CHICAGO — When it comes to direct bank loans, the profile of the borrower should determine disclosure standards, said panelists on a recent webinar hosted by the Council of Development Finance Agencies.
The webinar is part of a growing debate over transparency requirements in direct bank purchases, which are private loans to borrowers.
Private placements have spiked over the last year, with an estimated $13 billion of such transactions completed, according to Mark Brown, managing director at Bank of New York Mellon, who moderated the CDFA webinar. The trend has sparked concerns among some market participants over the lack of transparency. Borrowers are not required to report the transactions or financial terms of the loans.
For large borrowers that already have public debt outstanding, that poses a big problem for credit analysts, said James LeBuhn, a health care analyst at Fitch Ratings. Health care is one of the most popular sectors for direct bank loans.
“Our biggest concern about direct bank purchases is the fact that there’s no disclosure requirements,” LeBuhn said. “We feel that ongoing disclosure is a management best practice as it relates to our needs, and management best practice to [inform] all the stakeholders.”
Fitch in October published a report outlining the credit implications for borrowers of private placements. Analysts encourage issuers to disclose bank loans and their terms to the rater ahead of the transaction so that Fitch can accurately picture the borrower’s financial position. On the plus side, direct loans eliminate counterparty and remarketing risk, LeBuhn said.
Like the other panelists, LeBuhn said disclosure is less important when it comes to smaller borrowers, many of whom are unrated and rarely issue tax-exempt debt.
Small family-owned manufacturers that issue industrial development bonds are a prime example of a smaller issuer that would be hurt by municipal disclosure requirements, said Caren Franzini, chief executive officer at the New Jersey Economic Development Authority.
“The [IDB] program is the only national incentive we have to encourage advanced manufacturing to remain in the United States,” Franzini said. “We need to ensure that we’re creating the most affordable cost of capital to these small manufacturing borrowers. If we overlay the public disclosure requirements and the time and the money to do that, one, it becomes unrealistic, and two, that’s information that they consider confidential and it puts them in a less competitive position.”
Smaller issuers that should be exempt from disclosure requirements include IDB borrowers, nonprofits like Boys and Girls Clubs and YMCAs, panelists said. Larger borrowers like hospitals and colleges should be held to a different standard.
“A lot of the banks see more in terms of quantity of middle-market and small issuers, like IDBs and nonprofits,” said John Wooten, director at Wells Fargo Securities. “In most cases, small and mid-sized borrowers and nonprofits are unrated, and they don’t have the time, the sophistication, or the money [for disclosures or ratings]. These entities deserve separate treatment from the disclosure side.”
Wooten added that the rise in private placements is due in part to the disclosure requirements if a borrower is considering issuing variable-rate demand bonds backed by a letter of credit, the most similar public financing structure to a direct bank loan.
