municipal securities outline

Flow of funds

·        Where funds facility receives will be spent

Revenue fund

·        First, issuer must deposit received revenues here

Net revenues pledge

·        Revenue fund $ must pay project expenses

·        Remaining $ to pay debt service on bond

Gross revenues pledge

·        Revenue fund $ to pay principal and interest on bond

·        Remaining $ to pay maintenance costs

Operation and maintenance fund

·        $ to pay for operation and maintenance on facility

Sinking fund

·        For term bonds

·        $ issuer puts away, will redeem bonds with it later

·        Makes sure issuer has enough $ at bond’s maturity

·        Escrow account, part of issuer’s income from taxes or revenues is placed here, can only be used to pay principal back

·        $ must be deposited  yearly, $ invested in government bonds for security

·        $ in sinking fund: municipality will buy its own bonds at a discount or pay off bonds when called

·        Sinking fund call, if part of bond issue is called and paid by sinking fund

·        Term bonds have a sinking fund-why? The whole bond comes due at once and provides $ for issuer then

·        Serial bonds don’t have a sinking fund-why? Part of the issue comes due each year. Sinking fund could be useful with a serial bond to provide for future calls and for the part of the issue that comes due yearly

Debt service fund

·        Contains additional $ to be spent on bond’s principal and interest payment (debt service) if revenues aren’t enough to make payments

·        Debt service reserve fund: reserve to pay debt service in future years

·        Reserve maintenance fund: reserve to pay for unexpected maintenance costs

·        Renewal and replacement fund: reserve to replace worn out equipment and make repairs

·        Surplus fund: can be used for anything legal-the redemption of bonds or to decrease user fee payments

Which of the following provides for the debt service and maintenance of a municipal revenue bond?

·        Rate covenant

·        keeps rates high enough to pay operation and maintenance costs

·        promises such as keeping records, keeping insurance, maintaining facility

Investor protection outline

Investor protection outline

Indenture

·        Document that outlines all requirements municipal issuer must follow

·        Includes: maturity dates, interest rates, name of trustee and trustee bank, protective covenants

·        Does not include: re-offering yield: rate bond is selling in market, reoffering cannot be guaranteed

Protective covenants

·        Agreements made between issuer and purchaser of revenue bond

·        Set forth in indenture

·        Most important: rate covenant, insurance covenant, maintenance covenant, revenues pledge covenants

·        Rate covenant: Makes sure issuer keeps rates high enough to meet operation + maintenance expenses + debt service + other incurred costs

·        Insurance covenant-issuer promises to carry enough insurance on facility to protect against damage/destruction

·        Maintenance covenant: issuer promises to maintain facility, keep in good repair, will preserve revenues

·        Revenues pledge covenant: issuer promises to use revenues toward debt service or maintenance, depending on type of pledge

·        Two revenue pledges: gross revenues pledge and net revenues pledge