SAN FRANCISCO — A new California law requiring municipal debt issuers to disclose their bank loans is positive for the entire municipal market, as well as state issuers, according to a research paper from Municipal Market Advisors.
"In theory, it should make for a more informed municipal market as investors now have better credit knowledge of California issuers and should lower borrowing costs as a result," said MMA, an independent municipal bond strategy, research and advisory firm.
When the law goes into effect next year, investor comfort with issuers will likely improve because they will have more information on non-reported borrowings long after the transactions have closed, according to the report, released Monday.
Gov. Jerry Brown signed the legislation, which expands on current disclosure requirements, into law July 23.
Existing law requires issuers of debt to file a report with the California Debt and Investment Advisory Commission with 45 days of signing a bond purchase contract.
Starting Jan. 1, the law will also include disclosure of direct loans, along with other debt transactions, and shorten the amount of time that issuers have to file the information to 21 days.
The State Treasurer's Office said some state issuers had already been making bank loan disclosures under existing law, but the new law will make sure there is no ambiguity of what issuers are required to disclose.
"From the state's perspective, this is also a positive as the Treasury department will have more information about the financial agreements that local issuers are engaging in," MMA said. "Moreover, this is a great step in achieving greater transparency in this opaque part of the marketplace."
Concerns over bank loan disclosure have increased nationwide, as municipal issuers increasingly have used non-traditional financing. Disclosure of such financings is not required under Securities and Exchange Commission Rule 15c2-12.
MMA estimates that between $40 billion to $50 billion of these direct purchase arrangements will take place in 2014.
Credit rating agencies have also noticed the growing trend, and Standard & Poor's recently started to require notification and documentation of any private debt from issuers.
The agency told issuers that such financings potentially carry considerable credit risk, and if they do not disclose direct loans, they could face negative ratings actions.
California's recognition that these loans are as important as bond sales is prudent, MMA said, and it's a theme that other states should follow.
"Given the major ratings agencies' increased focus on direct purchases, issuers should take note of the growing trend toward better disclosure of all financings impacting outstanding municipal debt," the report said.
