The gusher of municipal bond information
The municipal bond market is often thought of as complex and murky. This is understandable; after all, there are over 50,000 issuers of bonds and a million plus specific municipal-bond issues. It’s staggering to imagine so many different securities.
A specific bond issue can be as small as the $995,000 offer that the city of Moose Lake, MN has coming to market this week, or as big as last week’s jumbo-sized $10 billion “State of Texas Tax and Revenue Anticipation Notes, Series 2011A”. (The Texas notes mature in one year and are paying 2.50 percent interest — they’re hot as griddle cakes.)
Municipal bonds also come in many different shapes because there is very little standardization of structure among municipal bonds. A straight bond generally has a fixed interest rate, or yield, and a set maturity date, or time of repayment. But many municipal bonds have floating interest rates; many others can be called or refinanced when interest rates go down. Regulatory agencies like the MSRB or the SEC don’t require that bonds have a certain structure or feature, only that the details are fully and accurately disclosed.
Beyond understanding the structure of a specific bond most investors want to review the health of its issuer. The Bond Buyer describes what information investors need to access to:
Investors will need to understand the issuer’s underlying finance structure, sources and uses of cash, and the cost structure of an issuer’s budget, as well as their own economic and legal rights as investors — in and out of court — in the event of a bond default.
Several regulatory changes in the last few years have increased the flow of information about issuers in muniland. With the full implementation of the Municipal Securities Rulemaking Board’s EMMA system, investors now have near real-time disclosure of the offering details of bonds and continuing disclosure of the financial condition of bond issuers.
It is the “continuing disclosure” part of the new information flow that makes the municipal market much more dynamic. Previously a bond that was issued in 2005 might become available to buy, but the issuer was making very little updated information public about tax revenues or additional debt they had taken on. It would be very hard to decide if their bond was too risky without evaluating the financial condition of the issuer. Now that issuer must make regular public disclosures, including the following:
- annual financial information
- bond calls;
- rating changes;
- principal and interest payment delinquencies;
- unscheduled draws on debt service reserves reflecting financial difficulties;
- modifications to rights of security holders;
There are many more specific events that must be disclosed through the EMMA system. You can see more detail here on the specific types of required disclosure. The MSRB published a study last week summarizing two years of information disclosure for EMMA. Some key points of the study (a map detailing the number of disclosures by state is at the top of the post) are:
- Between July 2009 and June 2011, the MSRB received 258,162 continuing disclosure documents, with fairly steady month-over-month increases in all types of continuing disclosure submissions.
- Approximately 89 percent of all event disclosures submitted were bond calls and rating changes. Bond call disclosures totaled 101,590 while rating changes reached 20,978.
- Nearly 12 percent of all continuing disclosures were submitted by the State of California or its municipalities.
- Texas, Florida, New York and Pennsylvania rounded up the top five states in terms of number of disclosures, accounting for 10, 7, 6 and 5 percent, respectively.
The credit rating agencies are also starting to demand more timely and accurate information from issuers. Last week Standard & Poor’s issued a market notice detailing the timeliness and accuracy of information that issuers were required to submit. The rater told the issuers that they would get three reminders to submit information; otherwise they would be put on “Creditwatch,” a signal to the market that a rating downgrade could be imminent. S&P, which also detailed the types of information that were permissible, will only allow accurate data that has been concurrently filed with regulators or for which the issuer had a contractual liability to provide. This was a powerful move on the part of S&P as they shield themselves from the risk of using fraudulent data.
Muniland is a deep and murky market but the waters are starting to run a little more clearly. As more commercial vendors (think Reuters) discover ways to make useful systems for this gusher of information more freely available, investors will have an important asset class to consider.