WASHINGTON — State and local governments of all sizes are using direct bank loans as an alternative to traditional bond financing, Standard & Poor's said Wednesday, renewing its call for more transparency surrounding bank debt.
The rating agency last summer warned in letters sent out to the roughly 24,000 issuers it rates that it now requires notification and documentation of any private debt issuer owe, including bank loan financings, whether or not that debt is rated by S&P. Issuers who do not reveal that debt to analysts could lose their ratings, S&P warned.
Direct loan, direct purchase, and private placement volume remains largely opaque because banks are not required to disclose those transactions. Municipal Market Analytics, then Municipal Market Advisors, said last year that total loan volume could be as much as $55 billion. S&P revealed a pie slice of that on Wednesday. "In 2014, Standard & Poor's evaluated the impact of 404 direct loans, with a par amount totaling $15.8 billion, on obligors' public debt ratings," the agency said in a release. "The loans ranged in size from less than $100,000 up to almost $1 billion. With few exceptions, the loans Standard & Poor's reviewed do not impair the rights and remedies of existing lenders or bondholders."
Of the 404 loans that the agency evaluated, 243 were tax-backed, appropriation, or water/sewer utility loans taken out mainly by local governments or local utility systems, S&P found. Those loans had a par amount totaling approximately $6.1 billion, and the average deal size was $25 million. The remaining 161 loans, totaling $9.8 billion, was concentrated in the higher education, health care, transportation and public power sectors, S&P said. The average loan size was $61 million.
Many market participants and regulators have called for improved transparency in this sector of the market, which has grown considerably in recent years because bank loans can often be faster and cheaper than a traditional debt offering.
The Municipal Securities Rulemaking Board encourages issuers to voluntarily report alternative debt on EMMA, and several members of the Securities and Exchange Commission have been emphasizing muni market transparency in recent months.
S&P said disclosure is necessary to determine if the loans have a credit impact on debt the agency rates, a key question for investors.
"Standard & Poor's continues to emphasize that disclosing the presence of these loans and their terms is critical to identifying those instances where the loans do compromise credit quality and existing bondholders' rights," S&P said. "Moreover, loan disclosure promotes transparency for all market participants, including the retail and institutional investors that use Standard & Poor's ratings."
