WASHINGTON — A bond lawyer group said Wednesday that while issuers technically do not have to file material event notices on rating changes for pre-refunded bonds that have been legally defeased by an escrow of U.S. Treasuries, they can easily file such notices with the Municipal Securities Rulemaking Board’s EMMA system.
John McNally, president of the National Association of Bond Lawyers, said the group issued the NABLNET alert after receiving several calls about the rating disclosure requirements for pre-refunded bonds. The calls came after Standard & Poor’s downgraded its rating on long-term Treasuries to AA-plus from AAA and then, a few days later, downgraded thousands of pre-refunded bonds with escrows of Treasuries to AA-plus from AAA.
NABL said that technically, most issuers of pre-refunded bonds would not have to file material event notices after the downgrades because, according to guidance the Securities and Exchange Commission issued in 1995, a legal defeasance of bonds terminates the issuer’s continuing disclosure agreement — unless the bond documents state otherwise.
In a legal defeasance, bond documents state the issuer’s obligation on the bonds terminates when certain conditions occur, such as that an escrow of Treasuries has been established which, without reinvestment, is sufficient to pay principal and interest when due.
“Issuers should consult with their bond counsel or disclosure counsel whether a material event notice is required,” NABL said in its alert. “Regardless of whether a notice is contractually required to be provided, the filings can be readily accomplished by an EMMA filing.”
The rating disclosure questions stemmed in part from changes the SEC made to its Rule 15c2-12 on muni disclosure that said that for any continuing disclosure agreement executed on or after Dec. 1, 2010, all rating changes are material and such notices must be filed with EMMA not more than 10 days after the changes have occurred.
For agreements executed before that, issuers only have to file material event notices for rating changes if they believe they are “material” and “in a timely basis.” The SEC has said that information is material “if there is a substantial likelihood that a reasonable investor would consider it important to an investment decision.”
Rule 15c2-12 requires most muni issuers to agree, in continuing disclosure agreements they usually put into official statements, that they will disclose bond-related financial and operating information annually and material event notices soon after the events occur.
