Informed investors should do their homework before buying a municipal bond by researching the bond’s risks and characteristics and evaluating the financial health of the municipal entity issuing the bond. And once the bond is in their portfolio, investors should regularly monitor the health of the bond and its issuer.
Municipal bonds carry ongoing risks that may be affected by:
- Changes in a bond issuer’s financial condition;
- Changes in an issuer’s credit rating;
- Infrequency of trading, which may make it challenging to determine the current market value; or
- Movement of interest rates, which may change the value of the bonds.
Investors should periodically review and evaluate information available about a municipal bond and its issuer. In addition to consulting a financial professional, investors can find information about municipal bonds and their issuers on MSRB’s Electronic Municipal Market Access (EMMA®) website, which provides free public access to official statements, continuing disclosure documents, as well as municipal securities trade data.
Assessing an Issuer’s Financial Condition
Consult the Official Statement
When first purchasing a municipal bond, particularly a newly issued bond, the official statement is an important reference document. Within the official statement, the bond issuer typically provides information about its financial condition and risk factors, as well as a description of the terms and features of the municipal bonds. See Official Statements.
Over time, however, an issuer’s financial condition and the terms of the bonds can change. Thus, the information in the official statement is valid only during the period of the initial offering of the bonds. When purchasing a bond, in addition to the official statement, investors should view current credit ratings and more recent disclosure filings to accurately assess the issuer’s current financial health.
Research Credit Ratings
Generally, a municipal bond credit rating is the evaluation or assessment that a rating agency such as Standard & Poor’s, Moody’s Investors Service, Fitch Ratings and Kroll Bond Rating Agency and assigns to a bond to indicate its opinion regarding the probability of timely repayment of principal and interest by the issuer and the likelihood of default. In some cases, the rating takes into consideration the potential loss to investors in the event of default. To learn more about credit ratings, read about them in Credit Rating Basics for Municipal Bond Investors.
MSRB’s EMMA website provides access to current credit ratings for all individual municipal bonds with an assigned rating. Current credit rating information is displayed on EMMA under the ratings tab of a particular security. Credit ratings on EMMA are displayed along with the trading and disclosure information for each municipal bond and are also integrated into EMMA’s Advanced Search function and Price Discovery Tool.
Review Continuing Disclosures
Continuing disclosures consist of important information provided by an issuer about its financial condition or the occurrence of events that arise after the initial issuance of the bonds. Securities and Exchange Commission (SEC) Rule 15c2-12 requires dealers, when underwriting certain types of municipal securities, to ensure that the state or local government issuing the bonds enters into an agreement to provide certain information on an ongoing basis to EMMA.
Issuers are required to provide audited financial statements or other financial information to investors and the public on EMMA at least annually. These documents contain important updates to information previously disclosed in the official statement. They can be found using the Browse Issuers function on EMMA. Use the map-based search to find the issuer’s unique homepage, then click on the Financial Disclosures and Event-Based Disclosures to view all disclosure filings of that issuer.
It could be a red flag if an issuer is not current on its continuing disclosure filings. Out-of-date or missing financials on EMMA may be an indication that disclosures have not been filed on EMMA as required and market stakeholders may not have access to information about events that could affect outstanding bonds. When an issuer’s continuing disclosures are out of date, the pricing of the bond could be affected. Consult your investment professional if that is the case.
Monitoring Secondary Market Trading
View Real-Time Trade Prices for Your Bond on EMMA
EMMA provides real-time trade prices for nearly every municipal security bought and sold. EMMA can be used to find out the price at which a bond is trading. EMMA trade price data can show where bonds have traded over a period of time and help compare purchases or sales to other trades in the market. Trade data can also show an investor any trends in pricing that have occurred.
Finding trade data
Use EMMA’s Quick Search bar to find the Security Details page for a specific municipal security. There you can see trading activity for that security on interactive graphs of trade prices and yields. Zoom in on the graph to view more details about each trade or click the Trade Activity tab to view daily summaries or trade details.
Comparing bond prices
Find and compare trade prices and yield for bonds with similar characteristics using EMMA’s Price Discovery Tool. For any security on EMMA, the Price Discovery Tool quickly finds others that share its key characteristics and presents a side-by-side or graphical comparison of their prices and yield.
Staying Informed in the Event of an Issuer’s Fiscal Distress
If an issuer can no longer fulfill its debt service obligations, it is deemed to have defaulted. If the issuer defaults, investors should review the bond/trust indenture, which is summarized in the bond official statement and available on the EMMA website. The bond/trust indenture is a contract among a trustee (usually a bank), investors and the issuer that establishes, among other factors, the security, bondholder rights and remedies in case of a default. Investors should contact their investment professional and the bond trustee of their municipal bond for additional information. Investors should also continue to review continuing disclosures posted on EMMA, particularly event disclosures that may pertain to the issuer’s plans for repayment of bondholders and other creditors.
