Is Your Bond-Proceeds Investment Earning What It Should?

An existing bond-proceeds investment is earning what it should when its rate, credit terms, liquidity and timing still match the fund it was bought for, and when a provider would bid comparable terms for the same money today.

A review answers that by setting the position against the fund's objectives, the investments the fund may hold, the projected draw schedule, the provider's credit terms, market conditions and timing.

What are the signs an existing investment is under-earning?

An investment shows its age in five places: the draw schedule, the provider's or guarantor's credit, the benchmark it references, the collateral behind it, and the bid process that set its rate.

A draw schedule that has moved, faster or slower, leaves the position's term and withdrawal schedule mismatched to the fund, which is the spend-down mismatch problem.

A rating action on the provider, or on a guarantor behind the agreement, is a second sign, because the credit protection provisions of an agreement can impose costs of their own after the fact.

In its Form 10-K for fiscal 2008, Ambac reported that the November 5, 2008 Moody's downgrade of Ambac Assurance resulted in a significant amount of collateral being posted by its investment agreement and derivatives businesses, and that its investment agreement portfolio shrank as agreements were repaid.

Ambac, which provided investment agreements including repurchase agreements primarily to asset-backed and structured finance issuers and, to a lesser extent, to municipal issuers, also reported that its 2008 downgrades triggered cure provisions in nearly all of its investment agreements.

It described the remedies most of those agreements offered: collateral posting, termination of the contract, or designation of a replacement guarantor, with most triggers based on the lower of the Moody's or S&P rating and Ambac usually able to choose the remedy.

Those were Ambac's own contract terms rather than market-standard terms, so the downgrade provisions of the specific agreement control.

A third sign is a benchmark that no longer exists: U.S. dollar LIBOR panels ended after June 30, 2023.

Under the LIBOR Act, the Federal Reserve Board adopted SOFR-based replacement rates for "tough legacy" contracts without workable fallbacks, in a final rule (Regulation ZZ) adopted Dec. 16, 2022 covering overnight, 1-, 3-, 6- and 12-month LIBOR in contracts subject to the Act.

How any particular investment agreement or swap moved off LIBOR depends on its fallback language, so the agreement itself is the place to look, and SOFR is the replacement benchmark the rule uses.

For a repurchase agreement, the Government Finance Officers Association's 1986 statement on repos says over-collateralization (haircuts) or marking-to-market should be mandatory procedures, and that delivery or safekeeping of the underlying securities with the purchaser's custodian significantly reduces risk, which makes the collateral terms of an existing repo worth a re-read (repo collateral).

For proceeds sitting in a local government investment pool, GFOA notes generally that pools are not registered with the SEC, that investments in them are not insured or guaranteed, and that substantial losses have occurred in the past; that is a statement about pools in general, not about any named pool (LGIPs).

The fifth place is the bid process itself, because the rate an existing agreement pays reflects whatever competition did or did not happen when it was bid.

What does a review of an existing investment compare?

A review compares the position against six things: the fund's objectives, the investments it is permitted to hold, the projected draw schedule, the provider's credit parameters, market conditions and timing.

That is the same list mGIC works through in its reinvestment advisory service.

Benchmark levels are visible in mGIC's daily rate updates, which carry Treasury yields, SOFR and SLGS links each business day.

For a pool position, GFOA's recommendations supply the checklist: confirm the pool is an eligible investment, read its offering statement, investment policy and audited financials, and check whether it seeks a constant or fluctuating net asset value.

GFOA also notes that deposits or withdrawals from pools may require advance notification, especially if they are large.

How the position was originally acquired matters here too, because the rate an existing agreement pays reflects the process that produced it.

What are the options for restructuring or re-bidding?

The options run from adjusting the existing agreement with the current provider to terminating the position and re-bidding the fund, and the agreement's withdrawal, call and termination provisions decide which of them are on the table.

The place to start is the agreement itself, because withdrawal provisions and optional termination rights set what can be changed, when, and at what cost.

Where the position can be exited, re-bidding the fund is how a fresh market price is obtained: bid specifications are drafted, qualified providers are solicited, questions are managed, and the bids are compared on rate and non-rate terms.

Comparing those bids is its own discipline, covered under evaluating bids.

The case for a clean, open competition when re-bidding is on the record in the SEC's bid-rigging cases, which involved reinvestment instruments such as guaranteed investment contracts, repurchase agreements and forward purchase agreements.

In a "last look," a provider received competing-bid information from the bidding agent; in a "set-up," the bidding agent deliberately obtained non-winning bids from other providers to rig the field, as the SEC described in the Wachovia case.

Each case was settled without the firm admitting the SEC's findings.

The SEC said that by December 2011 more than $743 million had been recovered from financial institutions in these settlements and that 18 individuals had been indicted or had pled guilty, and that the misconduct deprived municipalities of a conclusive presumption that reinvestment instruments were purchased at fair market value.

The SEC's litigation release in the Wachovia matter added that the bidding corruption "jeopardized the tax-exempt status of billions of dollars in municipal securities."

Individuals were also prosecuted: former UBS executives Peter Ghavami, Gary Heinz and Michael Welty were convicted of wire fraud and/or conspiracy to commit wire fraud for rigging bids on municipal investment contracts, sentenced to 18, 27 and 16 months and fined $1 million, $400,000 and $300,000, and the Second Circuit affirmed, per the Justice Department's brief in Heinz v. United States.

The same brief says UBS entered a non-prosecution agreement on May 4, 2011, accepting responsibility for employees on its municipal reinvestment and derivatives desk who rigged bids in violation of the Sherman Act, and that UBS, JP Morgan and Bank of America together paid $525 million in civil fines and restitution under those agreements.

The brief also says the UBS executives falsely certified compliance with Treasury regulations, which is one reason the certifications delivered at closing are part of the record a review reads.

For an issuer reviewing an older position, the question is whether the original bid was an open competition, and the solicitation records and closing certifications are where that answer lives.

Restructuring also has a federal tax dimension, because actions taken after the issue date are judged under the arbitrage rules as well.

Under Treasury Regulation §1.148-2(c), a deliberate, intentional action taken after the issue date to earn arbitrage makes the bonds arbitrage bonds if that action would have done so had it been expected at issuance, and an intent to violate section 148 is not necessary for an action to be intentional.

The same regulation provides that bonds are not arbitrage bonds as a result of an inadvertent, insubstantial error.

The arbitrage guide covers those rules, and the tax consequences of any specific restructuring step are a determination for tax counsel.

How does a free independent review work?

A free independent review puts the checklist above against a position at no cost to the issuer and with no obligation to act on it.

mGIC is an independent, SEC-registered municipal advisor: it does not sell a proprietary investment product, does not act as principal in the investments it evaluates, and owes its municipal clients a fiduciary duty.

The review itself is mGIC's reinvestment advisory service: fund objectives, permitted investments, projected draw schedules, credit parameters, market conditions and timing.

If the review points toward a change, mGIC acts as Bidding Agent, developing bid specifications, soliciting qualified investment providers, managing questions, receiving bids and comparing rate and non-rate terms, then coordinating documentation and settlement and delivering Bidding Agent and provider certifications to bond counsel, finishing with a compliance file.

When a bid closes, mGIC's fee is paid by the winning provider rather than the issuer, at or below the safe-harbor maximum in the Treasury arbitrage regulations, and it is disclosed.

Issuers weighing who to engage can start with the checklist for choosing a reinvestment advisor.

To request a free review of an existing investment, send the fund and position details through the contact page, or talk to mGIC first about what the review would compare.

The legal and tax conclusions that frame any change, from what a fund may hold to how a restructuring is treated under the arbitrage rules, belong to bond counsel and tax counsel.

Last updated 2026-10-06.

This page is general educational information about municipal finance and federal and state rules as of the date shown. It is not legal, tax or investment advice, and it is not a recommendation about any particular investment. Product availability, legality and suitability depend on the issuer, jurisdiction, governing documents and transaction-specific facts. Final legal and tax determinations remain with the issuer's bond counsel, tax counsel and other advisors.