Unscheduled draws on reserves due to coronavirus double

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The number of coronavirus-related unscheduled draws on reserves doubled over the last week, the Municipal Securities Rulemaking Board reported.

"In these times of widespread financial distress, we're starting to see the benefits to market transparency of disclosure requirements that took effect just over a year ago," said Mark Kim, MSRB chief operating officer.

In a weekly COVID-19 disclosure report released Tuesday, included among the hundreds of disclosures were two unscheduled draws on debt service reserves. That brings the total of such coronavirus-related draws to four since the MSRB began tracking them.

The Economic Development Corporation of the City of Dearborn, Michigan, just slightly west of Detroit, disclosed its draw on its reserve on April 22 in connection with its Limited Obligation Revenue and Refunding Revenue bonds issued in 2008 and 2017.

Henry Ford Village, a senior living community in Dearborn, has not been able to make monthly deposits toward its debt service due on April 15 and told the trustee that it would not make further debt service payments toward the payment of interest due on the bonds on May 15, 2020. The trustee, UMB bank, disclosed that it will use a transfer from the reserve to make the May 15 payment.

“The borrower has incurred extraordinary expenses from the outbreak of the COVID-19 virus at its facility in Dearborn, Michigan, which has affected residents and staff,” according to the filing. “The expenses have included increased staffing and overtime, as well as out of pocket costs for personal protection equipment for staff members and other expenses.”

Occupancy has also declined as a result and the senior living community cannot attract new residents.

On April 20, another issuer disclosed making an unscheduled draw on debt service reserves.

Franklin County Conventions Facilities Authority in Ohio made an unscheduled draw of just over $1.3 million from its rental reserve fund.

“The unscheduled draw on the rental reserve fund by the issuer is in response to the outbreak and spread of COVID-19 that has negatively affected hotel tax collections within Franklin County, Ohio,” the issuer wrote.

The market saw its first two COVID-19 related filings in the unscheduled draw event notice earlier this month. The MSRB had said it expected those filings to dramatically increase.

The Highlands County Health Facilities Authority in Florida disclosed on April 1 that it was necessary to request funds from three of its reserve accounts to satisfy debt obligations.

Other continuing disclosures also increased over the past few weeks.

Under Securities and Exchange Commission Rule 15c2-12, dealers have to ensure that issuers enter into an agreement to provide certain information to the MSRB on an ongoing basis.

Since Jan. 1, 2020, the MSRB received 65 Event 15 notices under amended SEC Rule 15c2-12. Event 15 says issuers have to disclose when they incur financial obligations, if material, as well as agreements to covenants, events of default, remedies, priority rights, or other similar terms of a financial obligation of the issuer that could affect security holders.

During that same time period, issuers filed five Event 16 notices, said Mark Kim, MSRB chief operating officer.

Event 16 says that in connection with those financial obligations, issuers have to disclose events which “reflect financial difficulties” such as a default or modification of terms.

“One of these notices indicated a missed escrow payment due to the coronavirus, and two notices indicated revenue shortfalls due to the coronavirus that may impact ability to make payments on a financial obligation,” Kim said.

The number of COVID-19 continuing event-based disclosures continues to increase to 2,095, up from 1,774.

Texas, California and Florida were the three states with the most COVID-19 related disclosures since Jan 1. Texas had 382, California had 329 and Florida had 235.

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