MSRB NOTICE 2012-18 (APRIL 3, 2012)

NOTICE CONCERNING VOLUNTARY DISCLOSURE OF BANK LOANS TO EMMA®

The Municipal Securities Rulemaking Board (“MSRB”) is issuing this Notice to encourage state and local governmental entities that issue municipal securities (“issuers”) to voluntarily post information about their bank loan financings to the Electronic Municipal Market Access (EMMA®) website.[1]  As described below, the MSRB has developed a recommended procedure for posting this type of information to EMMA utilizing the continuing disclosure submission process used by issuers.  Voluntary posting of information about bank loans on EMMA will provide timely access for investors and other market participants to key information useful in making informed investment decisions.

BACKGROUND

The increased use by state and local governments of bank loans to meet funding needs has raised concerns among market participants about the level of disclosure about such loans.  Because, as described below, bank loans generally do not require the same level of disclosure as public offerings for municipal securities, holders of an issuer’s outstanding debt, as well as potential investors and other market participants, may not become aware of such bank loans or their impact on the issuer’s outstanding debt until the release of an issuer’s audited financial statements.  Thus, for example, bondholders may not be aware of the terms and conditions of a bank loan that may require the acceleration of debt repayment if the borrower encounters financial stress.  In other circumstances, where bank loans are on parity with or senior to other outstanding debt, the bondholders’ security position could be diluted.

If a bank loan, in fact, is not a municipal security, existing securities law requirements with respect to disclosure do not apply.  In addition, if a so-called bank loan is, in fact, a municipal security,[2] no disclosure document typically will be prepared for such bank loan if the issuer negotiates and enters into the bank loan directly with the bank as an investor without the involvement of an underwriter or placement agent, thereby making Rule 15c2-12 adopted by the Securities and Exchange Commission (the “SEC”) not applicable to that transaction.  Even when an underwriter or placement agent participates in a bank loan financing that qualifies as a municipal security, such financing may qualify for the exemption afforded under SEC Rule 15c2-12(d)(1)(i) for “limited offerings,” depending on the structure of the financing and the relevant characteristics of the bank purchasing the municipal securities.[3]  Although the MSRB requires submission to EMMA by the underwriter or placement agent of an official statement, or information about how to obtain the official statement, for a limited offering if one has been prepared,[4] information about certain financings undertaken by issuers is not readily available to holders of an issuer’s outstanding debt until the release of an issuer’s audit, and such information is typically quite limited.  The inapplicability of the provisions of SEC Rule 15c2-12 in the circumstances described above extends both to primary market disclosures and continuing disclosures.

VOLUNTARY SUBMISSIONS TO EMMA

The MSRB believes that the availability of timely information about bank loan financings is important for market transparency and promoting a fair and efficient market.  Voluntary submission of information concerning bank loan financings through EMMA, as described below, would provide timely access for bondholders, potential investors and other market participants to key information useful in assessing their current holdings of municipal securities or in making investment decisions regarding potential transactions in municipal securities.

Current capability to accept voluntary submissions.  EMMA presently permits issuers and their agents to voluntarily submit certain information under the EMMA continuing disclosure service.  The MSRB suggests that municipal issuers that wish to provide disclosure, on a voluntary basis, to the marketplace regarding their bank loan financings employ the conventions described below in connection with their submissions to EMMA.  A detailed step-by-step process is set forth here.

Using the current mechanism to submit documents related to securities that are ineligible for CUSIP numbers, issuers are encouraged to use the current voluntary continuing disclosure category of “Financial/Operating Data - Investment/Debt/Financial Policy” for submission and indicate in the “Consisting of” free-text field that the documentation consists of “Bank Loan” disclosures.  Following that descriptor, issuers may use the remaining characters to identify the purpose of the financing or any other details they choose.  The issuer would submit an appropriate document relating to the bank loan financing, such as the loan or financing agreement, or in the alternative could submit a summary, as a portable document format (PDF) file, of some or all of the features[5] relating to the bank loan financing, including:  

Lender

Payment dates

Borrower

Maturity and amortization of loan

Purpose of loan/financing

Optional, mandatory and extraordinary prepayment provisions

Security for repayment

Tax status of interest

3rd party guarantees

Events of default/remedies

Source of repayment

Current credit rating of borrower (if applicable)

Dated date/closing date

Governing law

Par amount

CUSIP number, if applicable

Interest rates (or index if variable), including method of computation, if applicable

Redistribution rights, if applicable

A user of the EMMA website would be able to search for submissions concerning bank loan financings made in the manner described above by searching with the Advanced Muni Search tool on EMMA for “Bank Loan” in the Issue Description field and could narrow the search further using the other available search fields.

Furthermore, in many cases, bank loan financings undertaken by an issuer may constitute additional or parity indebtedness under the terms of some or all of the issuer’s outstanding municipal securities.  In addition to providing the voluntary disclosures described above, an issuer can use EMMA’s current capabilities to submit a voluntary disclosure notice for each of those outstanding municipal securities disclosing that additional or parity indebtedness has been incurred by the issuer and providing some or all of the documents and information described above.  For example, the issuer could use the current voluntary continuing disclosure category of “Event Filing – Capital or Other Financing Plan” to submit a voluntary filing for each nine-digit CUSIP number of its outstanding municipal securities for which a bank loan financing constitutes additional or parity indebtedness, indicating that the disclosure relates to a “Bank Loan” in the free text field for “Description” of the submission.  Submissions concerning bank loan financings made in this manner would be accessible to users of the EMMA website as a Capital or Other Financing Plan event notice on the continuing disclosure tab for every nine-digit CUSIP number entered by the issuer for its outstanding municipal securities.

An issuer seeking to submit disclosures about its bank loan financings to the EMMA continuing disclosure service will be able to use the same accounts established with respect to such submitter’s current submissions to the EMMA continuing disclosure service.  Using these current categories and proposed naming conventions will assist EMMA users in finding bank loan disclosures in a uniform manner.  Such submissions can be made regardless of whether a CUSIP number has been assigned to the bank loan.[6]

Additional enhancements.  In the future, the MSRB may consider changes to EMMA to create specific features for voluntary submissions of bank loan financing disclosures, as well as disclosures for other types of financing transactions such as municipal lease obligations.[7]  Although the decision by an issuer to make a submission would continue to be voluntary, changes to EMMA would provide considerably more uniformity in the indexing and accessibility of submitted disclosures as a result of the standardization of the bank loan financing disclosure process. 

April 3, 2012


[1]  EMMA® is a registered trademark of the MSRB.

[3]  SEC Rule 15c2-12 exempts offerings of municipal securities where such securities are issued in authorized denominations of $100,000 and are sold to no more than 35 persons each of whom the underwriters reasonably believe: (A) has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of the investment; and (B) is not purchasing for more than one account or with a view to distributing the securities.

[4]  See MSRB Rule G-32(b)(i)(C) and MSRB Rule G-32(b)(i)(E).  Under current Rule G-32, an underwriter or placement agent for a limited offering for which a limited offering document is prepared must either submit a copy of such limited offering document to EMMA or must post on EMMA contact information for investors to request a copy of the limited offering document.  However, in the case of limited offerings of municipal securities or any other new issue of municipal securities exempt from SEC Rule 15c2-12 for which an offering document is not produced, the existence of such offering is nonetheless disclosed on EMMA by the submission and dissemination of the maturity schedule, interest rates and initial offering prices of the new issue if a dealer has served as underwriter or placement agent for such offering.  This information submission also is required for any bank loan that constitutes a municipal security placed in a limited offering by an underwriter or placement agent, even if no disclosure document has been prepared by virtue of the exemption from SEC Rule 15c2-12.

[5]  This list is not inclusive, and issuers are free to add or delete factors.

[6]  Information and documents submitted to EMMA would be displayed on the EMMA web portal and also would be included in EMMA’s continuing disclosure subscription service.

[7]  See MSRB Reports, Vol. 2, No. 1 (January 1982) at p. 13 located in msrb.org/Publications.  As with bank loan financings, municipal lease obligations that constitute municipal securities distributed through an underwriting or placement are subject to the same disclosure requirements as other municipal securities under SEC Rule 15c2-12.  However, a municipal lease obligation entered into directly with the lessor without the involvement of an underwriter or placement agent would not typically have a disclosure document since SEC Rule 15c2-12 does not apply.  Issuers of municipal lease obligations currently may also provide voluntary disclosures through EMMA in the same manner as described above for bank loan financings, designating them as “Municipal Lease” disclosures.