What Is a Certificate of Participation (COP)?
A certificate of participation (COP) is a type of financing where an investor purchases a share of the hire revenues of a program moderately than the bond being secured by way of those revenues. Certificates of participation are, because of this reality, secured by way of hire revenues.
A certificate of participation (COP) will also be referred to as a participation certificate.
Key Takeaways
- A certificate of participation (COP) allows investors to participate in a pro-rata share of a lease-financing agreement.
- A lease-financing agreement is used by a municipality or local government to acquire exact property.
- As opposed to bond participation, COPs pay investors by means of hire revenues as opposed to bond interest.
- COPs are again and again found in municipal financing as an alternative choice to muni bonds.
- A certificate of participation is also a tax-exempt lease-financing agreement.
Understanding a Certificate of Participation (COP)
A lease-financing agreement is used by a municipality or local government to acquire exact property. Underneath the agreement, the local government makes commonplace expenses over the annual renewable contract for the acquisition and use of the property. A lease-financing contract is normally made available inside of the kind of a certificate of participation.
A municipal government will normally issue muni bonds from which the proceeds from the bond investors may well be used to move via a mission. The certificate of participation is an alternative choice to municipal bonds through which an investor buys a share inside the improvements or infrastructure the government entity intends to fund.
The authority in most cases uses the proceeds from a COP to construct a facility that is leased to the municipality, releasing the municipality from restrictions on the amount of debt that they can incur. The COP contrasts with a bond, through which the investor loans the government or municipality money to be able to make the ones improvements.
COPs and Taxation
A certificate of participation is a tax-exempt lease-financing agreement that is introduced to investors as securities equivalent to bonds. In a COP program, a trustee is normally appointed to issue the securities that represent a percentage interest in the best to acquire expenses from the local government beneath the lease-purchase contract.
Patrons that participate on this gadget are given a certificate that entitles each investor to a share, or participation, inside the source of revenue generated from the lease-purchase of the property or equipment to which the COP is tied. The hire and hire expenses are passed right through the lessor to the trustee, who oversees the distribution of the associated fee to the certificate holders on a pro-rata basis.
Specific Considerations
Certificates of participation do not require voter approval and in addition may also be issued further in brief than referendum bonds. In addition to, COP financing is further complex and generally resembles bond financing. An underwriter of the COPs may well be required, as will various fiscal agents.
An original statement providing disclosure to investors will have to be approved by way of the municipal government and, normally, the government will have to contract to make continuing disclosures to SEC Rule 15c2-12 beneath the Securities Industry Act of 1934.
COPs are also used as credit score ranking equipment by way of banks to boost finances from other banks to be able to ease liquidity. Temporary-term finances are raised by way of issuing participation certificates that include sharing credit score ranking belongings with other banks. The velocity at which the ones certificates may also be issued may well be negotiable depending on the interest rate state of affairs.
What Is COP Debt?
COP debt is a certificate of participation debt. This kind of debt is issued by way of state executive and secured by way of revenues from leases; each equipment or property/facility. This allows state executive or local municipalities to boost financing for duties all the way through the jurisdiction and not using a wish to issue bonds/long-term debt.
Why Would Someone Acquire a Bond Over a Stock?
Patrons that make a selection bonds over stocks are looking for a confident and predictable income move, which bonds pay out at commonplace periods. In addition to, if bonds are held to maturity, then an investor receives once more all of the major amount. Bonds are a strategy to download income while preserving the initial investment.
What Are the Advantages of Municipal Bonds?
Municipal bonds are tax-exempt, they are used for positive ends, paying homage to building infrastructure inside a locality, they are fairly low chance with a low default fee, and they are moreover fairly liquid investments.
