For hospitals and other not-for-profit borrowers who depend on the debt markets, bank direct placements continue to be a popular alternative to public bond offerings. The MSRB took notice and is looking for ways to force more disclosure.
Structures can vary, but a bank placement is generally a tax-exempt loan sold to a bank as an unrated, limited offering without bond underwriters or the infamous "Appendix A" disclosure found in public bond offerings.
Placements involve low costs of issuance and their reduced disclosure burden can be a welcome relief to hospital CFO's already dealing with a plethora of regulations in their day-to-day business.
The Municipal Securities Rulemaking Board (MSRB), the self-regulated organization authorized to write rules affecting the municipal markets, wants to change that.
The MSRB is concerned about the lack of transparency in bank placements and is currently seeking comments on ways to force more disclosure, including requiring financial advisors to share information about their clients' placements.
The MSRB Board currently includes six representatives from broker dealers, but only three from municipal advisory firms and one from a bank.
Broker dealers have long complained about losing business to bank placements, where their services are not needed.
While it's clear that bank placement terms can impact the rights of other bondholders, the evidence suggests that calls about more disclosure may be unfounded.
All three rating agencies already require hospitals to disclose bank placements terms to them as part of evaluating a borrower's creditbonded debt. It's hard to imagine a scenario where retail investors would be better equipped than rating analysts to read and interpret bank documents.
Standard & Poor's also confirmed in a recent report that the overwhelming majority of bank placements reviewed in 2015 did not have a negative effect on bond ratings. This is particularly relevant because S&P was one of the early advocates of enhanced bank placement disclosure.
The prospect of having to disclose bank loan terms to the world is not something hospitals or their banks are thrilled about.
They should not worry, at least not yet, because the MSRB does not have the authority to regulate bank loans, and the SEC does not seem interested in changing the rules.
Under current SEC rules, most bank facilities are not considered municipal securities, so out of the MSRB's reach.
In Reves vs. Ernst & Young, Inc., the U.S. Supreme Court held in 1990 that a demand note offered to the public as an investment was deemed a security based on a "family resemblance test" consisting of four steps including: the motivations of the buyer and seller, the plan of distribution, reasonable expectations of the investing public, and existence of an alternative regulatory regime.
Reading the particulars of the Reves case, and given that bank placements are sold to a bank in a limited offering with no intention of ending up in the hands of the general investing public, one would conclude that most placements will not be deemed securities under the Reves test.
Undeterred, the MSRB has been lobbying the SEC for more guidance on which types of placements constitute securities.
So far, the SEC has turned a deaf ear, and so has the Securities Industry and Financial Markets Association (SIFMA), an industry trade group representing broker dealers, banks and asset management firms.
SIFMA brushed off the MSRB saying rules do not apply to bank loans.
It will be interesting to see how this plays out.
Meanwhile, hospitals continue to look for ways to save costs and minimize the administrative burden of tapping the debt markets.