The MSRB is pushing hard for more regulation of bank placements, but so far the SEC has not shown much interest and is not providing guidance on how unregulated loans could become regulated securities. It remains to be seen if the MSRB's latest move asking borrowers to voluntary disclose loans on EMMA will be more successful.
In April, we reported that the Municipal Securities Rulemaking Board was pressing the SEC to classify more bank placements as securities, with the goal of bringing them under its regulatory powers.
Representing around 20% of total municipal debt, bank placements continue to be a popular alternative to public bond offerings, because they involve lower fees and less disclosure.
Placements landed in the MSRB's bull's eye primarily because of their limited disclosure, which has been a concern for investors who may be affected when placements are secured on parity with their bonds and have more stringent covenants such as acceleration clauses.
Pundits are saying another reason for the MSRB's push is that since bank loans are not considered securities, they do not require a broker dealer at the table, which does not sit well with bond underwriters.
Underwriters were already hit hard by the SEC Municipal Advisor rule, and they hold a majority of the ten "regulated entity" seats on the MSRB Board of directors.
Bank placements have also eaten into the supply of traditional bonds that institutional investors are able to buy.
The MSRB may not have the authority to regulate municipal issuers or obligors —only the SEC does—but it does regulate municipal advisors and earlier this year, it proposed to force them to disclose their clients' bank loan terms. This concept was quickly shot down by market participants for running counter to the fiduciary duty advisors owe clients.
Last week, the National Association of Municipal Advisors (NAMA) held its annual conference in New Orleans, and one presentation pointed out placements have been around for many years without much problems --until they became too big to ignore.
Indeed, the evidence shows that the vast majority of placements have terms that do not negatively impact borrowers or investors: S&P reported that out of the 126 bank loans the rating agency reviewed in 2015, all but five did not hurt credit quality.
Reality checks like the S&P report have been largely absent from the debate, partly because rating agencies are also pushing for more disclosure.
Borrowers are being warned by rating agencies to submit placement documents or face the prospect of losing their ratings.
By reviewing placement terms, rating analysts can determine if they could impact a borrower's credit quality, and can provide a summary in the rating report available to investors.
But that only works if borrowers are willing to provide the information in the first place, and it has rating agencies worried they could be blamed later for the borrower's failure to disclose.
If the MSRB succeeds in reining in placements, fees for hospitals and other municipal borrowers will likely go up and, depending on the level of disclosure required by the new rules, so will the administrative burden.
Thus far, the SEC has showed little interest in regulating bank loans, but the MSRB is not taking no for an answer, recently sending an email to remind borrowers that EMMA, the online municipal disclosure portal, permits voluntary bank loan disclosure on an issuer's homepage.
A relatively small percentage of hospitals have elected to follow the MSRB's pleas and have voluntarily posted bank placements terms on EMMA.
While well-intentioned, the information is not always helpful to investors.
For example, most investors are not interested in what interest rate is paid, who was bond counsel, or the trustee on the deal; they are more concerned about credit and liquidity risks including security, covenants, events of default and acceleration clauses, and any priority within the borrower's debt structure.
Basically, bondholders want to know how a borrower's bank placements could impact their ability to get repaid on a timely basis, which is a reasonable question.
Disclosure is only good if it can be understood, which is easier for institutional investors who make a living poring over bond documents, but for "mom and pop" bondholders, it's a different story.
If the decision is made to post on EMMA, the information should be associated with CUSIP-9s that are on parity with the placement, and the posting should be updated whenever placement terms change or the facility is paid off.
Hospitals should keep in mind that voluntary disclosure could come back to haunt them, as anti-fraud regulations apply to both required and voluntary disclosure. Omitting material information or providing information that is inaccurate or misleading may result in SEC charges.
For hospitals interested in voluntary disclosure, HFA has developed an EMMA template which summarizes the key terms of bank placements and may be more helpful to investors than uploading actual loan documents: