Alert August 29, 2011

Must Issuers Disclose Rating Downgrades on Pre-Refunded Bonds?

As we reported in Goodwin Procter’s August 11, 2011 Client Alert, “S&P Downgrades U.S. Credit – Muni Bonds Hang Tough,” Standard & Poor’s Ratings Services (“S&P”) downgraded the rating on the United States’ sovereign debt from AAA to AA+, and subsequently downgraded over 11,000 state and local bond issues, including thousands of pre-refunded bonds that were defeased by U.S. Treasuries.  Many issuers of pre-refunded bonds have expressed concern as to whether a rating downgrade on defeased bonds requires the filing of an event notice under Securities and Exchange Commission (“SEC”) Rule 15c2-12.

According to an alert recently released by the National Association of Bond Lawyers (“NABL”), unless the controlling documents provide otherwise, the SEC has indicated that the legal defeasance of bonds generally terminates an issuer’s continuing disclosure agreement.  Therefore, most issuers do not have to disclose a rating downgrade on pre-refunded bonds.

Notwithstanding the foregoing, NABL encourages issuers to consult their bond counsel as to the disclosure requirements relating to a specific issuance.  Should it be deemed advisable to do so, a notice regarding a rating downgrade may easily be filed using the EMMA system maintained by the Municipal Securities Rulemaking Board.