S&P tells muni issuers to disclose bank loans

May 16, 2014

Eight out of ten times when state and local governments need to borrow money, they go to the municipal bond market. The public information repository EMMA, which is offered by the MSRB, allows anyone and everyone to assess how the borrowing affects the borrower’s capital structure and predict whether bondholders will be paid back.

But there is a growing trend of state and local government borrowing from banks for which no law says that it had to be publicized. This has left taxpayers and bondholders in the dark.

A white paper issued last year encouraged local governments to disclose when they take money from a bank. Muniland players have not followed the suggestion, and government borrowing from banks has continued to go on behind closed doors.

Now rating agency Standard & Poor’s has cracked the whip. In an effort to do their ratings work efficiently, S&P sent letters to clients asking them to disclose bank loans or risk getting slapped with a red flag called “Creditwatch.”

S&P’s Creditwatch, like any “watch” from a ratings agency, is a signal to the market that the issuer could be downgraded. Think of it as a scarlet letter put onto an issuer for the community to see. It always creates a bit of a stink.

There is no law that requires disclosure of bank loans, but accounting standards require that loans be shown in annual financial statements. This could leave large gaps in which bondholders, raters and the public are without critical information for an issuer.

Puerto Rico borrowed multiple times in 2013 without publicly disclosing the precise terms of the loans. It is unclear whether credit rating agencies were notified of the specifics. The market had almost no information because Puerto Rico is always late in filing financial documents.

But S&P didn’t put Puerto Rico on CreditWatch until January, 2014, a month after the Puerto Rico Government Development Bank borrowed from the island’s worker compensation fund at 8 percent for three year maturities. That 8 percent yield is a screaming signal that something is wrong.

Other credit rating agencies should follow S&P’s lead and penalize municipal issuers for not disclosing the terms of bank borrowings. It would be a big step forward for the market.

The downside of this new step is that it reinforces the centrality of credit rating agencies in the municipal market. Raters will have more information than the general market and taxpayers until annual financial statements are filed.

Part of this problem for the general market is held in place by a 1975 law called the Tower Amendment, which restricts the SEC from requiring disclosure by municipal issuers that are offering securities. It’s another roadblock to better muniland information. So we are back to the imperfect solution of raters forcing the disclosure of this information. I’ll take this gain and push for more. Inch by inch, muniland gets more transparency.


Bond Buyer reporter Oliver Renick talked to Standard & Poor’s managing director Malachy Fallon about bank loans last March (video)

S&P’s FAQ on disclosure of alternative financing

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