Municipal Bond Analysis
Analyzing municipal bonds requires understanding credit ratings, official statements, and the factors that affect creditworthiness. This section covers the tools and documents used to evaluate municipal securities.
Municipal Bond Credit Ratings
Credit rating agencies assess the likelihood that issuers will repay their debt obligations.
Major Rating Agencies for Munis
| Agency | Investment Grade | Speculative Grade |
|---|---|---|
| Moody's | Aaa, Aa, A, Baa | Ba, B, Caa, Ca, C |
| S&P | AAA, AA, A, BBB | BB, B, CCC, CC, C, D |
| Fitch | AAA, AA, A, BBB | BB, B, CCC, CC, C, D |
Investment Grade vs. Speculative
- Investment Grade (IG): BBB/Baa or higher—suitable for most investors
- Speculative Grade (HY): BB/Ba or below—higher risk, higher yield
- Also called "high-yield" or "junk" bonds
Rating Modifiers
- Moody's: Uses 1, 2, 3 (Aa1 is higher than Aa3)
- S&P/Fitch: Uses + and - (AA+ is higher than AA-)
The Official Statement (OS)
The Official Statement is the municipal bond equivalent of a corporate prospectus. It's the primary disclosure document for a new municipal issue.
What's in an Official Statement?
| Section | Contents |
|---|---|
| Cover Page | Issue size, interest rates, maturity dates, ratings |
| Summary | Key terms and features |
| Use of Proceeds | How the money will be spent |
| Security | What backs the bonds (taxes, revenues, etc.) |
| Description of Issuer | Economic and demographic data |
| Financial Information | Budgets, debt levels, financial statements |
| Legal Opinion | Bond counsel opinion on tax-exempt status |
| Underwriting | Syndicate information |
Preliminary Official Statement (POS)
- Also called the "red herring"
- Used to gauge investor interest before final pricing
- Contains most information EXCEPT final price and interest rate
- Marked "preliminary" in red ink
Continuing Disclosure
Under SEC Rule 15c2-12, issuers must provide ongoing information to investors:
Annual Information
- Audited financial statements
- Operating data
- Posted to EMMA within specified timeframe
Event Notices (within 10 business days)
- Rating changes
- Principal and interest payment delinquencies
- Defaults
- Bond calls
- Defeasances
- Changes to underlying security
EMMA (Electronic Municipal Market Access)
EMMA is the MSRB's free online platform providing municipal bond information.
What's Available on EMMA?
- Official statements
- Trade data and prices
- Continuing disclosure documents
- Credit ratings
- Call notices
- Refunding documents
Website: emma.msrb.org
Bond Insurance
Municipal bond insurance provides a guarantee of timely payment of principal and interest if the issuer defaults.
How It Works
- Insurance company guarantees payment
- Insured bonds get the insurer's credit rating
- If issuer defaults, insurer pays bondholders
Key Points
- Insured bonds trade at the insurer's rating (if higher than issuer's)
- Premium is paid by the issuer at issuance
- Less common after 2008 financial crisis (monoline insurers downgraded)
- Major insurers: Assured Guaranty, Build America Mutual (BAM)
Underlying Rating
- The issuer's own rating without insurance
- Important because insurance can be downgraded or withdrawn
- Shown separately on EMMA as "underlying" or "unenhanced" rating
Factors Affecting Marketability
| Factor | Impact on Marketability |
|---|---|
| Credit Rating | Higher rating = more liquid |
| Issue Size | Larger issues = more liquid |
| Maturity | Shorter maturities = more liquid |
| Call Features | Non-callable = more predictable |
| Coupon Rate | Market rate coupons = easier to sell |
| Name Recognition | Well-known issuers = more liquid |
An investor researching a municipal bond should find the official statement on:
A municipal bond rated "Ba1" by Moody's would be considered:
The purpose of municipal bond insurance is to:
4.5 Municipal Securities Rules
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