The Government Finance Officers Association’s debt committee is developing a new best practice paper for issuers on bank loans following the release of a recent industry paper recommending disclosures for bank loans.
Direct bank loans have become increasingly popular in the muni market since 2009 as an alternative to publicly offered bond issues. Bank loans can be structured with fixed or variable rates and do not need credit enhancement and have recently been replacing debt with expiring letters of credit.
The term “bank loan” includes fixed-rate loans with defined maturities and loans or lines of credit that have variable interest rates and flexible payment provisions, GFOA said in a draft of its best practices paper.
“We have been getting a lot of questions from our members who’ve been seeing a lot more of these types of transactions in the market,” said Susan Gaffney, a consultant to GFOA. “So we wanted to provide some guidance about what kind of things, like many of our other best practices, questions you need to ask, the risks involved, rewards, etc.”
In May, 10 groups including the National Federation of Municipal Analysts and National Association of Bond Lawyers published a report to help issuers and other market participants decide whether to disclose information about bank loans. There had been growing concern about the lack of disclosure on bank loans because there are no disclosure requirements or offering documents as with municipal bonds. The Municipal Securities Rulemaking Board raised concerns that, with the lack of disclosure, investors would not know if an issuer had bank loans that could affect its finances and credit.
This GFOA best practice would dovetail on that industry collaboration, said Ben Watkins, chair of the debt committee and director of the Florida division of bond finance. He said that paper was a “great example of voluntary collaboration of industry stakeholders to formulate the appropriate solution for an issue.”
“The best practice enforces and endorses the paper that came out in May,” he said. “Banks are a big player in the market today and this makes it particularly timely and relevant.”
Watkins said the best practice draft paper should be finalized in the next 60 to 90 days after the GFOA board votes on it.
The best practice draft is broken down into two sections: what issuers need to know about bank loans and what issuers should disclose if they enter into a bank loan agreement.
The GFOA recommends that governments considering entering into bank loans develop practices and procedures related to these financial products. Governments should also consult with their financial advisor and bond counsel before pursuing a bank loan, the draft said.
Some of the questions GFOA urges an issuer to consider include whether: a bank loan is a better fit than a financing offered in the public markets; it has retained outside professional help to determine the legality of the bank loan, the terms of the bank loan create a larger financial obligation near the end of the financing.
GFOA recommends that if an issuer voluntarily chooses to disclose information about a bank loan, it do so only for loans that may be important to active or prospective bondholders of the issuer’s debt with security similar to that of the security for the bank loan.
Voluntary disclosure of bank loans can be accomplished in two ways: either by posting the entire financing agreement documentation, or by preparing a summary of the material terms of the bank loan, the paper said.
GFOA said the information that should be included in a summary of material terms includes: issuance of amount and date; final maturity date; amortization schedule; interest rate if fixed; interest rate method of calculation; and use of proceeds.
