CHICAGO — Municipal bond market participants may agree that bank loan disclosure falls short but there's little consensus about how to improve it amid heightened regulatory scrutiny.
Bank loan disclosure poses different challenges for issuers, underwriters, investors and analysts, said panelists at The Bond Buyer's Midwest Municipal Market conference Tuesday in Chicago.
Bank loans and direct placements may offer some issuers a less costly and less cumbersome method to borrow but ratings agencies and investors are clamoring for more disclosure, especially on the terms of loans, so they can better understand credit and liquidity risks. While an issuer's financial statements often will report the existence of a loan, the disclosure of terms is voluntary.
"We care because we need to know what the whole credit looks like," said panelist Jane Ridley, a senior director in S&P Global Ratings' state and local government group.
That assessment extends beyond simple knowledge of the existence of a bank loan and entails knowing all the terms of the transaction including debt repayment acceleration triggers and the priority it's been given in an issuer's debt portfolio.
S&P in March reported on the results of a review of 126 bank loans totaling $5.16 billion that were obtained by different types of governmental issuers and nonprofit borrowers. While S&P found that the majority were negotiated with terms that did not seem problematic, the credit quality of five issuers was hurt by bank loan terms.
Those issuers had loan covenants that were lenient and did not have the adequate liquidity levels to handle situations where accelerated loan payments could be triggered by potential financial problems, S&P said.
For underwriters, the challenge comes with compliance and reporting responsibilities given that questions can arise over whether a transaction truly qualifies as a loan that is not subject to the same regulations as a security.
For municipal advisors, the concern is that the reporting of bank loans or privately placed securities undertaken by their issuer clients will fall on them based on a question asked in a concept release issued by the Municipal Securities Rulemaking Board. The MSRB is accepting public comments until May 27 on the concept release, which was issued in March. The board is trying to address the limited voluntary disclosures on bank loans posted on EMMA.
It's troubling that disclosure hasn't been adequate after a few years of industry professionals pressing for more, and "the [MSRB] proposal is helpful," said Lisa Washburn, a managing director at Municipal Market Analytics and chair of the National Federation of Municipal Analysts.
But Leo Karwejna, chief compliance officer at Public Financial Management Inc., believes the proposal may miss the mark.
"It's unfortunate" that the MSRB proposal would put the burden on municipal advisors as their "true purpose is serving the issuer," he said.
"There's a lot more discussion to be had," Karwejna said.
"While I think there is a problem….I think unfortunately this solution doesn't quite get us all the way" to a fix, said panelist Ivan Samstein, Cook County, Ill.'s chief financial officer and a member of the Government Finance Officers' Association's debt management committee. Not all issuers employ a municipal advisor and doing so for some would pose a costly burden.
The GFOA earlier this month posted an alert encouraging its members to both voluntarily disclose the terms of their bank loans and heed regulators' increased scrutiny of the lack of disclosure.
GFOA also warned members that if they use EMMA, they will have to be aware that the bank loan will not have a CUSIP and thus will have to be uploaded as "other information" connected with an already posted bond issue.
The alert also focused on the MSRB concept release, expressing significant concerns with the proposal, partly because municipal advisors are the only party in a municipal debt transaction with a fiduciary responsibility to issuers.
Many have urged the Securities and Exchange Commission to provide more guidance on bank loans, including when they could be considered a security and when municipal advisors working with issuers on them may be crossing over into broker-dealer activities.
Underwriters shouldn't get bogged down in an internal debate over whether a private or direct placement qualifies as a security or loan, several market panelists said.
From a technical standpoint, both are an underwriting, said panelist Robert Stracks, an attorney who is of counsel at Quarles & Brady LLP.
"Whether it's a loan or a security we don't want to be in a position where regulators come in" and make accusations that rules are not being obeyed, he said. "I urge everyone to be very careful."
A bottom line in the structure that differentiates a security from a loan is whether it's transferable in the public market and whether bank terms that give the debt liquidity are features of a security.
DeVona Wright Cottrell, associate general counsel at Robert W. Baird & Co., said the firm generally treats bank loans like securities so as not to potentially bump up against regulations.
For issuers, Keith Kolb, Baird's director of public finance, said whether a debt is in the form of a loan, placement, or offering "they are going to need to pay the price and have the professionals in place to guide them through the process."
