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Securities Law

Groups to Issue Bank Loan Disclosure Guidance in Early 2013

DEC 3, 2012 3:19pm ET

WASHINGTON — A diverse group of associations with ties to the municipal bond market expects to publish a paper early next year that will give state and local governments guidance on how and when to disclose loans they receive directly from banks.

Led by the National Federation of Municipal Analysts, the effort comes amid increased regulatory scrutiny of "bank loans" by the Municipal Securities Rulemaking Board, which urged muni bond issuers in April to voluntarily post information about them on its EMMA system.

Lisa Good, NFMA executive director, said the groups expect to release a draft of the guidance in the first quarter of 2013.

NFMA is working with the American Bankers Association, Bond Dealers of America, the Government Finance Officers Association, the Investment Company Institute, the National Association of Bond Lawyers, the National Association of Health and Educational Facilities Finance Authorities, the National Association of Independent Public Finance Advisors and the Securities Industry and Financial Markets Association. Many of those same associations collaborated on pension disclosure guidance that NABL released in May.

Lisa Washburn, who is heading the effort as co-chair of NFMA's industry practices committee, said the guidance will provide a framework for issuers and their counsels to use when deciding whether to voluntarily disclose the loans.

Washburn, who is also a managing director at Municipal Market Advisors, said the existence of new bank loans, or loans that restructure existing debt, can be a critical aspect of an issuer's financial condition and credit assessment.

But because the Securities and Exchange Commission's Rule 15c2-12 on disclosure does not require issuers to disclose bank loans, analysts and other market participants sometimes don't know about them until issuers file annual financial statements, she said.

Issuers often don't file audited financial statements for six to 12 months after the end of their fiscal years, meaning the loans might not be discovered by analysts until a year-and-a-half after they were issued, Washburn said.

NFMA has been interested in timely disclosure of bank loans for years, Washburn said, and the joint industry effort arose from an MSRB industry roundtable in January.

NFMA's Good estimated the groups have held at least eight conference calls on the topic since March. She said the effort "builds" on the MSRB's April notice, which provided instructions to issuers on how to disclose bank loans on the EMMA system.

The MSRB said timely disclosure of bank loan information can improve market transparency and efficiency, as well as provide investors with information they need to make informed investment decisions.

Scott Lilienthal, president of NABL, said the paper will not dictate specific actions, but will include "considerations" for issuers who have bank loans.

Experts say state and local governments are increasingly receiving financing directly from banks, but lax reporting makes tracking the trend difficult. Bank loans have increased in popularity as letters of credit and bond insurance have become increasingly difficult to secure, they say.  In addition, bank loans can be attractive because they are not subject to disclosure requirements and issuers do not need to write initial offering documents.

In June, Eric Johansen, GFOA's debt committee chair and former treasurer of Portland, Ore., estimated the bank loan market had increased to roughly $40 billion in 2011 from $10 billion in 2009.