WASHINGTON – The Municipal Securities Rulemaking Board is urging a congressional task force to ensure Puerto Rico and its authorities follow five key principles with regard to their municipal debt, including voluntarily disclosing bank loans, alternative financings, and other information that could affect their debt or credit profiles.
Lynnette Kelly, the MSRB's executive director, laid out the principles in a seven-page letter sent to Sen. Orrin Hatch, R-Utah, the chair of the eight-member Congressional Task Force on Economic Growth in Puerto Rico, which was established under the PROMESA law.
She linked to the letter a number of MSRB resources as well as alerts and best practices from various market groups that Puerto Rico and its authorities could use to find more information.
The task force was created to identify current impediments that federal law and programs put on economic growth or health care coverage in Puerto Rico as well as recommendations to fix them. It is accepting submissions from interested stakeholders until Oct. 14 and must provide a status update on the information it has collected by the middle of September. It will then have to write a full report on its findings by Dec. 31.
Kelly said that an essential part of Puerto Rico's future economic growth will be reliable access to capital at a reasonable cost. The commonwealth is currently struggling with nearly $70 billion in debt and has faced a number of recent defaults.
"Given the territory's recent municipal bond default and restructuring, Puerto Rico and its bonding authorities will be working to increase investor confidence throughout its recovery," Kelly wrote. "These principles … can assist Puerto Rico issuers at all levels of government in maintaining reliable and cost-effective access to capital, and help assure that the path to economic growth is supported by a robust, transparent and fair municipal market."
She emphasized the importance of disclosure, both about bonds that have been issued and alternative financings like bank loans that do not require disclosure but can be an important piece of an investor's analysis of an issuer. It will be important for Puerto Rico and its authorities to "make timely and complete primary market and continuing disclosures throughout the life of [a] bond, facilitated by the use of effective policies and procedures," she said.
"The financial and operating status of an issuer of municipal securities is likely to change over time," Kelly said. "Whether the changes are positive or negative, disclosing timely, accurate, and complete financial information is critical for issuers, investors and the municipal market."
She added that in instances where audited financials are not available, Puerto Rico and its authorities should consider submitting unaudited or interim financial statements. The commonwealth has drawn criticism in the past, especially from Republican legislators, for failing to keep its financial statements up to date.
Kelly said Puerto Rico issuers should: identify required financial and operational disclosures; establish disclosure policies and procedures; schedule email reminders through EMMA for recurring disclosures; and make disclosures publicly available on EMMA, as they regularly provide financial disclosures to protect their future access to the muni market.
One way for issuers to ensure good disclosure is to fully utilize the MSRB's EMMA system, where issuers can customize their homepages and make it easy for investors to access relevant information, said Kelly. However, she cautioned that while EMMA allows issuers to meet minimum disclosure standards, issuers should also make more frequent voluntary disclosures to ensure enhanced investor confidence.
It is also important for Puerto Rico and other issuers to be aware of and consider possible alternatives to bond financing before issuing debt, she added. Puerto Rico and its authorities should specifically focus on the legal parameters surrounding the amounts and types of debt that are allowed to be issued, including under government policies. If the issuers decide to pursue municipal bonds, they should consider whether to sell them on a competitive or negotiated basis as well as how they want to assemble their financing team.
The commonwealth should institute training and make educational resources about the market and its oversight available to professionals at all levels of Puerto Rico's government, according to Kelly.
Puerto Rico and its authorities could require that their municipal professionals learn more about their obligations when accessing the market through resources like the MSRB's online education center. The center gives free access to resources such as webinars, podcasts, fact sheets, and other instructional documents that are designed to enhance participants' understanding of the market.
