CHICAGO - Disclosure remains a grey area in the growing direct placement market, market participants said at the Bond Buyer's Midwest Municipal Market Conference Tuesday.
A panel devoted to direct placements - an increasingly popular alternative to the traditional municipal bond market, in which debt is placed directly with a bank - centered almost entirely on the disclosure issue. There's no regulation requiring issuers or banks to disclose the amount of direct loans or the terms of the transactions. The market is estimated at $60 billion.
"We have not seen the development of standard practice from issuers," said Julie Seymour, partner, Nixon Peabody LLP. "The larger, more sophisticated issuers are aware certainly of the topic and have tailored their own disclosure to include disclosure of bank loans, and the [Government Finance Officers Association] has done a good job of framing the issue. But statistics show there isn't a routine protocol for the market."
The lack of disclosure, particularly regarding financing terms, which could include acceleration provisions or priority payment provisions, leaves other investors left in the dark.
"I have learned that you have to read every single word in every single document because something out there will affect you if certain things happen in the market," said Susan Dushock, senior vice president, Sun Trust Bank and with the National Federation of Municipal Analysts. "If I'm not satisfied with what I have in my hand, I won't buy the bonds."
Jane Ridley from Standard & Poor's said analysts need to know about an issuer's direct placements to understand the full credit picture. The ratings agency in 2014 sent a letter to the roughly 24,000 credits its ratings saying it now requires notification and documentation of all private debt.
"If it's direct purchase or something else - it doesn't make that much of a difference to us, we just need to know about it," said Ridley. "We can't do a good job if we don't know the terms and conditions of other transactions."
Ridley said acceleration provisions are one of the biggest concerns.
"It has liquidity implications," she said. "Do you have the cash on hand if there's an acceleration? A lot of this is likelihood, but we as rating agencies are worst-case-scenario people."
The Municipal Securities Regulatory Board and other groups have started to urge issuers to voluntarily disclose bank loans.
But voluntary disclosure often falls short, according to Lanny Schwartz, partner, David Polk & Wardwell LLP.
"Sadly in my perspective voluntary disclosure isn't really a very effective means of curing this problem," said Schwartz. "Obviously voluntary disclosure is going to be a hit and miss proposition, and many lenders and many issuers probably regard it as an advantage not to have to make this disclosure."
But issuers who don't disclose could risk turning off public market investors, Dushock warned.
"There are many deals that I pass by because I feel the disclosure is inadequate," she said. "I won't buy the bonds if I don't like what I'm seeing and if we already own them, I will have us sell out of that position."
