WASHINGTON – Most issuers that obtained bank loans in 2015 did not hurt their credit quality, but some had bank loans with terms that adversely impacted credit quality. Increased disclosure of bank loans obtained, as well as their terms, is needed, according to a Standard & Poor's report released on Wednesday.
The report compiles information from a review of 126 bank loans totaling $5.16 billion that were obtained by different types of governmental issuers and nonprofit borrowers. While S&P found that the majority of the 126 were negotiated with terms that did not seem problematic, the credit quality of five issuers was hurt by bank loan terms. Those issuers had loan covenants that were lenient and did not have the adequate liquidity levels to handle situations where accelerated loan payments could be triggered by potential financial problems, S&P said. One issuer's outlook was revised to stable from negative because it revised its loan documents.
The issuers with bank loans that were not downgraded by S&P had at least one of the following: negotiated terms that were consistent with the issuers' existing credit quality and current liquidity positions; a financing structure that did not present material liquidity risks; and loans that did not explicitly or implicitly subordinate other liens or give preferential rights to banks.
Loans secured by hospitals and other health care providers made up the largest portion of the data pool by dollar amount, with 43 loans totaling $2.4 billion. Loans secured by a variety of special taxes as well as general obligation and appropriation pledges made up the second largest portion with 46 loans totaling $759.8 million. Bank loans obtained by schools, not-for-profit institutions, utilities, and transportation entities were also represented in the study.
S&P has been concerned about the bank loans obtained by public finance issuers for several years and has published similar studies over that time, including one for 2014 that analyzed $15.8 billion of loans.
In April 2014, the credit rating agency sent a letter to the roughly 20,000 issuers it rates asking them to disclose any bank loans they have, said Geoffrey Buswick, one of the analysts who wrote the report.
Buswick and the other authors observed that issuers across the municipal finance market continue to meaningfully use bank loans as an alternative financing product to manage their debt profiles for various reasons. Despite that fact, they said, analyzing the public finance bank loan market remains a challenge because bank loan disclosure is only voluntary as bank loans do not meet the regulatory definition of securities.
Buswick said issuers are more diligent in sharing their information now than they were several years ago. But the report stresses that issuers could help identify cases where loans affect credit quality, while also promoting overall transparency in the market, if they continue to increase the number of bank loans they disclose.
"There's no police state obligation to force [issuers] to share them with us or the market, but we think it is a best practice to disclose to us and the broader market," Buswick said.
