Market sees common ground in need for disclosure of alternative debts

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DENVER – Municipal market participants should work more closely to get any ultimate requirements from the Securities and Exchange Commission on disclosing issuers’ alternative debt more narrowly focused on the areas of disclosure the market generally agrees on, issuers and others said on Saturday.

The market participants made their comments during a portion of the Government Finance Officers Associations’ Debt Committee meeting on Saturday that focused on reactions to the SEC’s recent proposal to add two material events to its Rule 15c2-12 on municipal disclosure.

The debt committee meeting preceded the GFOA’s annual conference here, which runs through Wednesday.

The amendments contained in the proposal are designed to achieve a goal most municipal participants have supported – helping rating agencies, analysts and others obtain information about bank loans, private placements and other alternatives to publicly offered tax-exempt bonds that fall outside the current 15c2-12 disclosure requirements. But many in the market, outside of investors, have criticized it for casting too wide a net.

“Institutionally, I think we’re in a place where we’re largely in agreement as to the substance of what is needed,” said Ben Watkins, director of bond finance for Florida and an ex-officio member of the debt committee. “The problem is the implementation.”

The first new material event would require an issuer or borrower to file a notice if it incurs a financial obligation that is material or agrees to covenants, events of default, remedies, priority rights or similar terms “any of which affect securities holders, if material.” The proposal defines financial obligations as "a debt obligation, lease, guarantee, derivative instrument or a monetary obligation resulting from a judicial, administrative or arbitration proceeding."

Many participants say that such a broad definition of financial obligations coupled with the need to determine materiality without SEC guidance on the topic will cause issuers and dealers to shoulder large and unnecessary burdens.

The proposal would also create another new material event category requiring a notice to be filed for certain actions or events related to the financial obligation that "reflect financial difficulties" such as a default, event of acceleration, termination event, or modification of terms.

“The SEC, in the discharge of its responsibilities, [is] not even to the stadium yet,” Watkins said about the proposal. “They create a lot of noise unnecessarily around something that the industry can largely agree on.”

Michael Decker, managing director and co-head of munis with the Securities Industry and Financial Markets Association, noted that most market participants “aren’t griping about disclosing bank loans.”

“If the proposal said bank loans, direct placements and swaps, I think you wouldn’t hear so much pushback,” Decker said. “It’s the virtually unlimited aspect of the rule and the vagueness of what to treat as material and what not to treat as material that creates the problems.”

Jonas Biery, business operations manager for the Portland Bureau of Environmental Services and chair of the debt committee, offered an analogy to illustrate the issues that would come from such an expansive proposal.

“I’ve never met a regulator who didn’t want more regulation. I’ve never met an analyst who didn’t want more information. And I’ve never met a child who didn’t want more candy,” Biery said. “We know as adults that if you eat too much candy, you end up with a result that’s not the outcome you expect.”

Watkins specifically called on the National Federation of Municipal Analysts, which submitted a letter in support of the proposal, to help other market groups convince the SEC to narrow the scope of the amendments.

NFMA’s comment letter broke down the obligations the SEC discussed in its proposal into “debt obligations” like private placements, limited public offerings, and associated derivatives and “other financial obligations” like leases and guarantees. It said that disclosure for debt obligations should be made without the need for a materiality determination but that the SEC would be correct in making disclosure of other financial obligations contingent on their materiality.

Bill Oliver, industry and media liaison with NFMA, pointed to the differentiation the group made between different obligations as an indication that NFMA is less focused on the portion of the proposal that refers to other financial obligations.

“In the number of years I have been in this business, I don’t think I have ever seen capital or operating leases really affect credit quality,” Oliver said. Oliver added that NFMA would not like to see the concerns about the proposal being too broad torpedo the progress that could be made from getting key disclosures on issuers’ alternative debt.
“Jonas’ comment that an analyst never saw a piece of information he didn’t want, stop the presses, it’s not true anymore,” Oliver said.

Watkins told Oliver “it would be very helpful” if NFMA would be “very direct” with the SEC on its stance in future communications with the commission.

Gail Sussman, managing director with Moody’s Investors Service, echoed those sentiments, proposing that participants start “with what everybody does agree with.”
“Most muni analysts care most about bank loans, direct placements and anything else that might have pledges that could undermine the integrity of the security existing investors have,” Sussman said.

While the individuals at the committee meeting generally agreed with each other on the need to get bank loans and other alternative debt obligations disclosed, there were still a number of lingering questions about how best to get that disclosure to the analysts and investors who need it while not burdening issuers too much.

Several issuers noted that the information investors and analysts want is generally already contained in issuers’ comprehensive annual financial reports (CAFRs). Issuers also keep debt schedules that could be beneficial to those interested in the alternative financings, some committee members said. However, the amount of information about their debt that issuers disclose in their financial reports varies by issuer, meaning some disclose the terms of the debt while others only disclose basic information like the amount of the obligation, several committee members added.

Biery also noted that while disclosure is important to many issuers, especially those who sit on the debt committee, financial officers and other state and local government officials often have to weigh putting money toward something like disclosure and funding important government services.

“As finance officers, we’re responsible for making decisions every day about how we can most efficiently use very limited resources,” Biery said. “When we make decisions about how we spend government dollars, often disclosure is frankly not going to hit the top of the priority list.”

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