SAN FRANCISCO — A new law that will require municipal issuers in California to disclose their private placements and bank loans is positive for investors, Moody's Investors Service said in a report released Friday.
The new law, Assembly Bill 2274, was signed by Gov. Jerry Brown on July 23 and will go into effect on Jan. 1.
It revises existing law requiring issuers of debt to file a report with the California Debt and Investment Advisory Commission within 45 days of signing a bond purchase contract. The new law clarifies that reports should include direct loans and other bank transactions, and shortens the amount of time that issuers have to file to 21 days.
"The law is highly beneficial to investors and analysts because it provides transparency to an area of the municipal market that can pose risks to traditional fixed-rate public debt investors," Robert Azrin, vice president and senior analyst at Moody's, said in a report. "With California (Aa3 stable) historically a top three issuer of municipal debt, the law may prompt other states to adopt similar laws around disclosure."
Direct lending arrangements, including private placements and direct loans from banks, have increased significantly in the past several years.
Moody's estimates that direct loans to municipal and not-for-profit borrowers have increased by approximately $60 billion to $116 billion during the past five years.
Direct loans are attractive to issuers due to banks' low funding costs and highly liquid balance sheets, relatively lower upfront costs of these loans versus public bonds, and a lower regulatory burden.
Many bank loans have replaced publicly issued variable rate demand bonds supported by credit and liquidity facilities provided by commercial banks. Direct loans usually include defaults and remedies, including acceleration rights, similar to those included in public VRDB support facilities.
"By mandating the disclosure of direct loans and submission of certain key financing documents to CDIAC, the new law provides investors and analysts with a fuller picture of the risks in their portfolio of public bonds," Azrin wrote.
Current disclosure requirements nationwide for direct loans are poor. Issuers can voluntarily post the information on the Municipal Securities Rulemaking Board's EMMA website.
Absent disclosure on EMMA, investors must rely on a review of an issuer's annual financial audit to identify new financings. However, such information is usually not published until six to nine months after the fiscal year-end.
"The awareness of this type of debt allows investors to better monitor the risks and incorporate them into their own credit assessments," Azrin said. "With more timely and complete information, investors will benefit from pricing and yields that more appropriately reflect the actual risks embedded in their debt portfolio."
