municipal securities outline

Municipal Securities outline

·        A.k.a. munis

·        State and local debt issues

·        Issues by cities, counties, local agencies/authorities

·        Bonds are used to fund highways, environmental cleanups, housing projects

·        Corporate bonds-greater risk

·        Munis < corporate risk

·        Municipal notes, short term issued in $1,000 amounts, banks and insurance companies buy $1,000,000 at a time

·        General obligation bonds, GO bonds, long term debt securities backed by taxes, issued in $1,000 amounts

·        Revenue bonds, long term debt securities issued for public projects, repaid by facility revenues, issued in $1,000 amounts

·        Municipal notes, short term notes, short maturity, less risk of default on interest and principal than other munis

Construction Loan Notes (CLNs) or Project Notes (PNs) issued for housing projects in low income areas

·        Issued to buy and build on property for new, low-income housing projects

·        Can be used to renew existing projects

·        Can be used to build urban housing

·        “construction loan” to start housing project

·        Backed by U.S. government

·        Issued by municipalities

·        Safest of all muni securities

·        Paid with public housing authority bond proceeds

·        Issued for up to-3 year

·        Low interest rate, tax free

·        Short term

·        Issued at discount

·        Appreciation tax free

·        Receive lowest return

 

Tax Anticipation Notes (TANS) anticipate incoming taxes

·        Issued by local agency to get temporary $ to finance current expenses until taxes are collected

·        Agency will receive tax $ soon

·        School district budgets run 07/01 to 06/30 but don’t receive tax $ until next December

·        Buyers get interest payments, exempt from federal income tax

·        Usually exempt from local and state income tax

 

Revenue Anticipation Notes (RANs) anticipate proceeds from a bond issue

·        Munis issue while waiting for future revenues

·        Anticipated $ will come from a facility

·        Facility revenues are expected to increase

·        Muni gets $ to keep operating facility until $ arrives

·        Interest exempt from federal income tax

·        Usually exempt from local and state tax

Bond Anticipation notes (BANs)

·        Issued by a municipality in anticipation of the issuance of a bond that has been passed for a project

·        Muni needs to be able to sell bond

·        Interest payments exempt from federal income tax

·        Usually exempt from state and local taxes

Grant Anticipation Notes (GANs) issued in anticipation of receiving $ from a grant to municipality

·        Issued by a municipality for a project that will be funded with a grant

·        Project must be finished before grant money can be received

·        Grant money pays off GAN, investors get principal & interest

·        TANs, RANs, BANs, GANs-usually exempt from state and local taxes

·        If bought by investors outside state of issue, subject to state taxes

·        MIG, Moody’s Investment grade

·        MIG 1-best, MIG 2, MIG 3, MIG 4-worst

All of the following are short term municipal notes, except:

·        banker’s acceptances-corporate short-term securities. Issued by munis: Project notes, revenue anticipation notes and tax anticipation notes-

General obligation bonds

·        munis backed by “full faith and credit” of the issuer

·        tax revenue pay for investor’s principal and interest

·        lower risk of default-GO

·        higher risk of default-revenue bonds

·        ad valorem, at value taxes on real estate to raise $ for GO bonds

·        ad valorem taxes on residential and commercial buildings help pay for debt service

·        property taxes in mils per thousand

·        mil is 1/10 of 1 cent

·        mil is .001 dollars

·        Ex. Tax of 7 mil on property worth $8 million based on 25% assessment = (25% x 8,000,000 x .007)

·        Munis can issue limited tax bond, backed by special tax, not backed by full taxing power of issuer

·        Ex. A municipal GO bond is paid by all of the following except: Sales taxes. Sales taxes pay for revenue bonds. Ad valorem taxes pay for GOs

Revenue bonds

·        Issued to get $ to build bridges, tunnels, streets, infrastructure, rapid transit, harbors, parks

·        Facility user fees pay back principal and interest to bond holders

·        Not paid by property taxes except special assessment bonds

·        Feasibility study needed, can a project pay for itself?

·        More risky>GO bond because facility must pay back bondholder

·        User-fee revenue bonds

·        Tolls and fees bonds

·        Special tax bonds

·        Special assessment bonds

·        Industrial development bonds

·        Public housing authority bonds (PHA)

·        Double-barreled bonds

·        Moral obligation bonds

·        Water and sewage fees pay back user fee revenue bonds

·        Special tax bonds-gasoline tax may pay back highway bond. Special tax pays interest and principal back to bondholders

·        Special assessment bonds-generate $ to buy a facility such as infrastructure in new housing areas to build infrastructure for a group of users

Industrial Development Bonds/Industrial Development Revenue Bonds

·        To raise $ to build pollution control facilities, industrial bonds, sports stadiums, airports, educational facilities

·        Issued as a municipal bond, sell to a corporation

·        Corporation pays interest and principal

·        Bonds used to buy equipment or build buildings

·        Municipal bond is tax free

·        Bonds obligation of corporation, get corporation’s debt rating not municipality’s debt rating