WASHINGTON — Standard & Poor's is urging municipal bond issuers to fully disclose their bank loans and other alternative financings, warning these potentially carry considerable credit risk.
The rating agency made the plea in a report released late Tuesday that notes the expanding popularity of issuers either taking direct loans from banks for projects traditionally financed by bonds, or selling their bonds directly to banks.
Standard & Poor's has rated or reviewed about 173 direct bank loan deals from January 2011 through Feb. 12 of this year, totaling about $10.4 billion. Such loans should be disclosed to credit analysts early so that it is possible to form a complete picture of an issuer's debt position, the report says.
"With greater use of these direct purchase obligations, and a more diverse group of banks entering into these types of financings, the terms and covenants within the agreements are less clearly defined and less uniform, creating, in our view, the potential for considerable credit risk exposure," the rating agency's analysts wrote. "Standard & Poor's ratings are assigned and surveilled based on information provided to us by issuers, and so disclosure to Standard & Poor's (and more broadly the lack of transparency in the capital marketplace) of the existence of these types of vehicles is critical."
Steve Murphy, Standard & Poor's head of public finance, said the rating agency has a responsibility to paint the most accurate possible picture of a borrower's credit risk profile, which it cannot do if it is unaware of bank loans an issuer may have obtained or is has only some bare bones information about them. Bank loans can include covenant provisions that analysts insist on knowing about in order to determine the amount of risk a borrower might be exposed to and under what circumstances those provisions could be triggered, the report says.
"We expect obligors to provide information on covenant thresholds, potential acceleration periods, and expiration dates of various liquidity facilities and/or bank loans and letters of credit," it says. "We also expect obligors to provide summary information on compliance with various covenants."
Such loans have affected credit ratings before. In June 2011 Oaklawn Hospital, Mich.'s outlook was revised to negative, with Standard & Poor's saying in a report that part of its reasoning was based on: "a debt structure with acceleration risk tied to certain financial covenants."
The rating agency sounded the call for disclosure because issuers typically disclose general information about bank loans in their comprehensive annual financial reports, but not the important information about the covenants and potential risks, said Geoffrey Bushwick, a Standard & Poor's analyst who co-authored the report.
Because bank loans are not securities, they are not subject to the same strenuous disclosure rules as bonds, although issuers of bonds are still required to disclose material information to investors. Material information is what investors would want to know in order to make investment decisions.
The Municipal Securities Rulemaking Board has encouraged issuers to voluntarily disclose information on its EMMA website even if they aren't legally required to do so, an idea that Standard & Poor's supports. Murphy said he believes there is about $50 billion to 60 billion of alternative types of debt outstanding to municipal obligors, but that an exact figure is probably impossible to come by.
The report warns that issuers who fail to be forthcoming might be viewed less favorably by Standard & Poor's, which factors the quality of the management of debt into its ratings. q The rating agency made the plea in a report released late Tuesday that notes the expanding popularity of issuers either taking direct loans from banks for projects traditionally financed by bonds, or selling their bonds directly to banks.
