Standard and Poor’s Ratings Service will hold a webcast this Wednesday, September 18, 2013, at 12:30 p.m. (Eastern) to discuss their recently updated local government credit ratings methodology and assumptions used for establishing credit ratings at the issuer level as well as for general obligation bonds. Registration is available free of charge to anyone who is interested.
The International Swaps and Derivatives Association (ISDA) announced last week a new form of 2013 Standard Credit Support Annex (SCSA). The release of the SCSA follows demands for greater standardization and efficiency in collateral postings and valuations. Although the project began some time ago, the announcement and release timely follow in the wake of various effective dates of Commodity Futures Trading Commission and Security Exchange Commission regulations under the Dodd-Frank Act.
The SCSA removes various options that counterparties would otherwise elect in “operationalizing” credit support arrangements. These include the standardization in provisions concerning designating cash as the sole collateral for variation margin and enumerating types of exposure collateral into five designated currency “silos”. The SCSA also promotes a universal adoption of overnight index swap (OIS) discounting, aligning mechanics and economics of collateralization between the bilateral and cleared OTC derivative markets. The SCSA promotes a homogeneous valuation framework and attempts to mitigate the need for novation and valuation disputes.
ISDA’s intent is that the SCSA will operate alongside the more familiar Credit Support Annex (CSA) forms, with counterparties having the ability to choose their application to one or more transactions. Like the traditional CSA’s, the SCSA is available as both an English law CSA (title transfer) and as a New York law CSA (security grant).
As stated by Robert Pickel, CEO of ISDA, “The Standard CSA is part of ISDA’s continuing efforts to increase efficiency and improve standardization in the OTC derivatives markets.” “The SCSA simplifies market processes regarding collateralization by promoting consistent and transparent valuations while making assignment and risk transfer in the bilateral and cleared space more efficient.”
In light of the sweeping overhaul of the OTC derivatives market under The Dodd–Frank Wall Street Reform and Consumer Protection Act, we anticipate numerous documentary changes to make their way into swap documentation as well as into guaranties, security instruments, master lien documents and the like. Much of this has already been documented and more is doubtless to come. The purpose of this memorandum, however, is specifically to provide sample language, which swap providers may deem useful for consideration in connection with express “Optional Termination Event” provisions enabling two-way market termination at the counterparty’s election. Providers may deem such language advisable under the Dodd-Frank External Business Conduct rules (effective May 1, 2013).
Sample Language for Consideration (For Confirmation documents under the 2002 ISDA® Master Agreement)
Optional Termination by Party B. Party B may, on any Business Day, terminate and cash settle this Transaction (in whole or part as applicable) entered into under the Agreement by giving telephonic notice, promptly followed by written notice (failure to provide written notice shall not affect the validity of the telephonic notice), to Party A designating a day not earlier than the tenth (10th) Business Day following the day on which such notice is effective as the Optional Termination Date (any such date, the “Optional Termination Date”), provided that in advance of the Optional Termination Date:
(a) Party B provides evidence satisfactory to Party A that Party B has (or will have on the Optional Termination Date) sufficient available funds to pay any amount which may be payable by it to Party A in connection with such early termination of this Transaction (in whole or in part as applicable); and
(b) Party B provides such representations, agreements and other assurances as may be required by Party A (and is capable of accurately providing the same) to assure, to Party A’s satisfaction, that Party A will enjoy the benefit of all “safe harbors” available to Part A under the Commodity Exchange Act (7 U.S.C. § l et seq.) or any successor statute thereto, and any and all other laws, rules or regulations governing dealings such as this Transaction, and also including any and all related regulations and guidance now or hereafter in effect as amended from time to time. The foregoing shall include without limitation, to the extent applicable, the “safe harbors” or similar benefits of the following CFTC regulations: 17 C.F.R. § 23.402(d) (know your counterparty, etc.); § 23.430(d) (eligibility); §§ 23.434(b) and (c) (institutional suitability); § 23.440(b) (non-advisor); § 23.450(d) and (e) (special entity provisions).
The amount due with respect to any such termination shall initially be determined by Party A, and notice of such amount shall be provided to Party B. If Party B elects to dispute such amount, the amount due with respect to such termination shall be determined pursuant to Section 6(e)(i) of the Agreement as if (a) references to the Defaulting Party and to the Non-defaulting Party were to Party B and to Party A, respectively; (b) the Optional Termination Date is the Early Termination Date, (c) Party B is the sole Affected Party (for all purposes other than the election to terminate) and Party A is the sole Determining Party, and (d) this Transaction (or portion thereof as applicable) is the sole Affected Transaction and, for purposes of Section 6(e)(i) of the Agreement, the sole Terminated Transaction. Such amount shall be paid by the party owing such amount within two (2) Business Days following the Optional Termination Date. Notwithstanding anything herein to the contrary, the parties will be obligated to pay any accrued amounts that would otherwise be due on such Optional Termination Date.
The Electronic Municipal Market Access (“EMMA®”) system was established by the Municipal Securities Rulemaking Board (“MSRB”) in order to provide access to municipal securities data. The MSRB recently published a guide entitled “Getting to Know EMMA®” in order to help state and local governments utilized the many services provided by EMMA®. The Guide will be helpful to those issuers who are trying to access information from EMMA®.
State and local governments utilize EMMA® to satisfy their continuing disclosure obligations by filing their annual reports with EMMA®. In addition to being the repository for all of the annual filings, EMMA® also contains trading prices of municipal bonds, official statements of a variety of types of bond issues, trading activity of municipal bonds, credit ratings of municipal bonds as well as various other market statistics on municipal bonds.
Legislation has been introduced in the South Carolina General Assembly to cause installment purchase revenue bonds issued after April 1, 2013 to count against that entity’s constitutional debt limit. H 3105 would amend the definition of “financing agreement” in S.C. Code Section 11-27-110 to include contracts entered into after April 30, 2013 that require installment payments of the purchase price to be paid by a governmental entity (installment payment revenue bonds). If a borrowing falls under the definition of financing agreement, then that borrowing will count against the constitutional debt limit of that entity, which such debt limit is eight percent of the assessed value of the property in such local government without the need of a referendum.
Currently the definition of financing agreement in Section 11-27-110 includes agreements to finance school facilities, causing such agreements to count against that entity’s debt limit. H 3105 would expand that definition to any capital project involving real property, structures, buildings or fixtures by any governmental entity.
If your entity is contemplating the use of an installment purchase revenue bond, you may want to consider contacting your General Assembly members and expressing to them the importance of this financing structure for your entity.
Local governments in South Carolina are fortunate to have alternative sources of credit available to meet capital needs. Issuers can access public investors through a public offering, or may elect to sell bonds and notes directly to a financial institution, referred to here as a “bank placement”. The issuer must make a choice between a public offering and a bank placement fairly early in the bond issuance process.
In a public offering, the issuer typically prepares a securities disclosure document, the “Official Statement” or “Offering Memorandum”, and in many cases applies to at least one of three agencies (Moody’s Investors’ Service, Standard & Poor’s, or Fitch Ratings) for a credit rating on the bonds. In a bank placement of bonds, the issuer requests proposals from financial institutions for a direct loan, and foregoes the preparation of securities disclosure and the credit ratings process.
From a quantitative perspective, the analysis focuses on which method will yield the lowest overall cost to the issuer. Interest rates on bank-placed debt will in most all circumstances be greater than that if the same debt is sold through a public offering. On the other hand, the upfront costs associated with a public offering may outweigh the additional interest cost associated with a bank placement.
Take, for example, a general obligation bond maturing in one year, issued by a local government with an existing “A” rating. Based on recent market data, a public offering would result in an interest rate of about 0.25%. A bank is likely to offer to buy the bond at a rate of 0.85%. For a $5 million bond, the difference in interest cost is $37,500 (bank placement) minus $12,500 (public offering), or $25,000. The inquiry shouldn’t end there, however, because one must account for the rating fees (as high as $20,000 for this example) as well as additional legal and financial advisory fees which might be incurred to prepare and carry out a public offering. Based on the assumptions in this example, the issuer will be well advised to consider a bank placement. Note that in the case of utility revenue bonds, the additional costs of a public offering over a bank placement are typically greater than that provided in this example.
In addition to the sort of cost analysis described above, issuers may wish to consider other factors as well. For example, a public offering requires a commitment of staff time to prepare the securities disclosure document and attend to the ratings process. For issuers that sell debt on a regular basis, this may be a relatively routine (but never unimportant) process. For issuers which sell debt infrequently, substantially more time will be required to attend to these tasks. It is reasonable to assign value to that time in choosing the method of sale. In any case, issuers should consult their bond counsel and financial advisors in choosing a method of sale for their debt offerings.
Cities and counties across South Carolina are now actively targeting research and development, technology and knowledge-based companies as part of more comprehensive economic development efforts. Whether it’s running incubators or facilitating research and development by established or new technology-focused companies, local governments are seeing that the role of technology companies in South Carolina’s economy continues to grow. As such, this post covers a topic that, while not directly related to governmental finance or local governance, is important for all communities which are focused on innovation: the America Invents Act. The AIA represents some of the most sweeping and transforming changes to the United States patent laws in the last fifty years. Some AIA provisions have already gone into effect while others will not go into effect until March 2013. Regardless, the ramifications of the AIA for the nation’s innovators are likely to be felt for the next fifty years.
One of the most significant changes will occur in March 2013 when the United States’ patent system will be transformed from the world’s only “First-to-Invent” system to a “First-Inventor-to-File” system, which is more in line with the rest of the world. So, why is this so significant? Because under the new First-Inventor-to-File system, a first inventor that first conceives of an invention will not be entitled to a patent if a second inventor, who separately conceives of the invention at a later time, files a patent application before the first inventor files. Under the old First-to-Invent system, the first inventor is entitled to the patent over the second inventor by producing evidence (e.g., in an interference proceeding) of the prior invention date. Under the new First-Inventor-to-File system, the second inventor, who was the first to file the application, is entitled to the patent over the first inventor even though the first inventor was the first to conceive of the invention.
The reasons for the change to the First-Inventor-to-File system are noble: to harmonize our patent system with foreign patent jurisdictions and to reduce litigation costs associated with determining who is the first-to-invent between two or more inventors claiming the same invention. Harmonizing our patent system may help to streamline international filing by making it easier for inventions originating in the U.S. to be patented overseas and inventions originating in foreign countries to be patented here in the United States. The new First-Inventor-to-File system may also reduce or eliminate expensive litigation to settle inventorship disputes where courts often base first inventorship determinations on tenuous evidentiary bases (e.g., old or questionable hand-scribbled notes, drawings, etc.).
There are likely to be drawbacks with the new system, however. For example, many patent practitioners believe that the new First-Inventor-to-File system will create a “race to the patent office” mentality, which is likely to favor the sophisticated, deep pocket patent factories of big businesses, such as Google, Apple, Microsoft, etc. This may hurt the less sophisticated and resource-limited inventors (although every bit as innovative), such as individuals or small businesses, who often need time to develop the invention, raise capital, learn the patent system, explore commercialization opportunities, etc.
While the change to the new First-Inventor-to-File system seems simple enough, it may be prudent for technology companies and publicly funded research entities/incubators to reexamine the way they conduct research and development, publish findings, and secure intellectual property rights in their inventions and discoveries. One way to do this is to file utility patent applications as early as possible and contemporaneously with ongoing research, technology development, product development or engineering rather than waiting until the research, development, or engineering has concluded and / or results are fully analyzed or published. Additionally, it may be wise to delay any publication or disclosure of the results until such time that the utility applications are filed.
The process of drafting and filing utility applications, however, usually takes time, which, under the new system, can cause a loss of intellectual property rights. Therefore, another way to ensure that intellectual property rights are protected is to file provisional applications to secure the earliest possible filing dates for inventions. The requirements for provisional applications are significantly relaxed relative to those for utility applications, which can be a time saver. For example, because of the relaxed requirements, provisional applications can often be drafted in a fraction of the time it takes to draft utility applications. While it is important that the content of provisional applications cover the full scope and features of the invention, the provisional applications need not include claims or fully developed specifications. Filing provisional applications may, thus, secure the earliest possible filing dates and provide a one-year grace period to convert the provisional into a fully developed utility application.
While the full effects of the AIA are yet to be realized, there are proactive measures that can be taken by inventors and centers of innovation to ensure that investments in and intellectual property rights are secured under the new First-Inventor-to-File system.
A report released last week by the federal Office of Management and Budget described the impact that automatic spending cuts referred to as the “sequester” may have on direct-pay subsidy bonds, such as Build America Bonds (BABs), if Congress fails to reach a compromise on a deficit reduction plan. Issuers of direct-pay subsidy bonds receive a subsidy from the federal government to pay a portion of their interest costs on such bonds. Unless Congress reaches a compromise and stops the sequester, subsidy payments for direct-pay bonds would be cut by 7.6% effective January 2, 2013. The cuts in subsidy payments would apply to all direct-pay BABs, Qualified Zone Academy Bonds (QZABs), Qualified School Construction Bonds (QSCBs) and Qualified Energy Conservation Bonds (QECBs).
If you have issued BABs, QZABs, QSCBs or QECBs, you should contact your bond counsel to review your documents and assess the impact that the potential sequester may have on your bonds.
The Municipal Securities Rulemaking Board (MSRB) recently added a number of resources to its online “toolkit” of educational materials for state and local governments to help them improve their understanding of the municipal securities market. The MSRB launched the State and Local Government Toolkit last year with a series of videos, fact sheets and guides about the process of issuing municipal bonds and using the MSRB’s Electronic Municipal Market Access (EMMA®) website.
Materials in the expanded toolkit include information on posting Preliminary Official Statements and URLs to the EMMA website as well as the following fact sheets and materials:
The EMMA Trade Monitor Fact Sheet allows state and local governments to quickly and easily download into a spreadsheet key data on the price, yield and amount of the secondary market trade activity of their municipal bonds.
Roles and Responsibilities of the Financing Team summarizes the current key responsibilities of dealers underwriting municipal securities transactions and of municipal advisors providing advisory services to or in connection with state and local governments.
MSRB Rules: Essentials for Issuers summarizes the current key responsibilities of dealers that underwrite municipal securities transactions and of municipal advisors that provide advisory services to or in connection with state and local governments.
What to Expect From Your Underwriter includes information regarding specific requirements that an underwriter must follow when communicating to and working with a state or local government throughout the new issuance process for municipal securities, particularly for negotiated offerings.
The SEC Rule 15c2-12 Continuing Disclosure Fact Sheet provides information about Securities and Exchange Commission (SEC) Rule 15c2-12 which 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 to the MSRB about the securities on an ongoing basis.
The MSRB’s online Issuer Toolkit is a no-cost resource for state and local governments.