Material Event Filings for Certain Pre-Refunded Rated Obligations That Have Been Downgraded
Public Finance Law Update 08/17/11 Elizabeth S. Blutstein, John W. Daniels, Julianna Ebert, Ann M. Murphy, Brian G. Lanser, Jeff Peelen, Jennifer V. Powers, Michael L. Roshar, Rebecca A. Speckhard, Allison M. Buchanan, Bridgette DeToro, Alexander J. Gore
The purpose of this update is to alert you to a potential requirement to file a material event notice for certain pre-refunded, rated municipal obligations that have been downgraded in connection with S&P's downgrade of the U.S. credit rating.
Obligations subject to the continuing disclosure requirements under SEC Rule 15c2-12 that have been advance refunded or defeased by depositing U.S. securities (e.g., SLGS) into an escrow account may require the filing of a material event notice if the obligations are rated by one of the rating agencies and have experienced a downgrade due to S&P's action.
Downgraded obligations that were not subject to SEC Rule 15c2-12 at the time of issuance (e.g., primary offerings of less than $1 million for which no continuing disclosure undertaking was made) or that have been "legally defeased" are not subject to SEC Rule 15c2-12 and will not require a material event notice with respect to the downgrade. Obligations (usually revenue bonds) are legally defeased if the issuer has complied with the provisions contained in the bond documents to defease the obligations and release the issuer of all pledges, covenants and obligations (including continuing disclosure requirements) after the issuer has deposited sufficient funds and/or U.S. securities into an escrow account to pay the remaining debt service on the obligations.
In contrast, general obligation debt cannot be legally defeased because establishment of the escrow account does not discharge the issuer's general obligation to pay debt service on the obligations. Therefore, even if such general obligation debt has been advance refunded or defeased, it is still subject to any continuing disclosure requirements the issuer undertook at the time the general obligation debt was issued. If such debt was rated, it may require a material event notice to be filed with respect to a downgrade.
Issuers should evaluate their outstanding obligations that have been advance refunded or defeased to determine whether or not the obligations have been rated by one of the rating agencies and have been legally defeased or remain subject to continuing disclosure requirements. If those obligations are subject to continuing disclosure requirements, have not been legally defeased, and the rating on such obligations was downgraded as a result of S&P's action, a material event notice is likely required.
For continuing disclosure agreements executed prior to December 1, 2010, a material event notice in connection with a rating change is required to be filed "in a timely manner" if the rating change is "material." The SEC has said that information is material "if there is a substantial likelihood that a reasonable investor would consider it important to an investment decision."
For continuing disclosure agreements executed on or after December 1, 2010, a material event notice in connection with a rating change is required to be filed within 10 business days of the rating change without regard to whether the change is material.
Please refer to the alert from the National Association of Bond Lawyers for additional information. Issuers should contact their financial advisors, investment bankers or continuing disclosure dissemination agents to determine whether or not an issue is rated or is subject to continuing disclosure requirements, or to file a material event notice. If you have any questions, please contact any attorney in our Public Finance Group.