Chapter 5 Flashcards
(29 cards)
Describe continuing disclosure requirements.
Agreement to provide information relevant to the market value of bonds throughout their lives.
Issuer commits to providing financial and operating information annually on a specified date and audited financial statements to MSRB.
Must provide disclosure to EMMA within 10 business days.
Describe the temporary period arbitrage yield exception.
Issuers can invest bond proceeds in higher yielding investments for a “reasonable temporary period.” Must pass three tests.
1) Expenditure test - 85% of proceeds must be spent on capital projects within 3 years of issuance.
2) Time test - Must spend at least 5% of proceeds on a capital project within 6 months of issuance.
3) Due diligence test - Must reasonably expect that the proceeds will be spent and the project will be completed.
Capital projects and qualified mortgage bonds have a 3 year temporary period. Construction projects have a 5 year temporary period.
What items would not be included in the POS?
1) Price
2) Interest rate
3) Selling compensation
4) Other terms specified in underwriter’s bids or once the market for the bonds has been tested.
In short, anything that people would have to submit in their bid to win the bond.
Describe the Alternative Minimum Tax
1) Qualified private activity bonds are subject to AMT.
2) Affects high-income earners
3) Must calculate their AMT and pay the higher of that or standard tax.
4) Only applies to individuals, not corporations.
5) State and local taxes are not deductible
6) These bonds pay higher yields, but is generally not high enough to compensate for the increased tax liability
7) Qualified 501(c)(3) bonds are not subject to AMT
What are the exceptions to arbitrage yield restrictions?
1) Temporary period
2) Reasonably required reserve fund
3) Exception for a minor portion
How long do underwriters have to deliver a POS to customers after they’ve been requested?
One business day
What are the exceptions to disclosure requirements?
1) If the issue is less than $1 million.
2) The bonds are sold in packages of at least $100,000 and sold to no more than 35 sophisticated investors.
3) Bonds come in denominations of $100,000 or more and mature in 9 months or less from when they were issued
4) Bonds were issued before July 1995
What are the exceptions to arbitrage yield restrictions?
1) Temporary period
2) Reasonably required reserve fund
3) Exception for a minor portion
4) Advance refunded bonds
How long do underwriters have to get the Final OS from the underwriter?
7 days after the purchase agreement has been signed.
What is the small issuer exemption from rebate requirements?
If the issuer doesn’t issue more than $5 million annually or $15 million in school bonds.
Only holds for non-private activity bonds
Issuers with general taxing authority
Issuers that spend 95% on local government activities
Underwriters must submit FOS to EMMA for how long?
For up to 25 days after the end of the underwriting period.
What is the arbitrage rebate spending exception?
All bond proceeds are spent on qualified purposes within 6 months of issuance.
All of the bond proceeds are spent on qualified purposes within 18 months of the bond issuance, according to the following schedule:
- 15% of proceeds spent within 6 months
- 60% within one year
- 100% within 18 months
For construction projects
- 10% within 6 months
- 45% within one year
- 75% within 18 months
- 100% within two years
Describe the minor portion exception to the arbitrage yield restrictions.
The lesser of 5% of bond proceeds or $100,000 can be invested at materially higher yields.
What is TEFRA?
Qualified private activity bonds must meet the Tax Equity and Fiscal Responsibility Act (TEFRA) requirement, which requires that such bonds receive public approval.
This can be done at a public hearing or a referendum.
What events would trigger a continuing disclosure?
o Bankruptcy
o Payment delinquency
o Rating changes
o Change in credit or liquidity provider
o Adverse tax opinions
o Unscheduled draws on debt service reserves
o Unscheduled draws on credit enhancements
o Tender offers
o Defeasances
o Scheduled calls (sinking fund redemptions)
What does an issuer have to do to be reimbursed for previous projects from a new issue?
1) create a declaration of intent no later than 60 days after the expenditure. Must be passed by legislative body, describe the project, the fund from which it was paid, and the amount expected to be issued for the project.
2) Bond proceeds must be allocated within 18 months of the date of the original expenditure, or when the project is completed, whichever is later.
Record keeping requirements
Must keep certain records as long as bonds are outstanding plus three years after the date they are redeemed or repaid.
Records on refunded bonds must be kept for the life of the refunding bonds + three years.
If electronic records are used they must be in the same basic format that physical records would be kept.
When are rebate payments due and how much needs to be paid?
Paid in 5-year installments. Payments must be submitted within 60 days after the end of the bond year.Payments must be equal to at least 90% of what is due and 90% every year after that.
Issuers of variable yield issues can choose to make the first rebate payment y the last day of any bond year that is within 5 years of the issue date. Future payments must be made at the end of every bond year or at the end of every fifth bond year.
What is the “materially higher” amount of arbitrage profits for program investments?
If student loan then materially higher is 2%
If a regular program (not student loan) then it is 1.5%.
How much of a bond must be used for designated public purposes to maintain its tax-exempt status?
95%.
Examples of such public purposes may include airports, transit projects, sewers, etc. These would be qualified private activity bonds.
Describe the Bona Fide Debt Service Fund exception
Investments in bona fide debt service funds may be exempt from rebate requirements if the earnings do not exceed $100,000.
If they do exceed $100,000 they may still be exempt if:
1) none of the proceeds are from private activity bonds, 2) the interest rate on the bonds is fixed,
3) the average maturity of the bonds is 5 years.
Failure to make rebate payments
If an issuer fails to make payments then the issue may become taxable back dated to the date of issuance.
Can pay a penalty of what’s owed + 50 percent, plus interest.
Penalty is 100% for private activity bonds.
What is the private business test?
Greater than 10% of bond proceeds are used to fund a nongovernmental entity.
Or if 10% of the debt service for a bond is paid by property used by a private business.
If both are these are passed, then the bond will be taxable.
How much is “materially higher” for the yield restrictions on an arbitrage bond?
usually it’s 1/8 of 1%
If it’s an investment in a refunding escrow or replacement proceeds, then materially higher is 1/1000 of 1%.
