Certificate of Participation (COP)
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 lease revenues of a program instead of the bond being secured by those revenues. Certificates of participation are, in this way, secured by lease revenues.
A certificate of participation (COP) can likewise be alluded to as a participation certificate.
Figuring out a Certificate of Participation (COP)
A lease-financing agreement is utilized by a municipality or neighborhood government to procure real property. Under the agreement, the nearby government makes standard payments over the every year renewable contract for the acquisition and utilization of the property. A lease-financing contract is ordinarily made accessible as a certificate of participation.
A municipal government will commonly issue muni bonds from which the proceeds from the bond investors will be utilized to go through a project. The certificate of participation is an alternative to municipal bonds wherein an investor buys a share in the improvements or infrastructure the government entity plans to fund.
The authority for the most part utilizes the proceeds from a COP to develop a facility that is leased to the municipality, setting the municipality free from limitations on the amount of debt that they can cause. The COP stands out from a bond, in which the investor loans the government or municipality money to make these improvements.
COPs and Taxation
A certificate of participation is a tax-exempt lease-financing agreement that is sold to investors as securities looking like bonds. In a COP program, a trustee is regularly selected to issue the securities that address a percentage interest justified to receive payments from the nearby government under the lease-buy contract.
Investors that take part in the program are given a certificate that qualifies every investor for a share, or participation, in the revenue generated from the lease-acquisition of the property or equipment to which the COP is tied. The lease and lease payments are gone through the lessor to the trustee, who manages the distribution of the payment to the certificate holders on a pro-rata basis.
Special Considerations
Certificates of participation don't need elector approval and furthermore can be issued more rapidly than mandate bonds. Likewise, COP financing is more complex and generally looks like bond financing. An underwriter of the COPs will be required, as will different fiscal agents.
An official statement providing disclosure to investors must be approved by the municipal government and, generally speaking, the government must contract to make continuing disclosures to SEC Rule 15c2-12 under the Securities Exchange Act of 1934.
COPs are additionally utilized as credit instruments by banks to raise funds from different banks to ease liquidity. Short-term funds are raised by giving participation certificates that include sharing credit assets with different banks. The rate at which these certificates can be issued will be negotiable relying upon the interest rate scenario.
Features
- A lease-financing agreement is utilized by a municipality or nearby government to gain real property.
- A certificate of participation is likewise a tax-exempt lease-financing agreement.
- Rather than bond participation, COPs pay investors through lease revenues instead of bond interest.
- COPs are normally found in municipal financing as an alternative to muni bonds.
- A certificate of participation (COP) allows investors to partake in a pro-rata share of a lease-financing agreement.
FAQ
What Is COP Debt?
COP debt is a certificate of participation debt. This type of debt is issued by state specialists and secured by revenues from leases; either equipment or property/facility. This allows state specialists or nearby municipalities to raise financing for projects inside the jurisdiction without giving bonds/long haul debt.
What Are the Advantages of Municipal Bonds?
Municipal bonds are tax-exempt, they are utilized for positive closures, for example, building infrastructure inside a region, they are genuinely low risk with a low default rate, and they are likewise genuinely liquid investments.
How could Someone Buy a Bond Over a Stock?
Investors that pick bonds over stocks are searching for a guaranteed and unsurprising income stream, which bonds pay out at normal stretches. Furthermore, on the off chance that bonds are held to maturity, an investor receives back the full principal amount. Bonds are a method for getting income while saving the initial investment.
