Glossary of Municipal Securities Terms
Second Edition (January 2004)
LAND USE RESTRICTION AGREEMENT – An agreement binding the parties to limit the use of property to a particular use for the term of the agreement. Land use restriction agreements (sometimes referred to as “regulatory agreements” or “tax regulatory agreement”) typically are used in connection with multi-family housing revenue bond issues or financings involving low-income housing tax credits to ensure that the financed facilities are used for low-income housing for the period required under federal tax laws. See: HOUSING REVENUE BOND – Multi-family housing revenue bonds.
LEASE RENTAL, LEASE REVENUE or LEASEHOLD REVENUE BOND – A bond from an issue that is secured by lease payments made by the party leasing the facilities financed by the issue. Typically, lease rental bonds are used to finance construction of facilities (e.g., schools or office buildings) used by a state or municipality, which leases the facilities from a financing authority. In many cases, lease payments may be subject to annual appropriation or will be made only from revenues associated with the facility financed. In other cases, the leasing state or municipality is obligated to appropriate moneys from its general tax revenues to make lease payments. Compare: CERTIFICATE OF PARTICIPATION. See: ANNUAL APPROPRIATION PLEDGE; NON-APPROPRIATION CLAUSE.
LEGAL FORM – A form of registration of certificated securities in which documents in addition to a properly completed assignment or bond power will be necessary to accomplish transfer. See: LEGAL ITEM.
LEGAL INVESTMENT – A security that meets the requirements of various states’ laws restricting the investment practices of institutions (particularly savings banks) located in the state. Compare: BLUE-SKY LAWS. See: LEGAL INVESTMENT SURVEY.
LEGAL INVESTMENT SURVEY – A memorandum typically prepared by underwriter’s counsel that surveys the laws of the states with respect to whether the securities being offered by an underwriting syndicate are legal investments. Compare: BLUE-SKY MEMORANDUM. See: LEGAL INVESTMENT.
LEGAL ITEM – A certificated security registered in a form such that a document is needed to accomplish transfer of securities in addition to the properly completed assignment or bond power. These documents establish the authority of the owner to effect transfer of the securities. Typical documents are corporate resolutions, trust indentures, power of attorney, or court orders. See: LEGAL FORM.
LEGAL OPINION – The written conclusions of bond counsel that the issuance of municipal securities and the proceedings taken in connection therewith comply with applicable laws, that the municipal securities are legal, valid and enforceable obligations of the issuer and that, in the case of tax-exempt bonds, interest on the bonds is excluded from gross income of the holders thereof for federal income tax purposes and, where applicable, from state and local taxation. Bond counsel’s legal opinion is often referred to as the “approving opinion” or “bond counsel opinion.” Compare: DUE DILIGENCE OPINION. See: BOND COUNSEL; QUALIFIED LEGAL OPINION; SPECIAL TAX COUNSEL; UNQUALIFIED LEGAL OPINION.
LETTER OF CREDIT (LOC) – A commitment, usually made by a commercial bank, to honor demands for payment of a debt upon compliance with conditions and/or the occurrence of certain events specified under the terms of the commitment. In municipal financings, bank letters of credit are sometimes used as additional sources of security for issues of municipal notes, commercial paper or bonds, with the bank issuing the letter of credit committing to pay principal of and interest on the securities in the event that the issuer is unable to do so. A letter of credit may also be used to provide liquidity for commercial paper, variable rate demand obligations and other types of securities. See: CREDIT ENHANCEMENT; CREDIT FACILITY; LIQUIDITY FACILITY.
LEVEL PRINCIPAL – A debt service schedule in which the combined annual amount of principal payments remains relatively constant over the life of the issue of bonds, resulting in declining annual debt service as the annual amount of interest payments declines. This is sometimes referred to as declining debt service.
LIBOR – A benchmark interest rate upon which many transactions are based. Obligations of parties to such transactions are typically expressed as a spread to LIBOR. The term is an acronym for “London Inter-Bank Offered Rate.”
LIMITED OFFERING – An offering of a new issue of municipal securities sold to a limited number of investors that meet certain established standards for qualifying as a purchaser of the securities. The term typically refers to an offering exempt from the provisions of Rule 15c2-12 as a primary offering of municipal securities in authorized denominations of $100,000 that are sold to no more than 35 persons each of whom the underwriters reasonably believe: (A) has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of the investment; and (B) is not purchasing for more than one account or with a view to distributing the securities. Compare: PRIVATE PLACEMENT. See: RULE 15c2-12.
LIMITED TAX GENERAL OBLIGATION BOND – A general obligation bond secured by the pledge of ad valorem tax that is limited as to rate or amount. Compare: LIMITED TAX BOND; REVENUE BOND; UNLIMITED TAX BOND. See: GENERAL OBLIGATION BOND.
LINKED SECURITIES – Pairs of an issuer’s securities that, if held simultaneously by the same owner, may together be treated as a single security for most purposes of the bond contract. Typically, this term refers to the joining or “linking” together of a floater with an equal principal amount of an inverse floater pursuant to the provisions of the bond contract under which both securities were issued, resulting in a single security bearing interest at a fixed rate with a principal amount equal to the sum of the principal amounts of the floater and inverse floater. See: DE-LINK; FLOATER; INVERSE FLOATER.
LIQUIDITY – The relative ability of a security to be readily convertible into cash without substantial transaction costs or reduction of value. A municipal security’s liquidity is a function of its structure (coupon, maturity, credit quality, credit enhancement, etc.) and marketability. A “liquid” municipal security is generally both short-term and highly marketable. Compare: MARKETABILITY.
LIQUIDITY FACILITY – A letter of credit, standby bond purchase agreement or other arrangement used to provide liquidity to purchase securities that have been tendered to the issuer or its agent but which cannot be immediately remarketed to new investors. The provider of the liquidity facility, typically a bank, purchases the securities (or provides funds to the issuer or its agent to purchase the securities) until such time as they can be remarketed. Compare: CREDIT FACILITY. See: LETTER OF CREDIT; LIQUIDITY; STANDBY BOND PURCHASE AGREEMENT.
LOAD – A sales charge or commission paid by an investor. Typically, this term is used only in connection with the purchase of a mutual fund or municipal fund security. See: COMMISSION; CONTINGENT DEFERRED SALES CHARGE; FRONT-END LOAD; MUNICIPAL FUND SECURITY.
LOANS-TO-LENDERS PROGRAM – A program in which bond proceeds are loaned by the issuer to an entity that in turn lends portions of the proceeds to the ultimate beneficiaries of the bond financing. Loans-to-lenders programs are sometimes seen in single family housing revenue bond issues and certain other types of private activity bond financings.
LOCAL GOVERNMENT INVESTMENT POOL (LGIP) – An investment trust established by a state or local governmental entity or instrumentality that serves as a vehicle for the pooled investment of public moneys of participating governmental units. Participants purchase shares or units in the trust and trust assets are invested in a manner consistent with the trust’s stated investment objectives. See: MUNICIPAL FUND SECURITY.
LOCKED MARKET – A trading situation in which the prices shown for a particular security by the broker-dealer posting the highest bid and the broker-dealer showing the lowest offer are the same, or a bid price and ask price through a broker’s broker are the same. One side needs to pay, or both sides need to share payment of, the commission in order to break the lock.
LONG TERM or LONG TERM RANGE – A designation given to maturities of a serial issue and term bonds typically having maturities of more than 15 years from issuance. Compare: INTERMEDIATE RANGE; SHORT TERM.
LOWER FLOATER – A colloquial term for a variable rate demand obligation. The put option feature of the obligation has the practical effect of making the securities short-term from the perspective of the investor; the variable interest rate on the securities, therefore, tends to fluctuate in the “lower” range of interest rates appropriate for short-term securities. See: FLOATER; INVERSE FLOATER; TENDER OPTION BOND; VARIABLE RATE; VARIABLE RATE DEMAND OBLIGATION.