-Axe, Public Finance Law – Fall 2011
-Introduction
-Municipal Bonds
-Represent a promise by state or LUG (issuer) or other qualified issuers to repay to lenders (investors) an amount of money borrowed, called principal, along with interest according to a fixed schedule
-Municipal bonds are generally repaid, or mature, anywhere from 1 to 40 years from the date that they are issued.
-They Finance Projects Like
-Elementary School Buildings
-Streets and Roads
-Government Office Buildings
-Higher-Education Buildings
-Transportation Facilities
-Electric power-generating facilities
-Municipal Bond Market
-Composed of thousands of professionals throughout the US. Bankers, underwriters, salespeople, traders, analysis, lawyers, financial advisors, rating agencies, insurers, commercial bankers, investors, brokers.
-Tax-Exempt Nature
-The interest paid to the investor is subject to neither federal income taxes or to state or local taxation
-There is, however, a small market for taxable municipal bonds issued for purposes that are not eligible for tax-free treatment.
-Primary And Secondary Market
-Primary Market
-Deals with the new securities of issuers
-Secondary Market
-Where securities are bought, sold, and traded after they have been issued
-Primary Issue Process
-An issuer seeds the need for money to pay for capital improvements or to fill in gaps in cash flow. The issuer takes a series of steps that leads to the primary market. There, the municipal bond dealer, usually a securities firm or a bank, purchases the issuers bonds through a process called UNDERWRITING.
-The bonds are resold to institutional and individual investors, who pay the dealer directly for the debt they have purchased.
-The dealer uses these funds to reimburse itself for its capital that was used to purchase the bond from the issuer.
-If an issue is underwritten and there are not enough buyers from all the bonds being issued, the underwriter assumes the risk of holding the bonds in inventory until they are eventually sold.
-Both principal and interest are paid to the investors by the issuer, usually through a bank acting as paying agent, on a fixed schedule
-Secondary Market Process
-The secondary market consists of the trading and other activity in securities after they have been sold as new issues.
-This helps to provide liquidity to investors who are more likely to buy a security if they know they can sell that security at a fair market price prior to its stated maturity.
-The Issuers
-Municipal bonds are issued by LUGs directly or through a special authority
-An authority is a separate LUG issuer expressly created to issue bonds or to run an enterprise.
-Authorities for transportation or power can issue bonds on their own behalf.
-They are issued pursuant to express state and local laws, which impose restrictions on the size and financial structure of the debt.
-Each new issue usually requires the approval of the governing body of the issuer, sometimes through an ordinance or resolution.
-Reasons for Bonds
-Bonds are usually sold for capital improvement projects
-These are the bricks anr mortar that make up the infastructure
-They are generally not sold to finance the normal, everyay operating issues of government (employee salaries, etc)
-GO Bonds
-Usually they are General Obligation (GO) bonds which have the full faith, credit, and taxing power of the issuer is pledged and obliged to be used for the repayment of bonds.
-Approval by voter referendum is frequently required for the finance of GOs.
-The Public urpose projects funded by GOs provide benefits for the common good and so are repaid by taxes on everyone who is subject to taxes in that governmental uni.
-In the event of a default, the holders of GO bonds have the right to compel a tax levy or legislative appropriation, by mandamus or injunction, in order to satisfy the issuer’s obligation on the defaulted bonds
-The broader the source of funds that the issuer can tap to pay principal and interest, the more secure the bondholder will believe it to be
-These are considered safer and will bear lower rates
-They are secured by the faith and credit of the issuer—so they will use all available revenue-producing powers to pay the obligation as it becomes due.
-Generally, the source fo repayment will be ad valorem property taxes levied on the issuer’s consitutionts, but genreeal obligation is not usually restricted to any particular fund
-For a public authority (MSHDA)
-It may represent the general obligation of an entity that does not have taxing power, but has other means of generating revenue (user fees or mortgage payments0
-A GO og this entity will allow bondholders to reach all available revenue sources.
-Tax-Backed or Tax-Supported Bonds
-There are times when it is not feasible or possible to provide a GO bond, so tax backed or tax-suported bonds provide a financing structure
-Revenue Bonds
-These are securities for which specific revenues, not government’s full faith and credit, are the source of repayment. The issuer can be the government itself or a separate authority.
-These are issued for the construction of facilities and plants that provide electric power, water, wastewater treatment, and resource recovery and transportation among other.
-Revenues and user fees that can be pledged to the bond include electric rates and charges, water and sewage usage fees, waste disposal, and tipping fees, tolls and landing fees.
enerate immediate investment capital to begin a large project. They are then repaid with future expected revenues from the completed project, which may come from sources like turnpike tolls or stadium ticket sales.
-Bond Anticipation Notes
-A short-term interest-bearing security issued in the anticipation of larger future bond issues
-These are smaller-short term bonds issued by LUGS. Knowing that the proceeds of the larger future issue will cover the anticipation notes, the issuing bodies sue the notes for short-term financing.
-Municipal Bond Dealers
-They are most often found in a department of securities firm or bank that provides other financial services. Public finance investment banking, underwriting, marketing, and trading municipal securities are their functions.
-Public Finance
-Public finance is the investment-banking arm of the municipal bond business. The investment bank work with exiting clients and develop new business with other issuers.
-Underwriting
-The underwriters set prices (the dollar amount to be paid for a security) and yields (the annual percentage rate of return earned on a security. It is the function of security’s purchase price and coupon interest rate) on new issues. They purchase through a competitive sale or negoitaited sale.
-A Competitive Sale – A type of auction where sealed bids for the bonds are submitted to the issuer at a specific time.
-The bonds are awarded to the underwriter who offers the issuer the lowest interest cost.
-Underwriters will often bid on bonds as part of a syndicate (a group of two or more firms who agree to make a bid together to an issuer in order to share underwriting risk)
-They are sometimes called advertised sales or sealed bid sales.
-Advantages
-In theory, the lowest possible capital cost is likely to be achieved because competing underwriters have a strong incentive to find investors willing to pay the highest prices for the bonds
-Competitive sales insulate municipal officials from potential accusations of favortism or impropriety
-Underwriters may bid aggressively for competitive issue in the expectation that they will be better placed to secure future negotiated underwriting mandates.
