JACKSONVILLE, Fla. — Municipal issuers should disclose direct lending purchases such as private placements with banks to avoid credit concerns, panelists said here Tuesday.
The deals with banks give issuers access to capital in a new and less costly way, though they can include terms that impact issuers' ability to pay debt service, subordinate outstanding bonds, and accelerate repayment of debt, attendees at The Bond Buyer's Financing Municipal Utilities conference learned.
The growing private loan market was highlighted in May when Standard & Poor's sent letters to about 24,000 rated issuers requiring them to notify the agency and provide documentation about any privately placed debt they owe, including bank loan financings.
The requirement is not designed to interfere with issuers' access to capital but "just to make sure it is incorporated in ratings," S&P managing director Geoffrey Buswick said at Tuesday's conference.
Buswick said S&P wants issuers to provide documents at least seven days before closing, or as much as 30 days if possible, so the agency has enough time to consider implications of the terms and factor them into the ratings.
"If we're putting out a rating that we say is current, we want to be able to back up that statement," he said.
A burgeoning problem is that direct bank placements have proliferated, and some have widely varying terms, panelists said.
Yet, they are not securities regulated by the Securities and Exchange Commission, and nothing in the rules of the SEC or Municipal Services Rulemaking Board requires them to be disclosed, said Richard Cosgrove, a partner at Chapman and Cutler LLP.
As a result, Chapman has "strongly" advised its clients to consider voluntary disclosure, he said, adding that sensitive information can be redacted.
Though the MSRB recommends that direct bank purchases be disclosed, the agency has no jurisdiction over issuers, Cosgrove said.
The National Association of Bond Lawyers encourages their disclosure as part of issuers' best practices, he noted.
The release of S&P's letter in May has placed more attention on the issue, he said, noting, "We think it plays an overall important role in municipal finance."
Banks are being "very aggressive," in offering the products, which can lead to inconsistencies in their terms, particularly among less sophisticated issuers, said Scott Allison, a director at the U.S. Bank Municipal Securities Group.
Some products were offered following the market crisis in 2008 when issuers needed to replace letters of credit for their variable-rate debt as rating downgrades occurred among bond issuers and some banks.
Allison said the industry has seen direct purchases jump from $50 billion to $75 billion to solve the LOC problem, though the sector is also growing to provide issuers new money for capital since the use of floating-rate notes is not as attractive as it used to be.
Additionally, banks have been pressured to lend money, and with little volume coming to market now they are also "chasing" that low volume, he said.
"Until banks are forced to comply with Basel III, we will still see in the next year or two great incentives to loan money," said Allison. He also predicted that direct purchases by banks would continue to develop for new money.
By the end of 2019, all banks are required to fully implement Basel III, which imposes stronger liquidity coverage ratios by holding minimum amounts of high-quality liquid assets that can be converted quickly into cash. Some larger banks have already completed the process.
