That “loan” may be a “bond”
That “loan” may be a “bond”
In a groundbreaking announcement, the Municipal Securities Rulemaking Board (MSRB) has advised municipal bond market participants that many “bank loans” currently being structured for state and local governments are likely to be classified as municipal securities, even though these “bank loans” are often being privately placed.
In the market advisory the MSRB makes reference to the Exchange Act and a landmark Supreme Court case about the definition of a “security.” From the MSRB:
Many loans are evidenced by notes. Section 3(a)(10) of the Exchange Act includes “notes” within the definition of “security.” The principal legal authority on the distinction between a note that is a security from one that is not is the U.S. Supreme Court case of Reves v. Ernst & Young, Inc. A note is presumed to be a security under the Supreme Court’s opinion in Reves unless it is of a type specifically identified as a non-security.
If a financial transaction is a “municipal security” then market participants must follow MSRB rules that apply to broker-dealers, which include the following:
- Broker-dealers must pay assessments on underwritings and placements of municipal securities
- Broker-dealers engaged in municipal securities activities must pass qualifying exams
- Broker-dealers must report purchases and sales of municipal securities
- There is a duty of fair dealing on broker-dealers and municipal advisors
- Broker-dealers must obtain CUSIP numbers for municipal securities issues
- Broker-dealers are banned from engaging in municipal securities business for two years following non-de minimis political contributions to certain “issuer officials”
Given all the oversight that the MSRB exercises when municipal bonds are issued and traded it’s easy to see why banks and broker-dealers were trying to escape oversight by structuring “bank loans” for municipal issuers. This market advisory is a very strong assertion of authority by the MSRB and effectively creates many protections for issuers and investors. The advisory will help illuminate the disclosure requirements and order of priority for municipal loan and bond investors. Outstanding regulatory effort by the MSRB. Kudos!
Increased municipal bond refinancings predicted
Due to historically low interest rates it’s likely that we will see increased municipal security issuance as state and local governments continue to refinance. From Bloomberg:
Low interest rates will encourage municipal borrowers to refinance debt in the last four months of 2011, said RBC Capital Markets LLC, which raised its forecast for long-term bond sales in the period to $100 billion.
As much as $275 billion of municipal bonds will be sold this year because of the increase, up from a previous estimate of $260 billion, Chris Mauro, an RBC analyst, said in a report today.
There is $166 billion of municipal debt currently eligible to be refunded, up from $140 billion in the same period last year, Mauro wrote.
The big municipal bond offering this week is not a refinancing but issuance in anticipation of future tax collections. Bloomberg reports:
California, the biggest seller of municipal bonds in the last seven years, is set to issue $5.4 billion of revenue- anticipation notes Sept. 15, following two days of sales to individuals. It is the first tax-backed issuance for the state this year after lawmakers chose to delay borrowing as they closed a $26 billion budget deficit.
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