Prior to structuring or issuing any form of debt, the municipal issuer (local government) typically forms a team of experts to assist them with complying with all the legal requirements and structuring the issuance. While each issuance can be unique, this team typically includes an underwriting firm, bond counsel, financial adviser, rating agency, an insurer, etc.

One of the important tasks of the issuance process is preparing an Official Statement – which is prepared by or on behalf of a state or local government in connection with a new issue of municipal securities. This statement is quite comparable to a fund prospectus that is often used in the sale of equities of mutual fund sales.

In this article, we will take a closer look at the use of an Official Statement in debt issuances and how investors can use this information in their investment decisions.

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The Official Statement is the document used by the issuer or the underwriting firms to sell their bonds to potential buyers and essentially protect investors’ interests by providing all the information deemed necessary by the Securities and Exchange Commission (SEC). Before we dive further into the contents of the Official Statement, the Municipal Securities Rulemaking Board (MSRB) explains the information included in an Official Statement: the terms under which bonds can be redeemed prior to maturity; the sources of money pledged to repay the bonds; and the state or local government’s covenants for the benefit of investors. The following information is also typically included in an Official Statement:

• The interest rate or, if the interest rate is variable, the manner in which such rate is determined
• The timing and manner of payment of the interest and the principal of the bonds
• The minimum denomination in which the bonds may be sold
• Whether the bonds can be redeemed by the state or local government prior to maturity and, if so, on what terms
• Whether the investor has the right to require the state or local government to repurchase the bonds at their face value
• The sources from which the state or local government has promised to make payment on the bonds
• Whether any bond insurance, letter of credit or other guarantees have been provided for repayment
• The consequences of a default by the issuer
• A description of outstanding debt, the authority to incur debt, limitations on debt and the future debt burden of the issuer
• A description of basic legal documents such as authorizing resolution, indenture and trust agreement
• Legal matters such as pending proceedings that may affect the securities offered, legal opinions and tax considerations

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As mentioned above, the Official Statement is either prepared by the issuer or the underwriter’s counsel, which is determined by whether the issuer sells its debt instruments through a competitive bid or a negotiated sale process.

The Internal Revenue Services (IRS) states the following in regard to competitive and negotiated sales of municipal debt and the preparation of the Official Statement:

• Competitive Sale of Municipal Debt – In a competitive bid, the issuer, with the assistance of its financial adviser and bond counsel, structures the financing and prepares the preliminary Official Statement. The issuer advertises the sale of the bonds in financial newspapers (such as The Wall Street Journal and The Bond Buyer) and requests sealed bids from underwriters. The issuer selects the bid of an underwriter or a team of underwriters with the best price (which provides the least interest cost to the issuer). In a negotiated sale, when the issuer determines that it needs to issue bonds for a project, it hires an underwriter or a team of underwriters to assist the issuer in structuring the transaction.

• Negotiated Sale of Municipal Debt – In a negotiated sale, the underwriter and its counsel are involved in structuring the transaction and drafting the bond documents. The underwriter also negotiates its fee or discount with the issuer or the conduit borrower, before the pricing of the bonds. The Official Statement for a negotiated sale is generally prepared by the underwriter’s counsel.

In all public offerings and most private placements, the underwriter’s counsel renders an opinion that the Official Statement does not contain any untrue statement of a material fact and does not omit to state a material fact that was necessary to be disclosed. To be able to render this opinion, the underwriter’s counsel reviews records of the issuer, the conduit borrower and the information pertaining to the project.

Although the contents of an Official Statement may vary depending on the issuance and/or issuer, the following content is quite universal for all standard Official Statements:

• Cover Page: Like many reports, the cover page of the Official Statement provides the identifying information about the issuer, bond issue and the principal amount. The name of the bond issue gives very basic information about financing. The name indicates whether the bonds are general obligation or revenue bonds.

• The Issuer: This section provides more information about the issuer, its governing board and other pertinent information about the issue. In a general obligation financing, the issuer is the ultimate source of debt service on the bonds. Therefore, an Official Statement for general obligation bonds provides detailed information regarding the issuer. It includes demographic and economic data regarding the governmental unit, the tax base and tax rate(s), audited financial data (including financial statements for last two to three years), proposed budgets and other information that would describe the issuer’s creditworthiness.

• The Project: This section highlights the purpose for which the debt is being issued. For example, if the revenue-backed debt is being issued to fund a new wastewater plant, this section will include information about the project and how the debt payments or service will be secured by the revenue streams generated from the project.

• The Source of Funds: This section consists of a table stating the source of all the money available for the financing. It also includes money from sources other than bond proceeds used to finance the project.

• The Security for the Bonds: This section talks about all the funds and properties available to the issuer to pay the debt service on the bonds. It lists all the funds pledged by the issuer or the conduit borrower, or funds reasonably expected to be used by the issuer or conduit borrower, to pay the debt service on the bonds.

• Description of Bonds: This section provides identifying information about the debt instruments as part of the issuance. This information includes: whether the bonds are book entries only; the date of the bonds; the authorization denominations; the interest payment dates; the interest rate; the redemption provisions, etc.

In addition to all the sections above, the Official Statement includes information that’s unique to each issuance, such as credit enhancements, tax exemptions, etc.

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For prospective and current investors in municipal debt, it is critical to conduct a thorough review of the Official Statements for any potential debt instruments before your purchase. The MSRB’s Electronic Municipal Market Access (EMMA) website provides free access to official statements. Underwriters are required to submit to the MSRB for posting on EMMA copies of the official statement for virtually all new issues of municipal securities. Underwriters are also required to submit to the MSRB copies of any amendments to the official statement up until the 25th day after the settlement of the underwriting.

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Disclaimer: The opinions and statements expressed in this article are for informational purposes only and are not intended to provide investment advice or guidance in any way and do not represent a solicitation to buy, sell or hold any of the securities mentioned. Opinions and statements expressed reflect only the view or judgement of the author(s) at the time of publication and are subject to change without notice. Information has been derived from sources deemed to be reliable, the reliability of which is not guaranteed. Readers are encouraged to obtain official statements and other disclosure documents on their own and/or to consult with their own investment professionals and advisers prior to making any investment decisions.