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Charles Carey is a Member of Mintz Levin, based in the firm’s Boston and New York offices. He has extensive experience in taxable and tax-exempt revenue bond financings. He has broad experience in the areas of general revenue bonds and disclosure. He has assisted various clients in connection with cross-border investments, including investments in offshore limited liability corporations and partnerships. He is a frequent speaker on disclosure and multifamily housing projects and is also a member of the National Council of State Housing Agencies’ Disclosure Task Force.
Mintz Levin champions a level playing field, and Mr. Carey continues to provide thought leadership for housing bond investors and institutional investors with his latest blog. Mr. Carey is principals-based in his legal analysis of the MSRB's latest rulemaking.
MSRB Addresses Selective Disclosure
By Charles Carey on September 15, 2017
Posted in Mintz Levin's Public Finance Matters: Disclosure
On September 13, 2017, the Municipal Securities Rulemaking Board (the “MSRB”) published a market advisory on selective disclosure (the “Notice”). The stated purpose of the Notice is to “increase awareness” of selective disclosure as a “market fairness” concern. Although the Notice acknowledges that selective disclosure by issuers of, or conduit obligors on, municipal securities is not prohibited or “inherently problematic”, the Notice cautions issuers and obligors in the municipal market not to selectively disclose material nonpublic information.
The Notice’s bottom line is to urge that issuers of and obligors on municipal securities voluntarily disclose to the broader marketplace information that is potentially material and is being disclosed or has been disclosed to a subset of actual or potential bondholders “by a method or combination of methods that is reasonably designed to effect broad, non-exclusionary distribution of the information to the public”, including, for example, by posting the relevant information on the MSRB’s EMMA website.
Southern Municipal Finance Conference:
Keeping An Eye to the Future and An Ear to the Past When Analyzing Southern Regional Credit Quality
The Southern Municipal Finance Society (SMFA) hosted "Southern Roll Call: How The Region is Preparing for the Future While Addressing the Present." The two-day event was at the Marriott Hotel City Center in Dallas, Texas, on Sept. 28-29, 2017. Angela Kukoda is the chair of the SMFA and she provided thoughtful commentary as well as gracious introductions.
Ted Damutz and Adebola Kushimo of Moody's are co-chairs of the Southern Municipal Finance Society's Education Committee.
Josh McGee of the Laura and John Arnold Foundation was the headliner for the program. He noted public pension debt has tripled over the last decade.
"We are paying for past debt," he said. "Public sector employment has been flat since the last recession. Estimates for total public pension debt may be as high as $8.4 trillion."
Clearly, the current system doesn’t leave employees with enough money for retirement. Mr. McGee took the time to look at how we got to triple public pension debt — mismanagement and broken incentives caused risky investments. For example, in 1999, Calpers pushed for retroactive benefit increases — they said it wouldn’t cost taxpayers a penny. It was a statement based on huge interest rate growth continuing — forever.
Around the year 2000, Calpers was fully funded, now it averages 71.8% funded. Now, Calper's portfolio includes riskier investments; a doubled share of alternative investments; it is less liquid; fees are unknown and riskiness is unknown.
In the future Mr. McGee said we can expect negative amortization, with growing interest costs over the next 10-15 years.
Trump to Dump CPP
At presstsime, U.S. Environmental Protection Agency (EPA) Administrator Scott Pruitt issued a Notice of Proposed Rulemaking, proposing to repeal the so-called “Clean Power Plan (CPP).” After reviewing the CPP, EPA has proposed to determine that the Obama-era regulation exceeds the Agency’s statutory authority. Repealing the CPP will also facilitate the development of U.S. energy resources and reduce unnecessary regulatory burdens associated with the development of those resources, in keeping with the principles established in President Trump’s Executive Order on Energy Independence.
Mr. Pruitt made the announcement at an event in Hazard, KY — in the heart of the Kentucky Coal Fields.
“The Obama administration pushed the bounds of their authority so far with the CPP that the Supreme Court issued a historic stay of the rule, preventing its devastating effects to be imposed on the American people while the rule is being challenged in court,” said EPA Administrator Scott Pruitt. “We are committed to righting the wrongs of the Obama administration by cleaning the regulatory slate. Any replacement rule will be done carefully, properly, and with humility, by listening to all those affected by the rule.
The CPP, issued by the Obama administration, was premised on a novel and expansive view of Agency authority that the Trump administration now proposes to determine is inconsistent with the Clean Air Act. In fact, the CPP was put on hold in February 2016, when the U.S. Supreme Court issued an unprecedented, historic stay of the rule.
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"It is a hot field. It is a high-yield field. It is a field that has bankruptcies. It has restructurings. It’s predominantly non-rated. It has a lot of things going on, a lot of bells and whistles," according to Ed Merrigan, Director of Research at B.C. Ziegler & Co. describing the senior living sector at SMITH's High Yield Municipal Bond Conference. He was talking about what went wrong and what is still going wrong in the sector.
As only Mr. Merrigan can do it, he described the size of the sector as, "a bug fart in the Amazon jungle, as far as municipal bonds are concerned." Well, you get the picture... In 2011 the sector was about $1 billion out of a $300 billion market. Mr. Merrigan said the senior living sector is on its way to about $3 billion in issuance in 2012.
Only a small portion of the CCRC sector is rated — about 140 borrowers of the total universe have rated bonds. It would be too risky for market participants to launch a bond deal in the 'BBB-" or, non-investment grade category. So, these types of deals come non-rated.
SMITH's Research & Gradings has reported on the speculative real estate bubble and the disastrous consequences for affordability in homeownership for a number of years.
In 2003, SMITH's stated the run-up in real estate values was based upon a theory of a greater fool. This theory suggests that although a buyer might recognize it would be foolish to pay such a high price, the buyer believes an even greater fool exists to purchase the property at an even higher price. SMITH's wrote "The greatest fool will ultimately be the American taxpayers, who will be forced to pay for a bailout because of the failure to regulate."
Swiss bank UBS AG warned last week it will write down the value of some assets by a staggering 4 billion Swiss francs ($3.4 billion) because of losses linked to the US subprime mortgage crisis. This portends an ill wind sweeping around the globe creating turmoil. The writedown means UBS posts a pretax loss of up to 800 million Swiss francs ($690 million) in the period ended Sept. 30, 2007. It's loss is the first quarter in nine years in which UBS will post an operating loss.
Municipal housing bond investors are more sophisticated than many of their corporate counterparts. That's one of the lessons from Kurt van Kuller's groundbreaking look at the Federal Mortgage Association (FMA) database of loans. The 64-page report was entitled, "A New Look At FHA Prepayment and Defaults." The research became possible with the release of a FHA database on loan payment history. The new FHA data now permits more in-depth analysis of the behavior of project loans, and consequently, of GNMA Multifamily MBS, REMICs, and municipal multifamily bonds. FHA originations rose to an all-time high of $5.1 billion in 2001. Multifamily GNMA volume more than doubled from 1995-01. Issuance of REMIC pools should easily set a new record this year. Sadly, mortgage-backed securities analysts — the "experts" — chose to ignore the huge treasure trove of data. They continued to publish research over the past year that was predicated on the wrong-headed idea that a GNMA REMIC can judged by its label. One might suppose the MBS analysts purchase books based on their covers.
Jeffrey Baker, co-director of municipal research at Chase Manhattan Bank, presented a discussion on disclosure at the National Association of Bond Lawyers. He said, "In accepting the invitation to join this panel, I fully understand the views of many lawyers may be radically different from those of an analyst. I was told by some of my peers that I should wear a bullet-proof vest today."
In general, most analysts want more complete, accurate and timely secondary market disclosure information. Since the amendments to SEC Rule 15c2-12 went into effect, most issuers have been providing adequate information in a relatively timely fashion. However, we have witnessed certain problems. First, some issuers are not providing information on a timely basis. Second, obtaining secondary market information has become more costly. Third, certain issuers have become more reticent about communicating information that used to be available to the analyst.
October 9, 2017, Vol. XXV, Issue 16 Municipal Edition
The Global Economic Doctor
October 2, 2017, Vol. 2, Issue 16
Lots of oxen must be gored or fattened before tax reform becomes a reality.
— Randall W. Forsyth, Barron's
Summary: September has come and gone — in a blur. A lot happened. We saw new record highs in the stock market, another failed Republican bid at repealing and replacing the Affordable Care Act, President Trump going after NFL players who opted to kneel during the national anthem, and massive hurricanes ripping through the Caribbean, leaving behind a trail of destruction and massive reconstruction costs. The Republican Party found itself busy dealing with an interim election in Alabama that witnessed victory of the Stephen Bannon-backed anti-GOP establishment candidate, Roy Moore, over the President Trump-backed interim Senator Luther Strange. At the same time, North Korea continued to menace the world; Germany re-elected a government (yet to be fully formed) headed by Angela Merkel; Spain forcibly responded to Catalonia's bid to hold a referendum on independence; and the Kurds in Iraq held their own referendum, which was overwhelmingly in favor of forming an independent country.
Markets, however, keyed off prospects for tax reform in the United States. It seems that everyone is for a more logical system of taxation in the United States. What markets liked in particular was the proposed reduction in the corporate maximum tax rate from 35% to 20%. As one commentator noted, such a cut "would give a significant jolt to after-tax profits." It would also serve as a major incentive for U.S. corporations sitting on small mountains of cash overseas to repatriate some of those funds. According to a Bloomberg estimate made in early 2017, Apple, Microsoft, Cisco, Alphabet, and Oracle together have over $500 billion in cash overseas. Even if the 20% rate is not achieved, a reduction in the corporate tax rate under 30% would probably be seen as a victory. And it would no doubt give the stock market another boost. That said, there remains considerable work to be done before tax reform is actually passed. We believe that something will be passed and probably with the aid of the Democrats. Both parties, but especially the Congressional and Senate Republicans, need to have something to show for the time that their party has held both houses and the White House. Currently they do not have much to show for their dominance of Washington. Investors will be closely watching the outcome of tax reform. What has been put out there is generally liked — the reduction of personal tax brackets from seven to three; the elimination of the estate tax; and the doubling of the standard deduction. The trick is how to transform the idea of tax reform into actual law.
Otto von Bismarck, one of the key forces behind the unification of Germany in the nineteenth century, once stated: "Laws are like sausages, it is better not to see them being made." No doubt the process of making tax reform is going to be an ugly business, but this may be the one piece of legislation that has a hope of passing through the sausage-making maze that is Washington.
Smith's Research & Gradings, has become a bellwether research company, often predicting significant trends and spotlighting controversial subjects sometimes months before they come to light elsewhere. Smith’s provides independent research and third-party analysis for institutional investors. Smith's analysis is an indispensable part of Wall Street and the world's capital markets.
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