WASHINGTON — The National Federation of Municipal Analysts released a paper on best practices in disclosure for bank loans, an opaque segment of the municipal debt market that is getting increased attention from regulators.
The new NFMA paper, released Tuesday, covers bank loans, direct purchases of bonds by banks, and other debt agreements between municipalities and banks. The NFMA, Municipal Securities Rulemaking Board, and other muni market participants have grown increasingly interested in the bank loan market, the size of which is difficult to know because those loans do not need to be explicitly disclosed the way bonds do. The MSRB has urged issuers to disclose bank loan and other non-bond debt on EMMA to give investors a better picture of an issuer's financial state, though they are not required to do so.
"It benefits obligors to release information that can be useful to the widest audience of investors," the NFMA said in its paper. "At a minimum, this means releasing all applicable documents for a particular transaction."
This would include the purchase agreement for a direct purchase of bonds or the loan agreement for a loan, NFMA said. A borrowing municipality should also disclose other documents referred to in that master agreement, and go beyond merely releasing the documents by preparing a summary for investors that includes the key features of the financing. The disclosure should take place as soon as possible after the closing of a loan, with EMMA as the best disclosure venue, the NFMA said.
It is important for analysts to have access to bank loan information so that they can determine how a loan obligation affects outstanding bond obligations, the paper explains.
"Obligors may face heightened liquidity risk from financial instruments with payment provisions that change upon the occurrence of certain events and that favor the bank loan provider over the obligor's capital market investors," NFMA said.
While NFMA didn't argue against municipal bank loans in its paper, it did warn that a lack of timely disclosure or the discovery of material risks in a disclosed transaction could spook investors.
"If an obligor does not disclose bank loans in a timely manner, certain investors may be unwilling to tolerate the uncertainty involved in holding such debt and may either sell current holdings or be unwilling to purchase newly issued bonds from that obligor in the future," the NFMA said.
"If material risks are discovered in a disclosed transaction, investors and rating agencies are likely to have concerns. It is important that the risks to credit quality are known by all parties and can be acted upon."
Some market participants have suggested that the Securities and Exchange Commission could add bank loans to the list of continuing disclosures required under its Rule 15c2-12, which is itself a hot topic on which the MSRB has called for a holistic reevaluation. If banks loans were included in regulation this paper would become obsolete; until then the recommendations would promote the health of the market, NFMA said.
"Consistent and uniform disclosure, regardless of the financing vehicle, is crucial to sustaining a stable municipal market," NFMA said.
The NFMA was part of a large muni market group coalition that released a bank loan paper in 2013. The group's leadership said the increasing popularity of this type of financing justified this new effort that began last year.
"The NFMA is focused on updating our papers to reflect developments in the market as needed," said NFMA chair Jennifer Johnston. "Given the rapid growth of this particular financing tool, we felt it was important to update our previous paper with what we've learned since 2013."
The NFMA is asking that comments on this paper be sent to NFMA executive director Lisa Good through May 3.
