Risk Factors: What you need to know about Investing in an Exclusive Financing
Investment in municipal securities inherently involves a number of risks to bondholders. Such risks relate to impacts on the following:
- Ability to collect revenues
- Employee relations/Labor Issues
- Federal and state regulation of the obligor’s industry
- Parity indebtedness
- Regulatory impacts on operations
- Ability to foreclose upon collateral
- Certain rights and remedies upon default
- Construction-related risks for project financings
- Factors impacting demand for the obligor’s services ɀ Impact of obligor’s 501(c)(3) status and other federal tax matters
- Risks of redemption
- Secondary market risks
For risks specific to any transaction, please refer to the Certain Bondholders’ Risks section of the Official Statement.
Risk Factors: What you need to know about investing in municipal bonds
- Credit Risk – The borrower fails to pay principal and/or interest.
- Interest Rate Risk – The market value of a bond drops when interest rates rise. While default risk is low, municipal bonds are subject to interest rate risk, or the risk that rising rates will lead to falling prices.
- Call Risk – The bonds may be redeemed prior to their maturity date depriving the investors of anticipated potential income.
- Liquidity Risk – The risk stemming from the lack of marketability of an investment that cannot be bought or sold quickly enough to prevent or minimize a loss. High yield bonds in particular are subject to more risk than investment-grade bonds and are generally less liquid and more volatile than investment-grade bonds. There is no guarantee of liquidity.
- Tax Risk – While tax-exempt municipal bonds may provide a tax advantage for some investors in that interest received on the bonds may be exempt from federal and/or state income taxes, there are certain cases where interest may be includible in income for purposes of calculating the federal alternative minimum tax applicable to a particular investor. Furthermore, certain actions or inactions taken on the part of the borrower for the bonds may result in interest paid on the bonds becoming taxable. All prospective investors should seek the advice of their own tax specialist prior to investment.
- Regulatory Risks – The underlying project is subject to various government regulation. Changes in regulatory policies could have an impact on the ability of the investment to operate, the rent they charge, staffing levels and of the expenses that could negatively affect the revenue of the investment.
In general, as for all types of investments:
- All investments involve risk and may result in a loss of principal.
- There is no guaranty of reliable, consistent, predictable income.
- Past performance is not indicative of future results.
- The purchase and sale of securities must be reviewed on an individual basis considering the risk tolerance and investment objectives specific to each investor.