WASHINGTON — The Municipal Securities Rulemaking Board is urging muni bond issuers to voluntarily post information about their bank loan financings on the EMMA system.
The MSRB made the request in a notice issued Tuesday, saying the transparency of bank loans, which in many ways can resemble bond issues, will help ensure investors and others have access to key information when making investment decisions.
At the same time, the National Federation of Municipal Analysts said it is partnering with other groups to develop its own best-practice disclosure guideline for bank loans.
The MSRB said investors often are unaware of issuers’ bank loans, or how they impact municipalities’ finances, because securities regulations generally don’t require issuers to disclose information about bank loans.
“The MSRB believes that the availability of timely information about bank loan financing is important for market transparency and promoting a fair and efficient market,” the board said in a release. “Voluntary submission of information concerning bank loan financing through EMMA would provide timely access for bondholders, potential investors and other market participants to key information useful in assessing their current holdings of municipal securities, or in making investment decisions.”
Issuers have increasingly turned to bank loans in order to meet financing needs, the board said. Experts agree — the number of bank loans is rising. But they say lax reporting requirements make tracking trends and collecting hard data difficult. Mark Brown, managing director at Bank of New York Mellon, said at a webinar in January that bank loans have spiked recently, with an estimated $13 billion transactions completed last year.
Industry groups largely support increased disclosure of bank loans, but are calling on regulators to provide more guidance about when a bank loan is considered a municipal security.
The MSRB has asked the Securities and Exchange Commission to weigh in on this. But board executive director Lynnette Kelly said Tuesday that the SEC has not yet responded.
The board warned market participants in an advisory notice last September that some bank loans “may, in fact, be municipal securities.” Making the determination can be “difficult,” but the issue was addressed in the 1990 U.S. Supreme Court case Reves v. Ernst & Young, the notice said. The court determined a loan is presumed to be a security unless its note is a type identified as a non-security, such as a consumer financing note, business loan or home mortgage. Loans may also be non-securities if they have a strong resemblance to non-securities.
Mike Nicholas, chief executive of Bond Dealers of America, said bank loans are “highly relevant to an issuer’s financial condition and investors, and the markets need to receive information about them in a timely manner.”
He added that BDA wants the MSRB and the industry to “craft more congruent rules regarding bank loans and municipal securities so that there can be as much information available publicly about bank loans as there is for bonds.”
Leslie Norwood, co-head of the muni division at the Securities Industry and Financial Markets Association, called the move “a good step” that will make EMMA, the online Electronic Municipal Market Access system, more useful.
But she added: “Clarifying the roles of the parties, as well as the products, is critical to the industry understanding their duties and responsibilities. SIFMA feels it is important for the SEC and MSRB to clarify the differences between bank loans and securities.”
The issue of bank loans came up at an MSRB roundtable for muni market groups in January, said Lisa Washburn, a board member for the NFMA. Washburn, managing director of Concord, Mass.-based Municipal Market Advisors, said since that meeting, the NFMA has been trying to develop best-practice disclosure guidance with the help of SIFMA, the National Association of Independent Finance Advisors, the Government Finance Officers’ Association, the National Association of Bond Lawyers, the National Association of Health and Educational Facilities Finance Authorities and the Investment Company Institute.
“Because of the impact it can have on other bondholders, we think it’s important that information about these direct loans be disclosed,” Washburn said.
Susan Gaffney, director of GFOA’s federal liaison center, said best-practice guidelines will “help our members understand the risks and rewards with these types of financings.”
Rating agencies have also called for better bank-loan disclosure. Sarah Repucci, senior director in the credit policy group of Fitch Ratings, said bank loan disclosures are critical to evaluating an issuers’ financial condition. “We’d like to see what these documents contain. We want to be able to determine if these loans could have any impact on credit quality of the issuers,” she said.
Fitch issued a report in October 2011 calling on issuers to disclose bank loan information. The report noted the increased use of bank loans and said they are often used to refinance variable-rate demand bonds.
But some issuers are urging regulators to take a cautious approach. Robert Donovan, executive director of the Rhode Island Health and Educational Building Corp., said he supports additional transparency, but questioned whether broad guidelines can be practically applied to such a diverse range of issuers. He fears that some small borrowers, such as local hospitals that have fewer staff and resources, will struggle to comply with the guidelines and deadlines.
“The municipal marketplace is not one size fits all,” he said. “You can strive for best practices, but I don’t think you can lose sight [of the fact that] some can’t … meet these standards.”