Securities Law

Muni Groups Issue White Paper on Bank Loan Disclosure

A municipal bond market task force issued a paper on Wednesday urging state and local issuers and conduit borrowers to consider voluntarily disclosing certain information about bank loans.

Bank loans — a bank’s purchase of bonds directly from an issuer or direct loans a bank makes to an issuer — have become increasingly popular as an alternative to bond financing since 2009 because they can be structured with fixed or variable rates but do not need credit enhancement, which has been hard to secure in recent years.  In addition, there are no disclosure requirements or offering documents as with municipal bonds.

Growing concerned about the lack of disclosure on bank loans, the Municipal Securities Rulemaking Board issued a notice last year encouraging issuers to voluntarily post information about them on EMMA. The board said “the availability of timely information about bank loan financings is important for market transparency and promoting a fair and efficient market” and that bondholders and potential investors need such information to assess their muni holdings or make muni investment decisions.

The 10 groups, which included the National Federation of Municipal Analysts and National Association of Bond Lawyers, as well as dealer, banker, issuer, financial advisor and other organizations, joined together to help issuers and other market participants decide whether to disclose information about bank loans.

“This is a significant achievement, which demonstrates the industry’s commitment to reach consensus on a framework to analyze important disclosure issues,” said Allen Robertson, a shareholder at Robinson, Bradshaw & Hinton, PA who is to become NABL’s president in October. “This paper encourages careful consideration of making voluntary disclosure about bank loans, while acknowledging that issuers and borrowers may conclude not to provide voluntary disclosure about a particular bank loan depending on the facts and circumstances.”

If the issuer or borrower decides to disclose, the paper provides “ a comprehensive discussion ... about how, when and what information might be disclosed,” he said.

The NFMA and Government Finance Officers Association may follow up with drafting best practice documents that provide further guidance for issuers and other market participants, said Robertson and Lisa Washburn, a managing director at Municipal Market Advisors who is NFMA’s secretary.

In their paper, the groups said, “Because the incurrence of additional debt, including bank loans, is not one of the material events for which disclosure is required under Rule 15c2-12, holders of an issuer’s outstanding bonds may not become aware of a bank loan or its impact on the issuer’s creditworthiness until the issuer’s next financial audit is released or new bonds are sold.”

Rule 15c2-12 is the Securities and Exchange Commission’s rule on muni disclosure.

Bondholders and investors may want such information as whether the bank loan increases the issuer’s outstanding debt or whether certain assets previously available to secure bonds are pledged to the bank as security for the bank loan, the groups said.

The groups said issuers could voluntarily disclose on the MSRB’s EMMA system, documents relating to a bank loan, such as the loan or financing agreement.

An alternative would be for the issuer to disclose on EMMA a summary of some or all of the features related to the bank loan.

This information could include: the date of incurrence, principal amount, maturity and amortization, the interest rate; the purpose of the proceeds; any collateral or security pledge; related hedges such as swaps or caps; information about what would constitute a default and remedies, if different from outstanding bonds; any ratings; and terms under which the loan could be transferred or sold.

“The list is nonexclusive and the issuer is free to add or delete features,” the groups said.

The paper recommended voluntary disclosures be made in the same time frame as other material events under Rule 15c2-12, within 10 business days of the execution of the bank loan.



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