The MSRB has issued a notice to encourage state and local governments to voluntary disclose bank loan financings on EMMA, but private not-for-profit borrowers are not explicitly mentioned in the rule. Should they start reporting, or fear the consequences?
In A Nutshell...
- The MSRB is encouraging municipal borrowers to disclose bank loan documents on the EMMA website
- Current SEC rules and bond documents do not require such disclosure
- For now, we think disclosure to rating agencies is sufficient for most hospitals.
Currently, very few 501(c)(3) providers disclose bank facilities on EMMA, simply because they don’t have to: these structures are exempted under SEC Rule 15c2-12. In fact, this is one of the many features that make bank debt and bank direct placements less cumbersome –and less costly-- than public offerings.
Is this an overreach on the part of the MSRB? Not if you talk to rating agencies and investors who buy bonds offered to the general public. Public offerings (typically sold by a bond underwriter) still represent the majority of tax-exempt bond sales and do require full disclosure. But with bank direct placements fast becoming the financing vehicle of choice for many hospitals, the structure's lack of transparency is a greater concern to some market participants.
In all fairness, depending on terms, placements could have a significant impact on a borrower’s ability to service debt sold to the general public. The MSRB gives the example of a bank loan sold on parity with bonded debt with an acceleration clause. In an acceleration scenario, an investor who bought bonds sold in a public offering may be behind a bank with a right of offset on the borrower’s deposits.
A quick review of EMMA filings shows that so far, very few providers are bothering to disclose bank placements, even those otherwise considered shining beacons of disclosure. Bank facilities are heavily negotiated, and evidently, not all hospitals are prepared to broadcast the details of confidential, private transactions.
The desire for more market transparency is nonetheless a valid concern. Rating agencies are now asking hospitals and other municipal borrowers for bank direct placement documents, so they can incorporate their terms into their overall credit analysis on public, rated debt. Cynical observers also point to the need for rating agencies to make up for lost revenue from the current borrowing slump and all those bank deals done without ratings; in fact, one of the rating agencies has started to charge for reviewing direct placements --regardless of whether or not they will be rated.
So what’s a hospital to do? Our advice is more disclosure is better than less, but don’t go overboard. Hospitals should absolutely share all bank direct placement documents with rating agencies. As neutral third parties, rating agencies can analyze terms and incorporate them into bond ratings for general public consumption, without giving away confidential information. But there is a reason why 15c2-12 exempts most bank facilities from public disclosure, and until the rule changes, we read “voluntary” to mean it’s up to the individual hospital to balance the sometimes conflicting objectives of mutual funds, banks, private lenders, and competitors. A good starting point may be a frank discussion with the hospital's financial advisor, bond underwriter, lender, and hospital counsel.
Stay tuned for our continuing coverage of what is sure to become a hot topic.
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