May 30, 2014
Rating Implications of Direct Bank Loan Financings of Municipal Issuers
Written By: Vincent J. Magyar, Jr.
In recent days, Standard & Poor’s Ratings Service (“S&P”) delivered a letter to numerous issuers of municipal debt regarding S&P maintaining a rating on the municipal issuer’s debt and, if so requested, future debt ratings. In its letter, S&P acknowledges that while direct bank loan financing has become an increasingly important component of the capital structure of municipal issuers, disclosure of such financings has been “erratic at best.” In turn, S&P advises municipal issuers that it must be “notified and supplied with all relevant documentation related to any private debt, including bank loan financing, [entered into by the municipal issuer], regardless of whether the private debt is being rated by Standard & Poor’s.” Municipal issuers are expected to provide bank loan financing notification and documentation to S&P promptly following the closing of the bank loan financing. Failure to timely advise and provide documentation to S&P may result in S&P suspending or withdrawing the municipal issuer’s rating.
The implications of S&P’s bank loan financing disclosure requirement for municipal issuers with S&P ratings is apparent. Bank loans may be secured by the same funding sources, revenues or covenants as publicly offered debt. Failure to adequately disclose these loans to S&P could undermine its ability to adequately rate municipal debt obligations of the municipal issuer, may impair transparency in the municipal debt obligation marketplace, could cause a suspension or withdrawal of a rating, thereby triggering a disclosure event under SEC Rule 15c2-12, and could raise other legal issues for issuers.
Furthermore, financial institutions entering into bank loans with municipal issuers should be keenly aware of the outstanding debt obligations of such issuers. In many cases, financial institutions may use a municipal issuer’s rating in connection with determining bank loan pricing and credit risk. If the municipal issuer’s rating agency has not evaluated all of municipal issuer’s outstanding debt, including bank loan financings, the rating may not accurately reflect the municipal issuer’s credit risk. Additional risk exposure in the municipal issuer - bank loan realm, such as multiple bank loans being secured by the same security or revenue stream, also may exist for financial institutions who fail to obtain a full picture of the municipal issuer’s debt obligations.
This alert is informational only and municipal issuers, financial institutions and investors should always consult with experienced legal counsel to evaluate the legal implications of the foregoing. Hill Wallack stands ready to assist you should you have any questions, comments or concerns related to this alert.
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