2 Understanding Municipal Financing 2.2 Notes Flashcards
Variable rate demand obligations (VRDOs)
-Floating rate obligations that have a nominal long-term maturity but have a coupon rate that is reset periodically (daily or weekly)
-Investor has the option to put the issue back to the trustee or tender agent at any with time with specified notice
-The put price is par plus accrued interest (ability to sell the security back to the issuer and receive 100% of principal)
Tax Anticipation Notes (TANs)
-A short-term obligation of an issuer to repay a specified principal amount on a certain date, together with interest at a stated rate, usually payable from a defined source of anticipated revenues.
-Notes usually mature in one year or less, although notes of longer maturities are also issued.
-Notes issued in anticipation of future tax receipts, such as receipts of ad valorem taxes that are due and payable at a set time of year.
Construction Loan Notes
Notes issued to fund construction of projects (typically housing projects). CLNs are repaid by the permanent financing, which may be provided from bond proceeds or some pre-arranged commitment.
Tax and Revenue Anticipation Notes (TRANs)
-A TAN is a short-term obligation of an issuer to repay a specified principal amount on a certain date, together with interest at a stated rate, usually payable from a defined source of anticipated revenues. Notes usually mature in one year or less, although notes of longer maturities are also issued. Notes issued in anticipation of future tax receipts, such as receipts of ad valorem taxes that are due and payable at a set time of year.
-A TRAN is issued in anticipation of receiving future tax receipts and revenues at a future date
Tax -exempt Commercial Paper
An unsecured short-term loan, usually issued to finance short-term liabilities, that provides the debt holders (bondholders) some level of tax preference on the earnings from their debt investment at a local, state or federal level, or a combination thereof.
Installment Purchase Agreements
An installment purchase agreement is a contract used to finance the acquisition of assets. Under the terms of such an agreement, the buyer pays the seller the full purchase price by making a series of partial payments over time. The payments include stated or imputed interest. The buyer takes title to the property at the inception of the agreement. The seller retains a security interest in the property until all of the specified payments have been made.
Leases
A bond that is secured by lease payments made by the party leasing the facilities that were financed by the bond issue. Typically, lease rental bonds are used to finance construction of facilities (e.g., schools or office buildings) used by a state or municipality. In many cases, lease payments may be subject to annual appropriation or will be made only from revenues associated with the facility financed. In other cases, the leasing state or municipality is obligated to appropriate funds from its general tax revenues to make lease payments as long as it utilizes the leased property.
Bank Loan/Direct Loan
A loan to a municipal issuer from a banking institution or another lender. The obligations may constitute municipal securities.
Certificate of Participation
An instrument evidencing a pro rata share in a specific pledged revenue stream, usually lease payments by the issuer that are typically subject to annual appropriation. The certificate generally entitles the holder to receive a share, or participation, in the payments from a particular project. The payments are passed through the lessor to the certificate holders. The lessor typically assigns the lease and the payments to a trustee, which then distributes the payments to the certificate holders.
Annual Appropriation Pledge/Lease
A pledge typically found in the bond contract for lease revenue bonds or securing a certificate of participation financing that commits the issuer or other obligor to make lease payments or other periodic debt service payments but only to the extent that funds are budgeted and appropriated on an annual basis by the issuer’s governing body. The governing body is not legally obligated to make such appropriation in any year. An annual appropriation pledge typically is used only in connection with projects that are considered to be essential to the issuer’s operations and therefore the governing body is likely to appropriate the money needed to pay debt service on an on-going basis. In many jurisdictions, this clause permits a borrowing entity to undertake a long-term certificate of participation or other lease revenue obligation financing without technically incurring debt, thereby avoiding statutory or constitutional debt limitations and referendum requirements because the lease payments are characterized as payments for use of the facilities rather than as payments on a promise to repay bonded debt.
Abatement Clause/Lease
A provision of a lease that relieves a lessee of the obligation to make lease payments in the event that the leased property cannot be utilized (e.g., because of construction delays, property damage or other causes).
Bond Banks
Agency or instrumentality created in certain states to buy issues of bonds directly from municipalities or other local governmental entities. The purchases are financed by the issuance of bonds by the bond bank. Bond banks frequently provide low-cost financing for local governments.
Pay-as-you-go-funding
Paying for capital projects directly from existing funds; likely requires that the government delay building the project in order to raise the funds over time; likely results in undue burden being placed on present taxpayers to finance a future need from which they may not fully benefit.
