Municipal Bond: In our continued effort to educate the investing public about various aspects of the securities markets, we are providing the below information. Because this information is being provided for educational purposes only, it should not be relied upon as providing legal or investment advice. Moreover, it is not intended to be complete in all material respects. If you have any questions concerning the information set forth below, you should contact a qualified professional.
If you are contemplating purchasing a municipal bond, you don’t just have to take the word of the retail investment account executive as to what the characteristics of the investment are. You can ask to see a copy of the official statement and any subsequent updates relating to the bond at issue. This will provide you with critical information concerning the proposed investment that should be considered by the potential investor in the privacy of their own home, with any questions concerning the contents of the document addressed to the investment professional.
What is an Official Statement Relating to a Municipal Bond?
The official statement, prepared by or on behalf of a municipal issuer in connection with a new issue of municipal securities, describes the essential terms of the bonds, including whether and on what terms the bonds can be redeemed prior to maturity, the sources pledged to repay the bonds, the issuer’s covenants for the benefit of investors, and much more. There are no strict requirements regarding the contents of an official statement.
In general, the terms of the bonds described in an official statement will include such features as, among many others:
the interest rate or, if the interest rate is variable, the manner in which such rate is determined;
the timing and manner of payment of the interest on and the principal of the bonds;
the minimum denomination in which the bonds may be sold;
whether the bonds can be redeemed by the issuer prior to maturity and, if so, on what terms;
whether the investor has the right to require the issuer to repurchase the bonds at their face value;
the sources from which the issuer has promised to make payment on the bonds (e.g., from its general taxing power, from a specific tax or revenue source, etc.);
whether any bond insurance, letter of credit or other guarantees have been provided for repayment; and
the consequences of a payment or non-payment default by the issuer.
Unless the terms of the bonds have been modified after the bonds were issued, the official statement generally will provide the most detailed description of the terms and features of the bonds throughout the life of the bonds.
Financial and/or operating data about the issuer of the securities or any other parties who are responsible for repayment of the bonds is generally provided in the official statement, together with descriptions of any covenants of the issuer or other parties intended to protect the investor’s financial interests. If the bonds are issued for the purpose of funding a specific revenue-generating project from which repayment of the bonds is to be made, the official statement generally will provide additional financial, operating or other information (e.g., feasibility studies, engineering reports, etc.) intended to assist an investor in determining whether the project is likely to generate sufficient revenues to make such payments. Financial and operating data contained in the official statement can become stale very quickly, no longer serving as reliable indicators of the then-current financial health or operating experience of the issuer with respect to most secondary market trading of the bonds. However, the financial and operating data provided in the official statement does serve as a basis for comparison for annual financial information provided by issuers and obligated persons under their continuing disclosure undertakings pursuant to Rule 15c2-12 of the Securities and Exchange Commission.
The official statement also typically includes summaries of the material terms of the relevant legal documents relating to the bonds, a copy of the legal opinion of bond counsel on the legality of the issue and the tax treatment of the bonds for federal income tax purposes, and (for insured bonds), a copy of the bond insurance policy.
Underwriters are required to submit to the MSRB copies of the official statement for virtually all new issues of municipal securities, which are made available on EMMA. Underwriters are also required to submit to the MSRB copies of any amendments to the official statement up until the 25th day after the settlement of the underwriting. However, there is no explicit obligation on the part of the issuer to update the official statement. Official statements for bond offerings generally speak only as of their date and are intended for use in connection with the initial distribution of the securities through the underwriters. Official statements generally are not intended to provide complete disclosure for bonds trading in the secondary market, although they continue to be valuable as the most comprehensive source for information on the specific terms of bonds.
If after reading this post, you have any questions, please leave a comment and we will endevor to respond as soon as possible.