Not All Municipal Bond Issuers Are Adjusting Well to the SEC’s Efforts to Make the Market More Transparent

According to The New York Times, the Securities and Exchange Commission is attempting to make the municipal bond market less “opaque.” One way it is doing this is by adding more disclosure requirements. For example, muni bond issuers now have to publish bond rating changes, financial statements, and other material on the Municipal Securities Rulemaking Board’s EMMA data site in a timely manner. However, the Times reports that not all 55,000 muni bond issuers are adjusting well to this era of greater transparency.

The newspaper cites the West Penn Allegheny Health System, which has been the target of an SEC probe for more three years after an earnings restatement in July 2008. The examination turned into a formal probe in 2009. (The multi-hospital system is one of the largest municipal bond issuers, with nearly $740 million bonds outstanding.)

Although West Penn posted $1.6B of revenue for fiscal year 2011, during the last six months of the year, it lost $56M. The company’s pension plan is underfunded by $200M. Last year, Fitch Ratings and Moody’s downgraded the West Penn bond rating so that it’s well in the junk category. Also, as of December 31, 2011, the system was in possession of just 58-days worth of cash. Meantime, as West Penn is awaiting the approval of a partnership with health insurer High Mark Inc., which said it would commit up to $475M over three years to support West Penn hospitals, the union has garnered the attention of the Justice Department’s antitrust division. Also, the SEC has been asking for information about West Penn’s financial statements.

The Times says that West Penn has not told bond holders, who are calling for more information about its turn around plan, about this probe. A West Penn spokesperson said the system continues to be in complete compliance with all “disclosure obligations” and that, in fact, management had met with the bond trustee and its advisers.

Investors that purchase muni bonds are lending cash to bond issuers in return for a promise of the return of principal, as well as of regular interest payments. While there are benefits, including (in general) exemption from federal income tax for the bonds and possibly even exemption from local and state taxes for those residing where the bond was issued, there are risks. The SEC’s Office of Investor Education and Advocacy has put out a bulletin to investors to familiarize them more with muni bonds. Risks involved include: Call risk, credit risk, inflation risk, interest rate risk, and liquidity risk.

Shepherd Smith Edwards and Kantas, LTD LLP represents investors throughout the US. Contact our securities fraud law firm to ask for your free case evaluation. We represent individual and institutional clients.

Investor Bulletin: Focus on Municipal Bonds, SEC.gov

A Fog Warning, Again, for Municipal Bonds, The New York Times, February 18, 2012


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