A bump in overall municipal issuance in October caused the number of deals using a temporary exemption that allows municipal advisors to arrange certain private placements, to increase nearly threefold, sources say.
A data disclosure report released by the Securities and Exchange Commission earlier this month shows that the number of issuers using the temporary conditional exemption rose to 101 from Oct. 1 to Nov. 30. In the last reporting period from Aug. 1 to Sept. 30, there were 35 issuers using the TCE. The TCE allows MAs to facilitate certain private placement deals without needing to register as broker-dealers.
“It does not surprise me that we saw a big increase and I think that’s from the number of issuers that were trying to get ahead of the election,” said Tim Sutton, director of bond pricing at BakerTilly.
In October 2020, there was $72.2 billion of issuance compared to September with $52 billion. The SEC did not immediately comment as to how much was issued using the TCE in November.
Also since the onset of the TCE in June, MAs have gotten more comfortable using it, sources said.
“More MAs are more comfortable and have gotten the policies and procedures in place,” Sutton said. “You tie that in with the swamp of issuance that came.”
The TCE allows MAs to engage in certain solicitations on behalf of issuer clients. It is subject to a variety of conditions to protect investors such as limiting qualified providers to banks, banks affiliated with credit unions and banks engaging in commercial lending and financing activities, such as an equipment lease financing corporation.
MAs that use the TCE have to provide notice to staff in the SEC Division of Trading and Markets, which is where the data comes from. The TCE ends on Dec. 31, 2020, though some sources would like to see it extended.
“What the data shows is that there is a need for this to continue and there is demand for this to continue,” Sutton said.
The National Association of Municipal Advisors also wants to see the TCE continue.
“We are hopeful that at some point the exemption will be made permanent so that MAs can continue to serve their clients well,” said Susan Gaffney, NAMA executive director.
The lowest aggregate principal amount for the TCE was low, at $38,950, which sources say was likely for an equipment lease or police car, for example. The highest aggregate principal amount was $18.28 million. The maximum allowed for the TCE is $20 million.
The median issuance principal amount stayed stagnant compared to the last reporting period of about $2.2 million.
The number of deals using the TCE is still small to the private placement market. The private placement market had $19.7 billion of issuance so far in 2020.
Bond dealers say that the SEC shouldn’t permit MAs to act as placement agents without registering as broker-dealers. The Securities Industry and Financial Markets Association is in the process of suing the SEC to block the TCE since the Commission did not solicit stakeholder’s input and was “arbitrary and capricious.”
The TCE is still not widely used, said Michael Decker, senior vice president of policy and research at Bond Dealers of America, and the pandemic is not limiting access to the market. When the TCE was initiated in June, SEC Chair Jay Clayton argued that many issuers faced declining revenue or delays in collecting it, and faced increased nonbudgeted costs as a result of COVID-19.
“In our view, it’s still being underutilized,” Decker said. “The volume of transactions that were sold using the exemption was really tiny during this period compared to the total issuance of this period.”
