Standard and Poor’s told issuers of municipal bonds this week that when seeking a rating it expects them to disclose all debt-like obligations including bank loans, which have become increasingly popular.
“Debt-like obligations, whether in the form of a bank loan, securities sold publicly, or in any other form, are, in our view, material and, thus, relevant to outstanding ratings,” analyst Mal Fallon wrote in a notice. “Therefore, additional debt in any form is something we want disclosed directly to us along with the related legal documentation.”
The statement from Standard and Poor’s is timely because of an emerging trend of issuers turning to bank loans as an alternative to publicly-traded debt. Bank loans have been increasing in popularity since 2009, and the Government Finance Officers Association’s debt committee is working on a best practices paper for issuers who use or are considering using them.
But unlike most municipal securities, bank loans are not subject to disclosure requirements and therefore may fall under the radar of anyone looking at an issuer’s financial condition. The Municipal Securities Rulemaking Board has encouraged issuers to disclose all obligations on EMMA, and Standard and Poor’s supports that concept.
However, Fallon wrote, posting to EMMA is not sufficient because it remains at the issuer’s discretion and might occur after the fact. The agency expects any loans or other obligations to be disclosed to its analysts even if the issuer is not requesting a rating on those obligations, so that the analysts can weigh the potential impacts of those liabilities on the issuer’s outstanding rated debt.
Fallon wrote that Standard and Poor’s would be particularly interested in the issuer’s overall strategy, the terms and size of the loan, potential calls on liquidity, and the security terms covering the obligation.
The notice is a specific restatement of existing agency policy, Fallon said, as Standard and Poor’s already requests that to maintain the rating, issuers must provide “all relevant financial and other information” as soon as it becomes available.
If the agency becomes aware of undisclosed loans or other debts at some point after assigning a rating, it may take steps up to and including suspending the rating, Fallon warned.