Meet EMMA
Marilyn Cohen, Forbes Magazine, 08.12.08

There’s a new gal in town: her name is EMMA. The acronym stands for Electronic Municipal Market Access and the free online municipal bond service is brought to us by the Municipal Securities Rulemaking Board (MSRB). I have written previous columns about www.investinginbonds.com to track secondary market municipal bond trades. Well, this is the front end of that system. Trades are electronically fed to the www.investinginbonds.com website by the MSRB.

EMMA (www.emma.msrb.com) has taken a gigantic step forward on behalf of the individual investor. In addition to municipal bond trade data (which is as real time as we professionals get) the site posts the issuers Official Statements. Have you ever seen an OS? If not, then either you’ve never purchased a new issue or your brokerage firm is not fulfilling their legal obligation to provide it to you.

The Official Statement is prepared, tweaked and finalized before the new issue goes to market. Think prospectus. Think: call dates, terms, sources and uses of cash, pledge agreements, covenants and financial information. Having access to the official statement isn’t the whole enchilada, but it’s a good start.

According to the MSRB, as of the end of 2007, there was $2.6 trillion par value of outstanding municipal bonds; 34.9% owned by households; 35.8% by mutual funds; 15.4% by insurance companies; and the rest by others. Tracking prices, trades and keeping current can be cumbersome for municipal bond investors. This can only be accomplished with expensive data systems like Bloomberg.

In January 2009, the MSRB is targeting an expansion of EMMA to include the municipal bond issuers’ current financials and material events. Never heard of material events? Lately in muniland it’s meant notification that the insurance purchased by the issuer has been downgraded (to junk, perhaps) and isn’t worth the paper it’s printed on.

Most reporters say the same thing; over the past 30-40 years munis have been safe. That they’ve had a low default rate. I say, “That was then.” There are now derivatives and interest rates swaps that can infect your muni portfolio and send bonds into a death spiral. These didn’t exist yesteryear. Today, you need more information.

Let’s say you are ready to purchase some municipal bonds and are offered Florida Hurricane Revenue bonds. The 4.25% due July 1, 2014 came to market in late July and are rated AA- Standard & Poor’s. Your broker tells you they are priced at 100.50 to yield 4.15%, that’s a great yield. Before you say yes, ask for the CUSIP number. Go to EMMA and enter the CUSIP 34074GCW2 to obtain the most recent trade data. Is the offering price on or off the previous trades? Then click on the Official Statement. You will see these are revenue bonds. But not plain vanilla revenue bonds. The OS tells you these are “secured by pledged collateral consisting of reimbursement premiums and earnings, emergency assessments and investment earnings from the Florida Hurricane Catastrophe Fund Finance Corporation.” The bonds turn out not to be a debt of the State. The document reveals the Corporation has neither taxing power nor the power to pledge the credit or the revenue of the State. These bonds are too risky and complicated. Pass on them.

A resident of Florida or any state with low or no state income tax would do better to buy the Florida State Department of Transportation bonds 5% due July 1, 2014. Priced at 108 to yield 3.48%. These are Right-Of-Way Acquisition and Bridge Construction bonds. Rated AAA by Standard & Poor’s, the bonds are payable from pledged gas taxes and additionally secured by the full faith and credit of the State of Florida. No runs, no hits, no errors. Just safe and secure bonds.

Finally, the last recommendation can generically be applied to municipal bonds issued in your own state. That is, buy any bond that is prerefunded and escrowed to maturity with US Treasurys. Some munis are escrowed with Government Sponsored Enterprises (GSE) which can include Fannie Mae and Freddie Mac bonds. If you are worried that Fannie and Freddie won’t pay off even after the Housing bailout bill was signed, then stick with issues escrowed with Treasurys.

Although these bonds sometimes trade by appointment, tell your broker you’d like that appointment. EMMA won’t archive the refunding details until 2009; make sure you buy exactly what you asked for.

One prefunded bond I like is Metropolitan Transportation Authority of New York. They are dedicated tax fund bonds whose revenues are from fixed sales tax and other miscellaneous tax. Issued in 1998 with a 5% coupon maturing April 2, 2023, the bonds were prerefunded in 2002 with a new final maturity date of October 1, 2015. The escrow account holds special Treasury securities sold by the U.S. Treasury to states and municipalities. Priced at 111.259 for a 3.22% yield; escrowed munis like these will help you sleep at night plus add balance to your overall portfolio.

Marilyn Cohen is president of Envision Capital Management, Inc., a Los Angeles fixed-income money manager. Visit her home page at www.forbes.com/cohen.