| Moody's | S&P | |
| Highest | Aaa | AAA |
| High | Aa | AAA |
| Upper Medium | A1,A | A |
| Lower Medium | Baa | BBB |
| Marginally Speculative | Ba | BB |
| Very Speculative | B,Caa | B |
| Default | Ca,C | D |
Feasibility studies and engineering reports
·
Needed for revenue bonds
Legal opinion
·
Bond counsel: lawyer knowledgeable in municipal
bond laws
·
Exempt from federal and state taxes
·
Research local and state taxes to check-is bond
tax exempt
·
May help in getting favorable legislation passed
·
Supply info to underwriters for official
statement
Bond rating organizations
·
Consumers have credit scores-show how credit
worthy
·
Bond ratings-show chance of default of interest
and principal
·
Big three: Standard and Poor (S&P), Moody’s,
Fitch Investors Service
·
Rate general obligation bonds and revenue bonds
backed by property taxes
·
Refunded, pre-refunded or advance refunded,
ratings go up to AAA and Aaa
·
Moody’s and S&P only rate large offerings
·
Small offerings aren’t rated, high cost to get
rating
·
Most revenue bonds aren’t rated
·
Revenue bonds backed by property taxes are rated
Bond rating criteria at time of rating
·
Amount of bonds issuer has outstanding
·
Amount of overlapping debt, if any?
·
Amount of debt/taxpayer (per capita debt)
·
Amount of population-growth and character
·
how will $ income be made to make payment
·
amount of property and assessed value
·
how well municipality has collected taxes in
past
Bank qualified bonds
·
municipal bond purchased by a bank
·
bank can deduct 80% of the carrying costs paid
to
·
carrying costs, interest expense to buy
municipal bonds, special benefit
·
banks can deduct carrying costs-allowed-only
bank qualified bonds
Which of the following is an S&P rating?
·
AA. S&P ratings are in capital letters.
Moody’s ratings are in lower case letters
Municipal Securities Rulemaking Board
·
Regulated underwriters, broker/dealers (B/Ds),
and sellers of municipal bonds
·
Exempt: osiers
·
Voters get to decide-new municipal issues
·
Two markets: one for new issues, next is secondary market
·
Notice of sale, municipal ad to underwriters,
want bids on cost of underwriting a new issue
·
Notice of sale, competitive underwriting only
·
Tombstone advertisement-underwriters ad to
buyers
Tombstone ad
·
Offering price
·
Name of issuer
·
Dated date-date interest starts to accrue
·
Dates on which interest payments are made
·
Offering scale, shows yield to maturity
·
How to get an official statement
·
Name of underwriter
·
Names of selling syndicate and (sometimes
selling group) members
·
Cannot: offer an incentive for new issue, info
only, names appear by % participation
Competitive underwriting
·
Issuer ad to underwriters to submit bid on cost
of underwriting a new issue
·
Issuer chooses underwriter who allows issuer to
get highest proceeds with lowest interest cost
·
Broker/dealer firm who want to compete submit
bids after seeing notice of sale ad
Negotiated underwriting
·
Issuer asks broker/dealer (B/D) to give a cost
estimate of underwriting a new issue
·
If estimate too high, issuer argues for lower
cost
·
If lower cost isn’t given, issuer contacts
another underwriter
Official statement
·
All muni bonds come with an O.S.
·
Tells important parts of bond-issuer,
protections for buyer, call features
Which of the following is not a method or component of a
municipal underwriting?
·
Standby-corporate underwriting.
·
Competitive, negotiated-municipal underwriting
·
Bid-part of competitive underwriting
Secondary market
·
Market for investors to trade with other
investors
·
Secondary issue, any issue sold for 2nd
time or more
·
Primary issue, issuer sells to buyer, 1st
time
·
Bond traders: broker/dealers (B/Ds) who buy
bonds from investors-want to sell and resell to investors wanting to buy
·
Secondary market trading: interdealer trading,
retail business between individuals, institutional investor business
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