You’re a finance director of a tax-exempt debt issuer. You worked for months, maybe years, to bring your bonds to market. It was a lengthy and sometimes painful process that might have included your board or city council, public meetings, resolutions, consultants, feasibility studies, investment bankers, lawyers, financial advisors, bond insurers, banks, rating agencies, and investors. You finally closed the deal! You got your proceeds from the sale and now you can continue your capital program, whether it be constructing a school, expanding a road, or some other project. Even better, you can finally put it all behind you and get back to your day job, right? Well, sort of.
Most municipal bonds are subject to SEC Rule 15c2-12, which seeks to ensure at least annual (“continuing”) disclosure of certain financial reports and operating data and notices of material events to the Municipal Securities Rulemaking Board (MSRB). You or your agents will need to post the materials on the MSRB’s Electronic Municipal Market Accesssite (EMMA). Now you can get back to your day job, right? Again, not quite.
Investors and their analysts will often request more information from the borrower than is required by 15c2-12. Anticipating their needs and dedicating resources to ongoing investor relations will enhance your reputation and credibility in the market, which could help you down the road with the next debt issuance. Additionally, knowing your investors and what they may need can reduce the time spent on “one-off” phone calls and requests from investors. The more transparent, frequent and accessible the information, the more likely investors are to understand your credit and view your credibility favorably.
Today’s market environment is very friendly to tax-exempt borrowers, featuring low interest rates, limited issuance (meaning more demand for new issues), and tight spreads (which reduces the cost differentiation between stronger and weaker credits). All these factors may lead tax-exempt borrowers to conclude that investor relations aren’t important, since they are likely to get attractive yields and covenants in this environment, even without a strong investor relations program. While that approach may work today, it’s probably unwise to assume that today’s environment will persist into the future. Most municipal debt is long-term, and most issuers plan to be back in the market periodically. Furthermore, a reputation, once earned, is hard to change. It’s easier to develop a favorable reputation as a trustworthy issuer with strong investor relations than it is to ignore investors when times are good, then try to change their minds when you need them again down the road.
Below are some thoughts and suggestions for a good investor relations program:
1. Many asset management firms review their holdings at least annually and assigntheir own credit ratings. They may evaluate credits more frequently if they have high exposure to a credit or lower rated bonds. Investors need consistent, updated information to conduct these reviews and evaluate changes in the creditworthiness of the bonds.
2. Investors often want more or up-dated and current information - beyond the minimal reporting requirements. Many firms will hold their municipal bonds for a number of years, sometimes 20 or 30 years, or longer. As an analyst reviews the credit, new issues or concerns may arise or change in relative importance. For example, although the tax base is always an important credit factor for general obligation bonds, the decline in home prices during the Great Recession in some regions of the United States accentuated this concern. Credit analysts intensified their research on local real estate markets and the impact on the tax base and government revenues. Many investors wanted more data on home prices, vacancy rates, buyers, and impact on the tax base, for example.
Current “hot topics” today include: the sustainability of pension funding; environmental, social and governance (ESG) issues, such as the level of carbon emissions; and, with the recent hacking of some municipalities’ data, cybersecurity. Rest assured, though, others will arise.
3. The annual financial report is helpful, but historical. The Comprehensive Annual Financial Report (CAFR) which is often submitted as part of the annual disclosure, usually includes the obligor’s audit from the previous fiscal year. However, by the time the report is released, the information is generally 3-9 months old and occasionally older. It may provide historical information but offers only limited value to the obligor’s current fiscal status. Issuers should consider providing more current unaudited information such as quarterly statements, budgets, and budget-to-actual reports. Also, consider providing relevant situational information, such as the status of capital projects. As a bonus, providing additional current financial and operating data should reduce the number of ad hoc requests from analysts looking to better understand current performance.
4. Investors’ opinions are forward looking. In addition to the current status of the credit, investors form opinions about where credit quality is headed. Is it improving, or perhaps deteriorating? Investors will scan the obligor’s website, evaluate management’s tenure and experience, skim local newspapers, and gather local economic statistics to develop their forward-looking view. They may also review minutes of board meetings and public hearings, press releases, and rating agency reports. If the obligor has a key taxpayer or employer located in the jurisdiction, they may research that entity. Since much of this information is public, it’s a good idea for management to be proactive and disclose it to bondholders. But be careful of materials that have overtly political content.
5. Disclose the good…and the bad. Even if the news is bad, disclosing it promptly will allow management the opportunity to explain the issues, and, more importantly, how officials they will address the problems. Investors understand that you’ll encounter problems and face unexpected challenges. Investors just want to understand what those challenges are and how management is responding. This transparency can sometime provide enough comfort to make the difference between holding the bonds or selling them. Moreover, it builds credibility and confidence with investors and other participants of the municipal market.
6. Providing information to EMMA is not only a good idea, but a requirement. Obligors that issue bonds pursuant to 15c2-12 generally sign a “Continuing Disclosure Agreement” in which they promise to submit annual reports and material event notices to the EMMA website. EMMA is often the first place that investors will look for information about the credit, as it’s convenient and easy to use. It lists the obligor’s bonds and official statements, as well as annual reports, operating data and material event notices. Credit ratings are also provided. Obligors may include additional information as well.
7. Consider adding an investor relations section to your website. Most obligors have their own websites, so creating an investor relations section and keeping it updated can provide measurable goodwill with minimal effort. Some suggested content: management bios, contact information, minutes from public meetings, budgets, audits, capital program updates, and debt covenant compliance schedules. You should also provide archives of historical information. It’s important, though, that information uploaded to EMMA is consistent with the webpage.
8. Designate somebody to speak to investors.Usually the finance director or debt manager takes the lead on investor relations.Having a backup person is also a good idea, in the event the first person is unavailable. If new information is being presented to certain investors, consider making it public, for example though EMMA and the website. All staff with responsibility for investor relations should be aware of the various covenants in your debt agreements and whether the covenants have been satisfied, or if not, be prepared to explain why they weren’t and the remediation plan. Some large obligors will hold periodic investor calls or visits. This may make economic sense particularly if there’s an upcoming bond sale. It also has the benefit of reducing the amount of time management spends on ad hoc phone calls and data requests from investors.
Resources
There are many resources that provide information on establishing a transparent disclosure policy:
· Municipal Securities Rulemaking Board (MSRB).The MSRB provides extensive information on submitting continuing disclosures and data to EMMA and even offers tutorials and manuals. It also provides information on SEC Rule 15c2-12 and voluntary disclosure. (www.MSRB.org).
· Government Finance Officers Association (GFOA). The GFOA has a disclosure section on its website that includes best practices articles on disclosure and maintaining an investor relations program. (www.GFOA.org).
· National Federation of Municipal Analysts (NFMA). The NFMA is a professional organization of municipal credit analysts. The organization has prepared Recommended Best Practices in Disclosure and white papers for various public sectors and different types of municipal bonds. (www.nfma.org).
Ultimately, a robust, proactive, and transparent investor relations program demonstrates strong management and provides credibility. As always, discuss your disclosure policies with your bond counsel and financial advisor to determine what is best for your entity.