NABL Bond Attorneys' Workshop - Notes and Impressions

On September 26-28 the National Association of Bond Lawyers held an annual gathering called the Bond Attorneys' Workshop, which consisted of a series of subject-specific meetings discussing topics in municipal finance. Most of the speakers/panelists were bond or tax lawyers, but in some sessions there were outside speakers, including representatives of the I.R.S. and S.E.C., underwriters and others. The following are notes and impressions from the sessions dealing with subjects other than federal tax law. (Note that attribution of any comments represents only the views of a particular speaker and does not indicate an institutional position of either the government or another entity, such as an underwriting firm.)

1. In an opening session on current issues, representatives of two underwriting firms had thoughts on continuing disclosure. There continues to be tension between underwriters and issuers even 20 years after enactment of the continuing disclosure requirement under SEC Rule 15c2-12. Most of the larger firms now use an outside vendor (such as BLX) to review issuers' compliance with continuing disclosure filings of annual reports, as the five-year look-back is now fully available on the EMMA platform. If the vendor finds some element of non-compliance, the underwriters just want it to be disclosed in the official statement, no matter if the non-compliance appears minor. Given that virtually all the underwriting firms in the industry are under SEC consent decrees to cease and desist from securities law violations as a result of the MCDC initiative, no underwriter wants to risk future trouble with the SEC, including large fines. The underwriters will tell the issuers to just disclose everything. Another representative suggested that disclosure of some past disclosure non-compliance doesn't have an impact on the high-grade market, but might have some pricing impact for lower-grade, higher-yield credits.
2. It has been understood that the underwriters' diligence obligations relating to past compliance with continuing disclosure agreements (CDAs) have largely been limited to whether annual reports have been filed on time and in full. No real effort has been made to determine if issuers made material event disclosures as required, since there is no simple way to verify this. The diligence burden on both issuers and underwriters will therefore become much more difficult once CDAs have to include the two new reporting events added by the SEC in August, which will be in effect for CDAs signed after February 27, 2019. One of the underwriter representatives indicated that at a minimum the underwriters will want to know if the issuers have taken steps to inventory all of their prior "financial obligations" (a term defined by the SEC in the new reporting events), and have policies and procedures in place to monitor these financial obligations so that reports can be filed in a timely manner (within 10 days) if there is a default or amendment to any of these obligations after the new CDA is signed. This makes it imperative for issuers and obligated persons to start planning these steps well in advance of the first public bond issue to be sold after February 27, 2019. The underwriters seem to know that in the end, for these two new events, there won't be any way to independently verify compliance and they will have to rely on issuer representations. From a practitioners' standpoint, as well, it will be impossible for an underwriter to hire an outside counsel to assist it in Rule 15c2-12 compliance shortly before a deal is to be sold. The new Rule requires advance preparation from all sides.
3. There were suggestions that some of the burden of monitoring and reporting the new "financial obligations" could be shifted to, or at least get help from, the accountants, as they are already familiar with the issuer or obligated person's financial structure. Underwriters will use the latest financial statements as a baseline for diligencing this area. A new GASB Statement 88 updates the disclosure of debts in a financial statement, particularly to ensure that private loans or private placements are fully disclosed. This can be a template for disclosures under the new SEC Rule.
4. Also related to GASB, a new Statement 87 dealing with leases was adopted in 2017 but will not become effective until 2020. GASB has eliminated the former distinction between "capital leases" and "operating leases" and treats all leases over one year in duration as a form of financing of property. Accordingly, leases will appear in the front of the financial statement rather than in the footnotes. This could create complications in connection with state law definitions of debt, indenture provisions dealing with coverages, additional debt tests, etc. This is one reason GASB has provided a long period for organizations to adjust before the new Statement goes into effect.
5. In discussions about the two new SEC reporting events, one point that came up is for reporting a new, material, non-public financial obligation (a private placement or bank loan): how should the issuer provide the necessary information? One option is to provide a summary of the important terms, but this raises an issue of how to decide what terms are material. Alternatively the issuer can post the entire loan document on EMMA, with deletion of certain sensitive information like bank account numbers, personal information of the parties to the loan, etc. There wasn't any consensus on the best approach. It was noted that what the rating agencies were most concerned about was terms in a bank loan that could give the bank priority over other debt-holders, such as acceleration rights or access to collateral. While a direct bank loan will look very much like a bank reimbursement agreement supporting a bank letter of credit, the latter has very little concern for bondholders and rating agencies since, if there is financial difficulty, the LOC bank cannot exercise any of its rights unless it has paid the bondholders. This isn't the case for a direct bank loan. Another point relating to the new SEC Rule is that it requires disclosure of amendments to existing private bank loans. The banks may not be anxious to have the entire market know what accommodations it has made to a borrower in the case of some workout of a nonperforming loan, but this seems unavoidable.
6. A session on direct bank loans elicited the information that volume was down in 2017, as the drop in the corporate tax rate makes it more difficult for banks to offer attractive tax-exempt rates to customers, given the banks' need to achieve a certain after-tax return. Rates have shifted from roughly 70 percent of LIBOR to 80 percent of LIBOR. Instead, larger, higher-grade issuers are going back to the public market for deals of sufficient size. On the other hand, banks can now make more attractive private loans competitive with taxable rates, and with rates still generally low this could be attractive to some issuers, such as for advance refundings or other transactions that can avoid tax exemption rules.

In a session with SEC representatives, the Director of the Office of Municipal Securities announced that the SEC will hold a public meeting in early December in Washington on Municipal Finance Disclosure. The Deputy Chief of the Enforcement Division Public Finance Abuse Unit reported on recent enforcement cases. There was particular emphasis on disclosure of conflicts of interest, and abuses by municipal advisers, including activity by a person who was not properly registered as a municipal adviser. The Deputy Chief suggested that if a new person or firm comes into a transaction team, someone should double-check their registration status. The SEC has also recently brought a number or actions based on persons "flipping" new issues of bonds by falsely putting in retail orders during a special order period.