Enhanced disclosure provides an opportunity for governments: providing more disclosure to bond investors may seem like an unnecessary burden at first, but it will likely provide real, tangible benefits to taxpayers over time.

Author:MacNaught, Colin
Position:Best Practices
 
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The biggest long-term benefit for a government in terms of lower borrowing costs may actually come from the efforts put in place by the finance director in communicating with investors in the years and months before the bond sale is even planned. Given the limited time and resources most finance directors have available, the key to improved borrowing is to use technology to enhance the disclosures of public data and reports to investors.

CONTINUING DISCLOSURE

Issuer disclosure to investors remains an important topic in the municipal bond market. The Securities and Exchange Commission (SEC) continues to review the voluntaiy filings submitted by issuers as part of its Municipal Continuing Disclosure Cooperation (MCDC) initiative. At the same time, bond investors continue to clamor for access to more issuer data--particularly more timely issuer data. The focus of both investors and regulators is on so-called continuing disclosure, which includes the data promised by an issuer at the time of a bond sale and the data to be provided annually to the market so long as its bonds remain outstanding. Relative to the quality of issuer data provided at the time of a bond sale (i.e., primary market disclosures), the quality of continuing disclosure can vary greatly among issuers. For bond market regulators, this lack of consistency in the municipal bond market --including instances of substandard or nonexistent continuing disclosure--creates a concern that municipal bond investors may receive far less robust disclosure than corporate bond investors.

BEST PRACTICES FOR DISCLOSURE

Since most, if not all, governments will require access to the capital markets on a continuing basis to finance their capital budgets for new schools, roads, or public buildings for the foreseeable future, finance officers need to understand the importance of disclosure in terms of ensuring robust investor interest in future bond sales at attractive and affordable interest rate levels.

Municipal continuing disclosure practices are less consistent than they are in the corporate bond market, so it is safe to assume that municipal bond investors assign an uncertainty premium to the price or yield of the bonds they are buying. The uncertainty stems from the investors' lack of confidence that they will have timely access to the public data they need to properly conduct credit surveillance on an issuer over the long-term life of the bonds. In a nutshell, if an investor is uncertain that they can make an informed buy or sell decision on the bonds that they own in the future, they will demand a higher return--a higher yield--from the issuer at the time of the purchase of the bonds in the primary market. That uncertainty premium hurts issuers --and taxpayers--in the form of higher debt service costs. An issuer who commits to providing more public and timely data to investors will attract more capital to their bond offerings and will be able to borrow at lower costs by avoiding any uncertainty premium. (1)

With finance officers having so little time and resources because of their other treasury responsibilities, how is...

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