Snitches don’t get stitches?
At least that’s probably the case when you’re doing the snitching on yourself. The Securities and Exchange Commission is tossing up an interesting offer to anyone in the municipal securities industry who may have been turning a blind eye to disclosure responsibilities. The SEC, through its Enforcement Division, is encouraging “issuers and underwriters of municipal securities to self-report certain violations of the federal securities laws rather than wait for their violations to be detected.”
In exchange, the SEC is promising “standardized, favorable settlement terms” – more information beyond that vague term, however, isn’t available.
But these folks aren’t messing around. Last summer the SEC charged a school district in Indiana and its municipal bond underwriter with falsely stating to bond investors that the district had been properly providing annual financial information and notices, as required as part of its prior bond offerings. The underwriting firm, City Securities, agreed to pay nearly $580,000 to settle the charges. Meanwhile, the underwriter and the school district’s settlement include a one-year ban from the securities industry. The underwriter was also permanently barred from serving as a supervisor.
That’s some fancy financing, Bob
The latest municipal issuer brief from Municipal Market Advisors highlights a unique move by the state of Wisconsin designed to avoid the expected increase in interest rates in the coming year or so. Rather than waiting until next year to go to the municipal market and refinance a certain set of bonds, the state got a $278 million loan secured directly from a bank. In doing so, Wisconsin locks in today’s interest rates and can pay off bondholders next year with the proceeds.
MMA notes that this type of refinancing tool, called a delayed draw term loan, may be something more issuers do to take advantage of today’s rates before they rise. But, because of its complexity and disclosure requirements, this will likely only appeal to large municipalities or states that are very accustomed to issuing bonds.
One man’s trash…
Puerto Rico’s bonds were downgraded to junk status just weeks before the commonwealth planned to issue $3.5 billion in debt. But who cares about a thing like that? The financially troubled island government went ahead with its bond sale last week and those junk-rated bonds flew off the shelf like toilet paper before a snowstorm.
The goal of issuing the bonds was to provide better liquidity to the Government Development Bank of Puerto Rico. The bonds didn’t create more debt for the commonwealth, the money is being used to pay off some of its $70 billion in outstanding debt. The bonds sold at an interest rate just under 9 percent, a high rate compared with most other governments but well below the double digit rate that some observers expected just a few weeks ago.
In advance of the sale, Fitch Ratings released a highly detailed report highlighting the government’s weaknesses and strengths. The bottom line? Puerto Rico’s long record of budget deficits, “overestimation of revenues, unfunded overspending, and a reliance on borrowing to meet budgetary gaps” doomed it even before the Great Recession hit.
However, despite the failures of past administrations, Fitch says the “the commitment and effectiveness of the current administration, under Gov. Alejandro García Padilla, appears strong.” Padilla’s plan is to reach a structurally balance budget by 2015.
Preaching to the choir
Fitch Ratings released a note last week singing a song state and local governments know well: the proposed changes to the tax-free status of municipal bonds in both President Obama’s budget and House Ways and Means Committee Chairman Dave Camp’s proposed tax reform will make it more costly for local governments to build stuff.
“The proposals could delay some projects, inhibiting economic growth as transportation and other public infrastructure costs mount,” analyst Dan Champeau writes.
So how much in infrastructure spending are we talking? According to the Department of Transportation, maintaining roads and transit systems at their current conditions will cost up to $105 billion, while improvements will bring total costs to $146-$171 billion annually through 2030.