A wave of coronavirus disclosures to come

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Disclosures of credit rating changes and drawdowns on reserves, among others, are set to surge as issuers work to keep their finances in order during the pandemic.

So far there have been over 200 COVID-19 related disclosures, according to Diver by Lumesis, a financial technology company. Most of those disclosures have been voluntary so far, but late filings and rating changes are scattered throughout.

In the near future, the muni market should expect to see even more disclosures, said Dee Wisor, an attorney at Butler Snow.

“We will see more material event notices,” Wisor said. “Two of the imminent ones are rating changes and reserve draws. So there will be more of those material event notices for sure.”

Wisor expects those disclosures to come over the next several months.

Securities and Exchange Commission Rule 15c2-12 sets forth 16 disclosures such as unscheduled draws on debt service reserves reflecting financial difficulties, rating changes and bankruptcy. All of those disclosures are required if material. The rule also requires filings within 10 business days of an occurrence.

Under the rule, an underwriter in a primary offering of certain securities has to determine that an issuer has entered into a continuing disclosure agreement. That agreement commits an issuer to provide certain information to the Municipal Securities Rulemaking Board on an ongoing basis.

Dee Wisor, an attorney at Butler Snow, predicts more disclosure in the next few months specifically regarding rating changes and drawdowns on reserves.

Wisor said rating changes can be tricky for issuers because they are sometimes the last to know about them since rating agencies have a direct feed to the MSRB’s EMMA site where the updated ratings are displayed. Issuers have 10 days to file rating change notices and may get those in late if they don't see that there is a rating change.

Disclosures of draws on reserves that reflect financial difficulties are also looming, Wisor said, as well as bankruptcies.

“Bankruptcy is an issue that has to be disclosed and we may eventually see some of that,” Wisor said. “It may depend on the industry segment, but that’s another thing that will happen eventually.”

State and local governments have been heavily impacted by COVID-19, which has now killed more than 2,000 in the U.S. and infected more than 140,000 others. Many states and municipalities have responded to the pandemic by issuing stay at home orders, which has caused many issuers reliant on user revenues and sales taxes to face future financial challenges.

“For any issuer, their starting point should be to review their continuing disclosure undertakings because some of them may require more than the rule requires,” Wisor said. “The rule basically establishes a minimum baseline and then there are some of these undertakings that are more detailed and have more filings required.”

Though many issuers seem focused on voluntary disclosures, Barry Fick, executive director of the Minnesota Higher Education Facilities Authority, is telling his conduit borrowers to be cautious.

“I’m urging folks to be very cautious in that at this point it’s too early for anyone to have a really good handle on what the effects long term of coronavirus are going to be,” Fick said. “I’m sure there’s going to be some short-term problems, but you just don’t know. The last thing I want my folks to do is put something out there that will be incorrect, so you put out misleading information for investors.”

However, for material event notices, Fick expects schools to file under SEC Rule 15c2-12 Event 16, which is a relatively recent addition to the events list.

Event 16 says that in connection with their financial obligations, issuers have to disclose events which "reflect financial difficulties," such as a default or modification of terms.

Fick doesn’t expect specific disclosures like Event 16 until the fall or into 2021.

For now, schools borrowing from his authority have not filed material event notices such as rating changes because they are still looking to see how the virus will affect them, Fick said. Schools should know by mid-May what their financial situation will be so there will be an increase in disclosures then, Fick said.

“Pretty much every school has gone to online learning for the balance of the spring semester, so they are contemplating if they will or will not give refunds for room and board that are not being used and how much those would be and how much the financial effect of that would be,” Fick said.

Currently, schools are in a good position revenue-wise since they received second-semester tuition in December and January, Fick said.

“So most of them have plenty of cash, so it’s a question of how will it affect their full-year statements and they just don’t know that yet,” Fick said.

It is good practice now to review standard disclosure and municipalities should be prepared for unexpected challenges and risks to revenues and expenditures, said Peter Chan, partner at Baker McKenzie and a former SEC enforcement lawyer.

More disclosures will be drafted as municipalities figure out how the virus affects their financial health, he added.

“There’s a cascading effect that may become material, so I suspect that a lot of municipalities, to the extent they’re working on disclosure, have to take a close look to make sure whatever they’re saying reflects the current reality,” Chan said.

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