In a January 29 regulatory notice entitled "Bank Loan Disclosure Market Advisory", the MSRB said bank loan disclosure is beneficial to the municipal bond markets and asked borrowers to voluntarily post loan information on EMMA.
Bank placements have emerged as popular alternatives to traditional bond offerings due to their lower cost, greater flexibility, and also because they do not require continuing public disclosures, a credit rating or an official statement.
The MSRB is asking for volunteers because bank placements are not considered securities and thus are exempt from the disclosure requirements.
Clearly, the potential exists for bank loans to affect other debt, for example when an event of default triggers an acceleration clause which impacts a borrower's liquidity and ability to repay other debt.
The MSRB is urging borrowers to post their loan documents, or at least a summary of key terms, on EMMA.
While bank placements can negatively impact existing bondholders, in a press release issued earlier this week, Standard & Poor's says that in practice, that is not often the case.
S&P reports that aside from a few exceptions, the more than 400 direct bank loans it reviewed last year did not impair the rights and remedies of existing lenders or bondholders and did not erode credit quality.
Bank loans are usually unrated, but rating agencies scrutinize how they affect rated debt, and include their findings in reports available to the public.
Borrowers who fail to share loan information with rating agencies risk losing their rating.
Investors who buy unrated bonds may stand to gain the most from the MSRB's recommendations since without rating agencies reviewing loan terms, they are in the dark.
Then again, additional disclosure is one the reasons why many investors shy away from unrated bonds.
In its notice, the MSRB suggests that underwriters include loan information in future official statements.
This is an interesting proposition given that bank placements are done in part to avoid the disclosure requirements of a public offering.
Also, many borrowers do not go to the public bond markets often, so by the time an official statement is available, loan information could be hopelessly outdated.
There is no doubt that the regulatory push for increased transparency in the murky municipal bond markets, as illustrated by the SEC's recent MCDC Initiative, can be a good thing for investors and for borrowers; efficient markets do lower the cost of debt.
But given how many borrowers already have a hard time meeting existing continuing disclosure requirements, there is a very good chance that asking them to voluntarily post information will fall on deaf ears.
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