August 4, 2009
With the loss of credibility of the rating agencies, investors must do their own homework. The rule changes being proposed are welcome, but do not go nearly far enough in providing for adequate disclosure.
The disclosure available from a VRDO bond Official Statement is woefully inadequate. The reason is that no VRDO bond can exist on its own. To be viable, a typical VRDO bond must be supported by:
1. a credit enhancement agreement
2. a remarketing agreement
3. and, a liquidity or repurchase agreement.
In recent deals, bank letters of credit are being used in place of credit enhancement and liquidity agreements.
If the terms of any of these agreements are violated, the bond issue, in effect, fails. The impact of these failures on investors can be serious (look no further than Jefferson County, AL). Therefore, the full text of each of these agreements, and any documents referenced by these agreements, should be required to be included as an Appendix to the Official Statement and published on the MSRB EMMA website.
Additionally, potential termination liabilities for all the issuer's outstanding interest rate swaps should be required to be disclosed as part of the issuer's financial information, because these hidden liabilities have become material to the financials of many municipalities.
As these agreements are renewed or changed, prompt disclosure of the full text of any new or modified agreements should be required, and published on the EMMA website.