Anxiety about SEC's MA order overblown

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Buy side analysts don’t buy that the Securities and Exchange Commission’s proposed exemptive order allowing municipal advisors to participate in some private placement activities would change the market’s makeup.

That consensus emerged in a series of interviews conducted by The Bond Buyer. Dealer groups have said that the proposed order would create incentives that would move a significant portion of the municipal market into the private placement space. The SEC received comments from muni market participants in December, and some expressed concern that the order as is would mean more private placements in the market with less protections for investors than are provided in public offerings.

“They (issuers) may go with a private placement where they might have gone public before, but I can’t see it having a real significant material impact,” said Joe Rosenblum, former director of municipal credit research at AllianceBernstein.

The SEC released a proposed exemptive order in October that would allow registered MAs to perform certain services to arrange private placement deals, without registering as a broker-dealer. Dealers have taken the position that such activities are de facto placement agent services, which regulators have said is the domain of dealer firms.

Buyers stay away from private placement deals compared to public offerings overall, which leads to a smaller group bidding on them, Rosenblum said. Public offerings are more advantageous for issuers, he added, and private placements can be tougher.

“It’s more advantageous to go the public route,” Rosenblum said. “You get a deal put together and you bring it out there and you try to get as many buyers as you can. Private placement tends to be those deals that are riskier and will have a harder time in the market and need a little extra effort to get them done.”

Rosenblum doesn’t see the dynamics between private placement challenges and public offerings changing significantly if the SEC order goes through.

If some issuers are on the margin of deciding between a public offering or a private placement, they could decide to go the private placement route, Rosenblum said.

Analysts say that the private placement market is relatively small. Private placements only made up about 3.3% of the municipal market in 2019, according to a Loop Capital report.

“The private placement section of the municipal market is very small and we have seen tremendous issuance of taxable debt in the last six months or in the public markets,” said Karel Citroen, head of municipal research at Conning, a global investment firm that invests on behalf of insurers and pension funds. “The private placement deals tend to be taxable, so you could make the observation that the uptick of taxable issuance has not translated in private placement deals in the municipal market.”

Therefore, Citroen said, he wasn’t sure that an exemptive order proposed by the SEC in October would mean more issuance in the private placement market.

“It’s another tool that the issuer may have already had in their tool bag, he said. Now they will be alerted to it by their financial advisors, but I’m not quite sure that that is reason enough for them to tap into the private placement market.”

Also, issuers that already have good access to capital markets will continue to issue their bonds publicly, Citroen said.

Unless the market changes, Citroen doesn’t see the SEC’s proposed order pushing MAs to issue more in the private placement market.

However, lower-rated issuers could view private placements as a good alternative to a public offering, where disclosure may be less stringent, Citroen said.

Some private placement deals could have better disclosures than investors would see in the public market, Citroen said. Investors can set the terms of the deal and ask for certain disclosures. Institutional private placement has well-established practices when it comes to due diligence, disclosure and legal documentation.

Patricia Healy, senior vice president of research and portfolio manager at Cumberland Advisors, does not see the SEC’s order changing the amount of private placement deals.

“The level of private placements (direct purchases) would not change that much just because an MA was allowed to market the placement since the MA is working in the best interests of the client,” Healy said. “It could possibly result in lower costs to the issuer to use only one agent; however, depending on the MA there may be additional services or experience the broker-dealer could provide.”

Some analysts see the concern that retail investors in the secondary market may end up with bonds sold in private placement deals.

“There are concerns that eventually these issues could get broken up and end up in retail hands and that’s always a problem,” said Bill Oliver, a retired buy side analyst. “A requirement to issue bonds in minimum $100,000 denominations for the life of the bond issue would help to address this concern.”

If MAs do decide to go the private placement route, it could mean less supply for retail investors.

“To the extent that part of the market is being siphoned off to an institutional investor, that would definitely affect supply,” Oliver said. “That would definitely limit the overall scope of the market to retail investors.”

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