This local tax-exempt bond is selling at a deep discount to its face value of $100 -- no surprise considering that the Fort Worth assisted-living community in question has had trouble making payments.
The surprise is how wild its price can be. An investor paid $32.50 on Aug. 21 to purchase the issue floated by the Tarrant County Texas Health Facility Development Corp., a quasi-public financing authority that lends money to health care providers.
On the same day, a dealer paid $17.24 to buy it back.
"I think somebody got picked off," said Hill A. Feinberg, a Dallas municipal-bond underwriter. "You'll probably be surprised to hear me say that. Someone didn't check prices."
Investors should be heartened to hear Feinberg talk tough. Feinberg is chairman of the Municipal Securities Regulation Board, the industry group that polices the unregulated market.
No exchange makes a national market in municipal bonds, or munis, in the same way that the Nasdaq and the New York Stock Exchange price equities from one moment to the next. Bond dealers set their own prices.
As a result, bondholders must work to find the pricing information and disclosures that investors in stocks take for granted, and they may be asked to pay for it.
Investors should be mindful of the difference as they look to safe munis in a bleak stock market. The image is a sturdy bond backed by a government's ability to raise taxes. The reality is much broader, including many shaky issues backed by airport ventures, nursing homes and special utility districts.
The result can be deep discounts and wildly divergent prices, as the Web site MunicipalBonds.com demonstrates daily. Web publisher Kevin Olson reconfigures a price report issued by the regulatory board using a format similar to newspaper stock listings.
Among his "worst spreads" for the third quarter: A $19 gap between the best bid and the best offer on the same day for an Alliance Airport issue to be repaid ultimately by American Airlines.
"The bigger the spread, the worse it is," Olson said. "If the bid side is $69, then the offer side should be in the same range."
The industry is providing more information today than ever before, says Feinberg, whose day job is chief executive of Dallas-based First Southwest Co. First Southwest is a major underwriter of municipal bonds.
Feinberg hopes to persuade bond issuers to let in more sunshine. He also wants to educate investors on the pitfalls of tax-exempt securities, notably the risky business of buying dicey bonds without adequate study.
The Bond Market Association publishes average bond prices daily at www.investinginbonds.com. The data, also from the regulatory board, summarize previous-day trades of selected municipal bonds. The board also publishes a comprehensive list of bond trades but delays it a week to sort out errors.
Feinberg says that some of the discrepancies Olson reports result from errors that slip through anyway.
Unmollified, Olson wants the board to publish an error report and identify the dealers making the trades.
"I want to see all the information," he said.
Feinberg wants more data, too. He believes that bond issuers should disclose more information on faster deadlines. Local governments aren't bound by the disclosure rules imposed on public companies by the Securities and Exchange Commission.
"The dealer community is adamantly behind better disclosure," he said.
But the task is difficult in the fragmented muni market, in which 51,000 issuers have floated 1.3 million securities. Small issuers don't have the expertise or manpower, Feinberg says. Large issuers resist the idea.
"The Highland Parks of the world get offended when you say you have to have financial disclosure promptly," Feinberg said.
The roadblocks continue for investors. What disclosures muni issuers make are not easily accessible. Private companies keep the four central databases storing muni documents, and they charge for access. The Bond Market Association Web site has a link offering partial access to one of them.
In Texas, the Municipal Advisory Council, an industry group, offers a free look at the documents on file for specific Texas bond issues. Copies of the documents cost $25. Look for the site at www.mactexas.com.
Investors who stick close to home know what they're buying and where to go for more information, Feinberg said.
Olson isn't convinced. Olson grilled California officials last month in San Francisco as they presented an $11.9 billion bond issue meant to fill the fiscal hole created by California's troubled experiment with electric deregulation.
Olson wanted to know what the state would do to help investors resell the bonds, which will ultimately be repaid by utility ratepayers.
"I was actually grabbed and told I couldn't ask any more questions," he said. "Municipalities don't represent the investing public. They represent their interests in borrowing money."
