Will Detroit’s bankruptcy put a damper on individuals who buy bonds?
If you look at who owns municipal bonds, you’ll discover that most (75 percent) of the outstanding principal is in the hands of individuals, either directly or indirectly through funds.
Amazingly, there are more than 1 million individual bonds outstanding, representing $3.7 trillion in principal, according to the Securities and Exchange Commission’s July 2012 Report on the Municipal Securities Market. Ninety-nine percent of the outstanding bonds do NOT trade on any given day.
Because the municipal-bond market is so vast, how does an individual investor cope?
Since most individuals hold bonds to maturity, they have to look at risk disclosure at the time of the bonds’ original issue and during the holding period.
The key concern is whether the issuer will be able to meet its obligations. That is, will the issuer default on its obligations to pay interest during the holding period, and will it repay the face amount at maturity?
That calls for an evaluation of the issuer’s financial condition.
An "official statement" is the place to start. You can ask your broker for one or go online to the Municipal Securities Rulemaking Board’s Electronic Municipal Market Access system, called EMMA, at www.msrb.org.
The official statement will give you the interest rate, the timing of payments, whether the bond can be redeemed before maturity, the consequences of a default by the issuer, financial and operating information, and an undertaking to provide additional information after the issue is sold.
An official statement is not technically a prospectus, but it’s the closest thing to it.
To get grounded on the basics, start with "What is an Official Statement" in the Education Center of EMMA.
After you buy the bond, you’ll need to know how the issuer is doing, and more importantly, whether there are events that may lead to default. These are called "Continuing Disclosures," and you will find them on EMMA for issues coming to market after June 1, 2009. For earlier issues, you may have to go to a state "information depository." For more information, read "About Continuing Disclosure" in the "Frequently Asked Questions" section on EMMA.
To make things easier for individual investors, EMMA gives you the opportunity to sign up for alerts. To do that, look at the top of the website for "MyEMMA" to set up a free account. Then you can add your municipal bonds to the tool to receive an email when the issue trades or when a disclosure document posts on EMMA.
Be sure to sign up for event notices, so that you receive an alert in the event of rating changes, delinquencies in interest or principal payments, and insolvency and bankruptcy.
EMMA also provides current credit ratings and real-time trades, all for free, through the Real-Time Transaction Reporting System (RTRS).
No municipal-bond investor should live without EMMA.
While municipal bonds are considered safe by investors, they are not without risk.
The Detroit Free Press recently quoted Leon Pedell, a retired physician who owns Detroit water and sewer bonds, as saying: "You never used to worry about munis. There’s nothing like a risk-free bond any more."
If you invested in Detroit bonds, you can look up each bond on EMMA. Go to http://www.msrb.org/Market-Topics/ Detroit Bond Information.aspx. There you will be able to download a spreadsheet listing specific Detroit bonds.
How many bonds actually default? They’ve increased since the financial crises, according to Moody’s Investors Service, but remain "extremely infrequent." In the period from 1970 through 2007, defaults of Moody’s rated credits averaged 1.3 per year. From 2008 through 2012, they averaged 4.6 per year.
For more background on investing in municipal bonds, you’ll want to read "Municipal Bonds — Important Considerations for Individual Investors," found on the Financial Industry Regulatory Authority’s website, www.finra.org, in the "Protect Yourself" section of "Investors," under "Investor Alerts." FINRA is the largest independent regulator of securities firms.
Julie Jason, a personal money manager (Jackson, Grant of Stamford, Conn.) and award-winning author, welcomes your questions/comments at email@example.com.
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