CHICAGO — Ongoing turmoil in financial markets and historically low interest rates have led institutional investors to increase scrutiny of issuers’ disclosure documents, an insurance company investment officer said at the Government Finance Officers Association annual meeting.
Speaking at a session Monday on disclosure trends, William Trauner, investment officer at State Farm Insurance Cos., said investors are increasingly making investment decisions based on the availability of accurate, timely and complete disclosure documents.
“Investors in general are looking harder at the credit risks involved in municipalities,” Trauner told several hundred attendees at the session. “Investors are struggling to determine how best to invest their capital.”
Trauner said that because 10-year municipal bond yields are hovering around 2%, investors have little incentive to buy bonds from issuers that have not issued complete disclosures.
“Sometimes it’s not worth taking on risk you don’t understand,” he said.
Investors these days have a sense that municipal bonds are riskier than in the past, he added. Fueling that notion are “headlines and hyperbole, but some if it’s true, and investors are tuned into that.” He seemed to be referring to stories about possible defaults of muni bonds and issuer bankruptcies.
“Our perspective has almost shifted to where we need to be proven that this is going to be a good investment,” he said.
Trauner said that before 2008, the municipal bond market had been essentially commoditized by bond insurance firms, which guaranteed investors would be paid principal and interest if an issuer defaulted. With insurance, bonds issued by states and localities with double-A ratings were effectively as secure as bonds from issuers with triple-A ratings, he said.
“A few years ago, we knew these [issuers] were ongoing concerns” without much risk, he said. “Growth was good and [preliminary official statements] could give a good overview of the municipal issuers.”
He also challenged what he called a long-term perception in the municipal market “that municipal issuers have little to gain from quality disclosure.”
On the contrary, he said, a history of thorough disclosures can help issuers secure lower borrowing costs and help them gain better access to credit markets. And while higher borrowing costs might concern issuers during the current interest-rate environment, penalties could magnify if interest rates rise.
“When we get back to some semblance of normal in the market, bond yields may go back up to 5%. If you are hit by the market for poor disclosure, that could hurt you, bottom line,” Trauner said.
Municipal bond issuers who spoke at the seminar echoed Trauner.
One speaker, who declined to be identified, urged issuers to “use your website to your advantage.” Post material-event notices, preliminary offering documents and other disclosures online in addition to on the EMMA system, the speaker said.
Also, he said issuers should consider developing “investor relations programs,” which could help them proactively respond to investors’ inquiries.
Frank Hoadley, Wisconsin’s capital finance director and a member of the GFOA debt committee, said issuers should not take chances with disclosure. An issuer who has any question about whether an event might be considered “material” to investors should probably disclose it.
“If there is any doubt at all, simply go ahead and [disclose] it,” Hoadley said.
At another session on Monday, Alan Anders, director of New York City’s Office of Management and Budget, praised efforts by participants of the municipal bond market for helping to develop a culture that promotes transparency.
Muni issuers, attorneys and other market professionals “all think very carefully on an ongoing basis about what needs to be disclosed,” he said.
Anders added that any efforts by regulators to require municipal issuers to provide corporate-style disclosures could backfire.
“If they go to corporate-style disclosure … there is a real risk they will get less disclosure,” he said.