat on the law…
“Generally speaking, the security for California local government GO bonds is a dedicated, unlimited, voter-approved property tax levy, the proceeds of which cannot be used for any purpose other than the bonds authorized by voters.”
However, Fitch seemed to take a more conservative view.
“Revenues supported by a statutory lien are not free from the automatic stay of a municipality’s general revenues once bankruptcy proceedings begin,”
Further “These protections will not guarantee full or timely repayment, only potentially higher recovery.”
Higher recovery on my bond investment in a bankruptcy proceeding? I’m down with that concept.
Palmer also said, “This would potentially save taxpayers billions of dollars over the time.”
That could be a serious win-win in my book – and yours.
[Editor’s Note: This is certainly a step in the right direction. It looks like very welcome news to bondholders who are becoming increasingly skittish about investing in our bonds. I am going to check out what Munivestor (the investor side of the community) has to say…]
Back by Popular Demand….
Given the recent settlements by the SEC and focus on “what might be coming next” for issuers, let’s make sure we are all…
Solving the Compliance Puzzle!
I have to say that this is still one of my favorites – I fell in love with this graphic as it so clearly and brilliantly represents the puzzling complexity we are dealing with, as issuers, in meeting our compliance needs.
We also know that both the IRS and SEC are paying much closer attention to it these days – and that it is our obligation as issuers to understand (and have fully complied with) our respective bond covenants.
As part of this effort, each week for the next ten weeks, we will focus on providing tips, insights and resources for one new line of our compliance puzzle.
So, are you ready?
Today, we are going to take a closer look at the second line of our puzzle – Regulations.
Before we get started, remember that we are SOLVING the puzzle – and that is a GOOD thing!
But Deb…it’s the Regs.
I get it. Let’s face it…I don’t know many of us who just jump up and down with excitement when we hear new IRS or SEC regulations are coming, right?
It’s more like taking your youngster to the dentist for the first time or watching from the auto repair shop lobby as the technician who is working on your car suddenly calls two more techs over. They all disappear under the hood for several minutes, then reappear, shaking their heads sadly.
Yeah…it’s that “oh this is not going to be good news” feeling.
We are right there with you. Regulations, even the simple ones, can be complicated. Then you have those really awesome ones that say, “shall abide by all of the foregoing except as described in Section x.1(c),” – then you have to stop …go look up that section first…then come back and re-read it again. Are you with me?
The good news is – it doesn’t have to be this way!
Issuer 2 Issuer has tools for you. Here are a few of the big ones as well as specific sections it will help you to get comfortable with.
Seriously, when it comes to looking at the newest final Regs impacting your bonds as well as to keep an eye what’s being proposed, you will want to go to this handy IRS site, Tax-Exempt Bonds, Treasury Regulations.
Now, one of the foremost Internal Revenue Code Regs for issuing tax-exempt bonds is 26 U.S. Code Section 103. This section also goes into a brief description of certain exclusions related to private activity bonds under Section 141, and arbitrage bonds under Section 148.
Generally near the top of page 1 of your Official Statement you will find an opinion statement from your Bond Counsel, which reads something like this – “based upon…and assuming, among other matters, the accuracy of certain representations and compliance with certain covenants, interest on the Bonds is excluded from gross income for federal income tax purposes under Section 103 of the Internal Revenue Code of 1986″ [Bold added by me for emphasis.]
For guidance governing Municipal Continuing Disclosure, we look to SEC Code 15c2-12. You will note that, in your bond transcripts, you have a binding Continuing Disclosure Agreement between you, as the issuer, and the underwriters who sold the bonds on your behalf. Here again, we attest that we will uphold our covenant and pledge to monitor and timely disclose any of the material events and items listed therein.
The enforcement of these covenants is the premise behind the MCDC Initiative…
When you have multiple bond issues outstanding and, as a result, more than one valid Continuing Disclosure Agreement (CDA) –possibly with differing due dates for items – you need to carefully cross-check each to make sure you are meeting the one with the most stringent timeline. Issuing newer bonds or even adopting a more modern Master Trust Indenture does not necessarily negate older reporting requirements. Check to be sure.
As you can see, although we just touched briefly on a few Regs, there are serious ongoing implications to protect the tax exempt status of your bonds, which means lower interest costs, greater transparency and stronger public trust.
A few final thoughts to help you with regards to Regulations – have a strong, working relationship with highly qualified bond counsel, your underwriter, and if applicable your financial advisor. Be realistic about what you do and don’t know – ask questions of fellow issuers and other experts as needed and focus on the critical compliance areas first.
We hope this was helpful! Stay tuned for next week – we will chat about line 3 of the puzzle – Terms.
For more information and other “regulations” resources, check out our Knowledge Library.
We really do look forward to your feedback – and to provide the best content possible.
Based on feedback, I will be working with a couple of “finance team experts” who will provide guest articles on selected topics in muni finance, including the new rules for MAs and the investor view. Are there other topics of interest?
Just shoot me an e-mail or drop us a line in the comments below and let us know, OK?
In closing, we are so excited that PIC Essentials: the Audit-Proven Blueprint is now available! A special welcome to members who joined us last week at the special “member’s only” discount rate. We look forward to your comments, questions and chatting with you in the Private Facebook Group – Club PIC!
NOTE: You can still join the learning group here: PIC Essentials: the Audit-Proven Blueprint.
Plus, as we believe so strongly in the team approach to success, we are offering a tremendous “team discount,” where you and four additional compliance members within your agency or company can join the series right along with you…for only $70 more!
We hope you found this week’s edition of the Monday Muni Minutes valuable and informative.
Chat soon!
As always, your comments are welcome…scroll down and let us know what you think about any of the articles!
To your compliance success,
Debbie
The greatest compliment you can pay us is to share this newsletter with your issuer friends….
P.S. Remember, invite your issuer friends to join us on Issuer 2 Issuer and to get their free online training, PIC Basics!
P.P.S. PIC Essentials: the Audit-Proven Blueprint is now available! You can sign up for the informative, on-demand webinar series by clicking above! As we are strong believers in the team approach to compliance, you can include four additional members of your team (within the same agency please) to take the training for only $70 more – that is truly a great deal. We have also had requests for one-on-one initial consultations as part of our PIC Essentials program offering…would that be valuable to you?
P.P.S. Want a one-click way to get faster information? If you are on LinkedIn, you can get access to breaking muni news articles as well as interesting compliance tips and resources, posted by us during the week. Join our private LinkedIn Group Page, and follow us on our Company Page.