CHICAGO — Government Finance Officers Association debt committee members on Sunday urged municipal issuers to consider disclosing information about their bank loans online on EMMA in the wake of a Municipal Securities Rulemaking Board notice requesting such information.
“As issuers interested in providing the best disclosure we can, you should always be erring on the side of over-disclosing,” Eric Johansen, the debt committee chair and former treasurer of Portland, Ore., told attendees during a session on bank loans at the GFOA’s annual meeting here. “Maybe you should be using the voluntary notification process that is built into EMMA in order to tell the market [that you have] financing that may not otherwise be visible.”
The MSRB “really does believe in the importance of market transparency; issuers should be concerned about that,” said Julia Cooper, acting treasurer of San Jose, Calif., an ex-officio member of the debt committee and a GFOA board member.
“Make it easy on yourself,” Cooper said about disclosing bank loan information. “Post information that is readily available.”
The session, titled “What’s Old is New Again: Bank Loans as a Financing Tool,” addressed the increased use by municipalities of bank loans, which are direct loans from banks to issuers.
Because securities regulators do not currently require issuers to disclose information about bank loans, hard data showing the growth of the loans remains scarce.
“Historically, these have not been reported in any systematic manner, so it’s been hard to figure out how much of this activity is going on,” Johansen said. But he estimated that the direct loan market increased to roughly $40 billion last year from $10 billion in 2009. That’s still a “small fraction” of the municipal bond market, he noted.
Though issuers have used direct bank loans for years, the boom in their use has caught the attention of securities regulators, analysts and other groups.
In April, the MSRB issued a notice urging issuers to voluntarily disclose information about bank loan financing on the EMMA system. The board said increased transparency of bank loans will help ensure investors have access to key information when making investment decisions. Market participants have been concerned that without information on bank loans, they are not getting the whole financial picture that exists for some state and local government muni bond issuers.
“We are beginning to hear a lot more concern from the marketplace about issuers needing to report,” Johansen said.
GFOA has responded by starting work on a paper that will provide issuers with guidelines on how to disclose bank loan information. Johansen did not say when the guidelines would be complete, but added that the paper will likely follow the release of bank loan guidelines being developed by industry groups such as the National Federation of Municipal Analysts.
Cooper said bank loans, once popular primarily with small issuers, are increasingly being used by large municipalities. In many cases, issuers are taking out loans for projects that, in the past, would have been financed with bonds.
The loans are popular partly because bond insurance and letters of credit, which are commitments by banks to pay the principal and interest on an issuer’s debt, are increasingly difficult to secure, she said.
In addition, bank loans can be attractive because there are no mandatory disclosure requirements, and issuers do not need to write an initial offering document, which can be costly and time-consuming for staff, she said.
Cooper said San Jose recently selected a bank to provide a short-term loan for up to $125 million for its annual cash-flow borrowing needs. In 2010, the city received $93 million in bank financing to repay a term loan and loans made in connection with affordable housing.
Johansen noted that bank loans tend to have higher interest rates and shorter maturities — usually no longer than 15 years — than bond issues, which often have maturities of 30 years. But there can be savings — sometimes, banks will make loans without requiring issuers to receive ratings from credit agencies, which charge issuers for their ratings. He said 5% of Portland’s debt is financed through bank loans.
Another speaker at the session, Timothy McKeon, senior vice president and managing director of U.S. Bank, said bank loans are increasingly popular among some banks, too.
That’s partly because new regulations, including those mandated by the Dodd-Frank Act and a new international Basel III agreement, impose higher capital requirements on banks, increasing banks’ expenses for guaranteeing municipal debt.
“Bank regulations … are still becoming far more onerous, increasing the cost of providing liquidity.” McKeon said.
Some banks, including those that once focused on providing letters of credit, are now viewing direct lending as an attractive option — one that lets them lower their costs. Banks that have recently been downgraded may also see direct lending as an attractive alternative because issuers may not ask them to guarantee their bonds.
“Regulatory changes are pushing the banks towards offering direct lending, and [the existence of] fewer highly rated banks is pushing issuers to consider direct lending,” McKeon said.
Meanwhile, speakers at another session called “Derivatives: What Now,” said derivatives can be an effective means to manage risks associated with fluctuating interest rates.
Nathan Flynn, director of the infrastructure and investment banking group at William Blair & Co., said new regulations of the derivatives market have been a positive step towards protecting issuers.
Among those regulations are requirements that swap dealers register with the Securities and Exchange Commission, disclose their roles in transactions as well as conflicts of interest, and adhere to anti-fraud standards and other rules.
In addition, the MSRB’s recently approved interpretive guidance for Rule G-17 on fair dealing will require underwriters to disclose to issuers any potential risks associated with complex financing arrangements.
Still, Flynn said issuers should be cautious before entering into derivative or swap agreements. He added that smaller issuers that have derivatives contracts will have a greater portion of their debt exposed to risk.
“I’m a swap advisor, but I really think you can’t beat good, old-fashioned fixed-rate debt,” Flynn said. “You can get caught up in the sizzle of some of these complex financial transactions.”
