For several years the lending and investing community has been expressing concerns about how and when local governments provide disclosure to that community about non-rated government bank loans and other private financings. We previously visited this issue in a prior post, and the Government Finance Officers’ Association has recently addressed the topic in this GFOA “Alert.”
Investors and lenders are concerned that if local governments don’t provide timely disclosure about private financings, then the buyers and holders of rated debt are at a disadvantage. The Alert highlights two primary concerns from lenders and investors:
· The amount of private financings, either individually or in the aggregate, could have a material adverse effect on the borrower’s financial condition.
· The private financing could contain terms that operate to the detriment of the rated debt and its holders – for example, provisions allowing acceleration of that debt, or provisions that give the private financing preferential repayment terms.
In the Alert, GFOA recognizes that private financings can carry significantly lower financing costs, be simpler for the borrower, and carry more flexible terms. The Alert expresses concern, however, that because of the wide range of financing structures available, it may not be as easy for the borrower to know if it’s getting a “good deal” or not.
GFOA recommends that local governments take two steps:
· Disclose your private financings either by making a posting on the EMMA system, by making the information available on your website, or by making sure the relevant information is disclosed in your financial statements.
· Get advice to help avoid terms that are either particularly harsh on the borrower or that may cause conflicts with the terms of other debt.
It seems to us that the problems identified by GFOA are of less concern here in North Carolina than they seem to be in other states. First, our local governments have a good record of completing financial statements in a timely manner, and those financial statements provide fairly comprehensive information about private financings. The statements don’t discuss all the terms of a loan, but no disclosure will do that. On the other hand, the investing community does not generally think that disclosure in financial statements is sufficient.
Second, we have a community of experienced lenders that don’t ask for loan terms likely to cause the problems that concern others. We will occasionally see documents from a lender with less experience in local government lending that have problematic terms – such as, a provision allowing a bank to demand immediate repayment just because it believes the loan is no longer secure – but those cases are so few and far between to be not an issue.
This issue is not going away – for example, the Municipal Securities Rulemaking Board has asked for public comment as to whether financial advisers should be required to make these disclosures with respect to their clients. We also don’t think that any eventual requirements in this regard will be hard to comply with.
But until the disclosure is mandated, we will not recommend to our clients that they make any disclosure of private financings beyond what they are already doing in the financial statements or otherwise under a contractual requirement (as with the rating agencies). At this time, we just don’t see the benefit to taking on the additional time, trouble, and possible risk.
The GFOA alert includes links to other articles on this topic. You should take our disclaimer. into account, and call or email us if you want to talk more about this (or about anything else, really).