To improve transparency in the municipal debt markets, the Securities and Exchange Commission will require municipal borrowers to report bank loans, direct placements and interest rate swaps if they could affect existing bondholders.
Here are nine things to know about the amended rule and how it affects hospitals:
1. The SEC proposed adding bank placements and other financial obligations to Rule 15c2-12 of the Securities Exchange Act in March, according to HFA Partners.
2. Rule 15c2-12 requires municipal borrowers with public outstanding bonds to report "listed events," including annual reports, any failures to pay interest or obligations and all rating changes within 10 business days.
3. Bank loans and direct payments were initially exempt from this rule, which many regulators criticized. Regulators argued that these bank loans and direct payments can compete with the existing issuer's rights because they are private debt and their terms are often undisclosed, which keeps existing bondholders in the dark.
4. The new amendments to the rule will require municipal borrowers, including hospitals, to disclosebank loans and direct placements, interest rate swaps, guarantees related to debt, leases that are a way to borrow money, and financial difficulties. The rule only applies if any of those factors could affect an existing bondholder's liquidity, overall creditworthiness or his or her rights as a bondholder.
5. The rule will apply to continuing disclosure agreements for bonds sold to the public after the compliance date. The compliance date for the rule change is 180 days after it is published in the Federal Register. Existing agreements will be exempt. In addition, if new events don’t materially affect existing bondholders, they will also be exempt.
6. Bondholders appreciate the rule change because they have complained for years about the lack of disclosure surrounding bank placements, according to HFA Partners.
7. Borrowers, on the other hand, may be less thrilled about the rule because direct placements had its perks in comparison to public bond offerings, the most notable being limited disclosure and lower costs.
8. Placements have generated tremendous interest from hospitals and other municipal borrowers, mainly because "placements can be implemented faster and cheaper than publicly sold debt, in large part due to their limited disclosure," an HFA Partners report reads.
9. Overall, the direct placement market grew from $67 billion in 2010 to $153 billion in 2015, according to HFA Partners.