Note 2—BONDs available-for-sale

Sale of the Company’s common shares in TEB

On July 3, 2013, the Company sold the common shares of TEB to Merrill Lynch Portfolio Management, Inc. (together with its affiliates, the “Purchaser”), an affiliate of Bank of America Merrill Lynch, pursuant to a Share Purchase Agreement, dated as of July 1, 2013 (“Share Purchase Agreement”), by and among the Purchaser, MuniMae TEI Holdings, LLC, the Company and TEB. Immediately prior to the closing, TEB distributed to the Company, and the Company retained approximately $146.7 million of bonds and bond related investments on an unleveraged basis comprised of TEB’s bonds that were non-performing (i.e., bonds that are 30 days or greater past due in either principal or interest) as well as certain performing bonds with debt service coverage below 1.0x, its participating multifamily bonds, and all but one of its CDD bonds.

Following TEB’s distribution of the foregoing bonds, the Purchaser paid the Company $78.7 million for the TEB common shares, reflecting (a) the value of the bonds and non-bond related investments remaining in TEB, consisting of fixed rate performing multifamily bonds and interests in such bonds and one CDD bond (aggregate fair value of $848.6 million) as well as cash, restricted cash and accrued interest of approximately $51.5 million, net of (b) TEB’s contractual debt and preferred share obligations of $821.4 million including interest and distributions due and payable of $4.8 million, which will remain the obligation of TEB. As a result of the transaction, the Company eliminated $816.7 million of debt and preferred equity financing (liquidation preference). See Note 6, “Debt” and Note 12, “Equity” for more information.

Even though the Company sold bonds and interests in bonds with a fair value of $848.6 million, the Company derecognized from its balance sheet only $679.0 million of bonds because bonds totaling $94.4 million did not receive sale accounting and $75.2 million were not reported as bonds on our balance sheet because the Company consolidated the real estate serving as collateral to these bonds.

On July 3, 2013, the Company also entered into two Total Return Swap (“TRS”) agreements with the Purchaser using the July 3, 2013 fair value of two bond assets of $30.6 million to set the notional amount for the TRS. Under the terms of the TRS, the Purchaser is required to pay the Company an amount equal to the interest payments received on the two assets, currently a weighted average rate of 6.9%, and the Company is required to pay the Purchaser a rate of SIFMA (Securities Industry and Financial Markets Association) plus a spread of 150 basis points (“bps”) on the notional amount of the TRS. The Company also agreed with the Purchaser to pledge $16.3 million of cash as additional collateral against the Company’s new and existing TRS borrowings with the Purchaser. Because the Company retains the economic risk and rewards associated with these bonds, they do not receive sale accounting (these bonds are included in the $94.4 million described above). Also included in the $94.4 million of bonds that did not receive sale accounting were $63.8 million of senior certificates in bonds where the Company retained the subordinate certificates and therefore did not receive sale accounting for the sale of the senior interests.

The following table summarizes the third quarter 2013 impact of the transactions described above.

(in thousands)
Increase in MuniMae’s cash (including $16,337 of restricted cash)	$	$78,664
Reduction in bonds		(678,983)	⁽¹⁾
Reduction in other assets (bond interest receivable)		(4,612)	⁽²⁾
Reduction in TEB’s cash (including $1,665 of restricted cash)		(44,841)	⁽²⁾
Net reduction in assets	$	(649,772)

Reduction in senior interests and debt owed to securitization trusts	$	574,652
Reduction in mandatorily redeemable preferred shares		121,000
Reduction in perpetual preferred shares ($121,000 liquidation preference)		117,978
Reduction in accounts payable and accrued expenses and other liabilities (interest and distributions payable)		4,781
Increase in debt (resulting from bonds and interests in bonds that did not qualify for sale treatment)		(94,410)	⁽¹⁾
Increase in debt (due from CFVs)		(75,191)	⁽¹⁾
Increase in accounts payable and accrued expenses (interest payable resulting from failed sales)		(618)	⁽²⁾
Increase in accounts payable and accrued expense (interest payable due from CFVs)		(1,442)	⁽²⁾
Net reduction in liabilities	$	646,750
Net reduction in common shareholders’ equity	$	(3,022)	⁽³⁾

⁽¹⁾ The sum of these amounts total $848.6 million and represents the fair value of the bonds sold on July 3, 2013.

⁽²⁾ Represents the total cash, restricted cash and interest receivable of $51.5 million transferred to the Purchaser as part of the sale of TEB.

⁽³⁾ Represents the difference between the Company’s carrying value of the perpetual preferred shares on June 30, 2013 of $118.0 million as compared to the liquidation preference amount assumed in the sale on July 3, 2013 of $121.0 million.

In addition to the net $3.0 million reduction to common equity as described above, the bonds transferred to the Purchaser (that received sale accounting) resulted in a gain on sale of bonds of $75.7 million reported through "net gains (losses) on assets and derivatives" on the Consolidated Statement of Operations. These gains were offset by a corresponding reduction to "reversal of unrealized gains on sold/redeemed bonds" on the Consolidated Statements of Comprehensive loss resulting in no changes to common equity.

The following table summarizes the Company’s bonds and related unrealized losses and unrealized gains at September 30, 2013 and December 31, 2012.

	September 30, 2013
(in thousands)	Unpaid Principal Balance			Basis Adjustments ⁽¹⁾		Unrealized Losses		Unrealized Gains		Fair Value
Mortgage revenue bonds	$	146,587		$	(3,879)	$	(37,572)	$	16,776	$	121,912
Other bonds		80,045			(1,921)		(22,922)		19,371		74,573
Total	$	226,632	⁽²⁾	$	(5,800)	$	(60,494)	$	36,147	$	196,485

	December 31, 2012
(in thousands)	Unpaid Principal Balance			Basis Adjustments ⁽¹⁾		Unrealized Losses		Unrealized Gains		Fair Value
Mortgage revenue bonds	$	898,209		$	(10,314)	$	(118,933)	$	115,196	$	884,158
Other bonds		86,113			(2,339)		(22,364)		23,826		85,236
Total	$	984,322	⁽²⁾	$	(12,653)	$	(141,297)	$	139,022	$	969,394

⁽¹⁾ Represents net discounts, deferred costs and fees.

⁽²⁾ The Company had bonds with an unpaid principal balance (“UPB”) of $113.5 million ($124.9 million fair value) and $123.9 million ($125.1 million fair value) at September 30, 2013 and December 31, 2012, respectively, which were eliminated due to consolidation of the real estate partnerships where the real estate served as collateral for the Company’s bonds. See Note 16, “Consolidated Funds and Ventures” for more information.

Mortgage Revenue Bonds

Mortgage revenue bonds are issued by state and local governments or their agencies or authorities to finance multifamily rental housing; typically however, the only source of recourse on these bonds is the collateral, which is a first mortgage or a subordinate mortgage on the underlying properties. The Company’s rights under the mortgage revenue bonds are defined by the contractual terms of the underlying mortgage loans, which are pledged to the bond issuer and assigned to a trustee for the benefit of bondholders to secure the payment of debt service (any combination of interest and/or principal as set forth in the trust indenture) on the bonds.

The payment of debt service on our subordinate bond investments occurs only after payment of senior obligations which have priority to the cash flow of the underlying collateral. At September 30, 2013, the Company’s subordinate bond investments had an aggregate unpaid principal balance of $9.5 million (or $49.0 million including those bond investments eliminated in consolidation, $15.2 million of which a third party held the related senior interests).

At September 30, 2013, the Company had no participating bonds (i.e., bonds that allow the Company to receive additional interest from net property cash flows in addition to the base interest rate) on its balance sheet; however, there were participating bonds eliminated in consolidation with an unpaid principal balance of $33.3 million.

The interest income from the mortgage revenue bonds (including interest income from the participating bonds) is exempt from federal income tax. However, a significant portion of the tax-exempt income generated from the mortgage revenue bonds is subject to the alternative minimum tax (“AMT”) calculation for federal income tax purposes. Prior to July 10, 2013, we were a pass-through entity for federal income tax purposes, meaning our shareholders paid any taxes due on our pass through income, which included any taxes due in respect of bond income subject to AMT. Effective July 10, 2013, we are taxed as a corporation and therefore the Company will now be responsible for AMT related to our mortgage revenue bonds. However, we have significant loss carryfowards that we expect will be sufficient to offset federal taxable income and gains for the foreseeable future.

Other Bonds

Other bonds consists primarily of municipal bonds issued by community development districts or other municipal issuers to finance the development of community infrastructure supporting single-family housing and mixed-use and commercial developments such as storm water management systems, roads and utilities. In some cases these bonds are secured by specific payments or assessments pledged by the issuers or incremental tax revenue generated by the underlying properties. The income on these bonds is exempt from federal income tax and is generally not included in the AMT calculation.

Maturity

Principal payments on bonds are based on amortization tables set forth in the bond documents. If no principal amortization is required during the bond term, the outstanding principal balance is required to be paid in a lump sum payment at maturity or at such earlier time as may be provided under the bond documents. The following table summarizes, by contractual maturity, the amortized cost and fair value of bonds available-for-sale at September 30, 2013.

	September 30, 2013
(in thousands)	Amortized Cost		Fair Value
Non-Amortizing:
Due in less than one year	$	–	$	–
Due between one and five years		–		–
Due between five and ten years		–		–
Due after ten years		1,429		1,532
Amortizing:
Due at stated maturity dates between December 2013 and June 2056		158,909		194,953
	$	160,338	$	196,485

Bonds with Lockouts, Prepayment Premiums or Penalties

Substantially all of the Company’s bonds include provisions that allow the borrowers to prepay the bonds at a premium or at par after a specified date that is prior to the stated maturity date. The following table provides the amount of bonds that were prepayable without restriction, premium or penalty at September 30, 2013 as well as the year in which the remaining portfolio becomes prepayable without restriction, premium or penalty at each period presented.

	September 30, 2013
(in thousands)	Amortized Cost		Fair Value
Bonds that may be prepaid without restrictions, premiums or penalties at September 30, 2013	$	–	$	–
October 1 through December 31, 2013		1,133		1,400
2014		–		–
2015		–		–
2016		10,183		13,410
2017		5,725		6,488
Thereafter		106,023		128,531
Bonds that may not be prepaid		37,274		46,656
Total	$	160,338	$	196,485

Non-Accrual Bonds

The carrying value of bonds on non-accrual was $70.5 million and $103.8 million at September 30, 2013 and December 31, 2012, respectively (or $103.4 million at September 30, 2013 including those bonds eliminated in consolidation). During the period in which these bonds were on non-accrual, the Company recognized interest income on a cash basis of $3.2 million and $2.4 million for the nine months ended September 30, 2013 and 2012, respectively (or $3.9 million for the nine months ended September 30, 2013 including those bonds eliminated in consolidation). Interest income not recognized on the non-accrual bonds was $3.6 million and $3.7 million for the nine months ended September 30, 2013 and 2012, respectively (or $5.5 million for the nine months ended September 30, 2013 including those bonds eliminated in consolidation).

Bond Aging Analysis

The following table provides an aging analysis for the fair value of bonds available-for-sale at September 30, 2013 and December 31, 2012.

(in thousands)	September 30, 2013		December 31, 2012
Total current	$	117,709	$	850,155
30-59 days past due		–		8,013
60-89 days past due		8,244		7,471
Greater than 90 days		70,532		103,755
Total	$	196,485	$	969,394

Bond Sales and Redemptions

The Company recorded cash proceeds on sales and redemptions of bonds of $10.1 million and $8.2 million for the nine months ended September 30, 2013 and 2012, respectively.

Provided in the table below are unrealized losses and realized gains and losses recorded through “Impairment on bonds” and “Net gains (losses) on assets and derivatives” for bonds sold or redeemed during the three months and nine months ended September 30, 2013 and 2012, as well as for bonds still in the Company’s portfolio at September 30, 2013 and 2012, respectively.

	For the three months ended September 30,				For the nine months ended September 30,
(in thousands)	2013		2012		2013		2012
Bond impairment recognized on bonds held at each period-end	$	(939)	$	(2,282)	$	(1,242)	$	(3,369)
Bond impairment recognized on bonds sold/redeemed during each period		–		–		(530)		–
Gains recognized at time of sale/redemption		76,362		2		76,960		54
Total net gains (losses) on bonds	$	75,423	$	(2,280)	$	75,188	$	(3,315)

Unfunded Bond Commitments

Unfunded bond commitments are agreements to fund construction or renovation of properties securing a bond over the construction or renovation period. Since September 30, 2010 there have been no unfunded bond commitments.