A credit rating agency wants borrowers to shine more light on a practice they’ve been using increasingly to issue debt.
Direct bank purchases — private loans to a municipal bond issuer — have increased rapidly in number over the past 12 to 24 months.
Direct purchases this year total roughly $13 billion, according to estimates discussed at a Bond Buyer conference earlier this month, but a precise amount is difficult to determine because few borrowers disclose deals in a timely manner.
Fitch Ratings on Tuesday became the latest rating agency to publish a report assessing the credit implications of the growing sector.
Because these deals are private, Fitch noted, the issuer isn’t bound by public disclosure requirements and doesn’t have to submit loan documents to the Municipal Securities Rulemaking Board’s online EMMA system.
But Fitch urges borrowers to make details of private loans known to the broader market so investors and rating agencies have an accurate picture of an issuer’s outstanding debt.
Direct purchases represent “additional debt or a change in debt structure, and that can have an impact on outstanding credit,” said Richard Raphael, a managing director at Fitch. “We and the market need to be informed when such a transaction occurs so they can analyze if there’s any impact on existing credit.”
Some issuers see opportunity in the lack of disclosure requirements. When American University needed $75 million for some construction costs last June, it found that weaker disclosure requirements meant it could put together the transaction more quickly and with less paperwork.
The university tapped JPMorgan for a 10-year bullet issue — a longer duration than most retail buyers of bonds prefer — and attained cheaper financing than what was offered via the capital markets. The single-A borrower paid a 4.19% interest rate, payable monthly and due in June 2021.
“Part of the benefit to us was that there was less disclosure requirement,” Laura McAndrew, the university’s senior director of treasury management, told the Bond Buyer conference. “The banks can’t require the disclosure, at this point. It may come in the future, but the benefit to us was the limited disclosure.”
American University’s fiscal year ends April 30. When it published its annual financial report in August, it included details of the June transaction in a “subsequent events” footnote so investors and rating agencies would be fully aware of its situation.
McAndrew feels that disclosure is sufficient, as the transaction is private and so doesn’t require a rating.
Sitting next to McAndrew at the conference was Mary Peloquin-Dodd, senior analytical leader at Standard & Poor’s. She confirmed that rating agencies often don’t hear about these private placements until after they are complete, and expressed reservations about the lack of communication.
“You don’t want to keep the rating agency people in the dark,” Peloquin-Dodd said.
Similarly, the Fitch report calls it “imperative” that issuers promptly notify rating agencies when they take on new debt.
Aside from disclosure issues, the Fitch report noted several positives about the growing sector.
Direct purchases increase issuers’ access to credit and liquidity, Fitch said, and they represent an alternative to variable-rate demand bonds. This is due to the fact that they eliminate counterparty and remarketing risks, and limit refinance risk.
As for the market’s opacity, Sarah Repucci, a senior director with Fitch, said banks purchasing the debt can do little more than encourage transparency among clients.
“They have a role in encouraging it,” Repucci said. “But they don’t have a right to require it or demand it.”
