Municipal Bond Forum
Simple, or not
Q
As you state in the article ETMs and You, “The concept is simple: when buying ETM bonds, investors should be certain that all calls have been defeased or the bonds have been priced to the call date.” While that may be simple to you, it’s not that simple for individual bond investors to ascertain that an ETM bond’s calls have been defeased and the bonds have been priced to the first valid call. How many investors know where to find this information? If an ETM bond’s description doesn’t state anything, are we to assume that its calls have not been defeased and it is not priced to its first call, or are we to assume the opposite? Two simple categories in your bond descriptions would alleviate this concern for investors: “This bond’s calls have been defeased: yes or no,” and “This bond is subject to call before the ETM maturity date: yes or no under no circumstances.” With these two descriptive categories and a mandatory “yes or no,” much confusion and suspicion would be eliminated. Now it appears that the investor is subtly being told, “Let the buyer beware,” which not only alienates the investor but probably deters future investment. One municipal dealer I used to deal with actually had a category, “callable.” However, there were instances that when it said “no”, the “no” wasn’t really a “no.” There were extraordinary call provisions that would make that “no” a “yes” and the investor didn’t find out about it until it was called.
A
James A. Klotz responds:
We agree the investors should not be forced to obtain this information themselves. It should be provided by the brokerage firm offering the bonds and the call status should be noted on the confirmation of sale. Unfortunately, there are too many firms selling bonds that may not be aware of all the nuances of escrowed securities, thus our caveat.
There are two ETM offerings on our site today that illustrate this point. The Intermountain Power Agency 5% due 2012 bonds are escrowed to maturity but are callable prior to maturity. As you can see, they are priced to reflect this call. The North Carolina 5 1/2% bonds due 2014 listed below them are not callable prior to maturity. This is reflected on the bond detail screen, which is accessed by clicking on the bond offering. These bonds are priced to maturity.
It is the responsibility of the brokerage firm, not the issuer, to be as clear as possible regarding the call status of escrowed bonds. Most brokerage firms have this information available to them through information services such as Bloomberg or J.J. Kenny. Our advice: if you don’t see it in the description, ask.
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