Download bank loans and private placements

BANK LOANS AND PRIVATE PLACEMENTS
Annual NAMA Conference
October 7, 2016
Heidi Amspaugh, Umbaugh
Alex Handlers, Bartle Wells Associates
Jeff Sharp, Capital One Public Funding LLC
Topics for Discussion
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What are Private Placements (PPs)?
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Brief History of PPs from an MA Perspective
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Why Use PPs/Bank Loans?
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Pros and Cons
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Legal Concerns
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MA Firm Best Practices
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Good RFP Practices
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Issues for Consideration
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Questions
What are Private Placements?
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Debt issued via a “private offering” to limited number of lenders via a direct negotiation or limited competitive sale
• Not a “public offering", not publicly issued or traded
• As such, reduced issuer disclosure requirements & often no rating required
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Exempt from registration with the SEC under federal securities law •
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Meets specific exemptions enumerated in Securities Act of 1933
Generally no CUSIP number
Not subject to some of the laws/requirements designed to protect investors
U.S. Supreme Court Case Reves vs. Ernst & Young, Inc., 494 U.S. 56 (1990)
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Lenders generally include “accredited investors” such as banks, mutual funds, insurance companies, pension funds, individuals
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Non-­standardized product, every lender has unique requirements
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MA History of Private Placements/Bank Loans
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In use for many years, despite the recent hype
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Historically, PPs typically only made financial sense for small issues
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Interest rate differential over bonds has decreased in recent years
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Size of transactions has increased
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Increasing number of banks and issuers participating in market
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Some banks have reduced their max terms, others have increased terms
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Some banks using PPs to push other banking services
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Growing share of muni debt market
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Increased regulatory oversight
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Rise of the placement agent
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Why use PPs/Bank Loans?
§ MA recommendation
• Can provide lower-­cost financing
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Shorter execution time
Ability to negotiate flexible legal covenants
Story bonds
Only option (e.g. revolving line of credit)
In client’s best interest!
§ Client preference
• Less burden on agency staff & minimal disclosure req’ts & liabilities
§ Underwriter recommendation
MA fiduciary responsibility to consider Private Placements
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Pros & Cons of PPs/Bank Loans
Pros
Cons
Ø Shorter timetable
Ø Shorter repayment terms
Ø Simpler execution
Ø Often higher interest rates
Ø Lower issuance costs
Ø Less structuring flexibility
Ø Less burden on staff
Ø Some lenders have limits on issue size
Ø Less disclosure requirements & Ø Lack of market transparency
related legal liability
Ø Ratings typically not required
Ø Allows for explanation of story bonds
Ø Minimal interest rate variance due to differences in credit quality
Ø Legal flexibility & ability to negotiate terms
Ø Easy to get indicator rates or actual bids to determine best financing approach
Ø Interest rate lock, reduced market risk
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Ø Differing state legal requirements
Ø Differing lender requirements
Ø Unique covenants or triggers
Ø Lender can opt out due to “credit concerns” (if not pre-­approved)
Ø Evaluation of proposals is often not an “apples to apples” comparison
Legal Concerns
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Definition of broker/dealer activities include:
• Identification of investors
• Solicitation of investors
• No fiduciary responsibility to issuer, arms-­length transaction
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MAs need to be careful not to act as unlicensed broker/dealers
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Are we using our own proprietary list of banks and lenders?
Are we soliciting the potential banks and lenders?
Is our fee contingent on closing? (MSRB Warning)
Minimal SEC/MSRB Guidance
No “Safe Harbor”
• Lots of gray area
• Use of a Placement Agent 7
minimizes/eliminates risk
MA
Activity
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Broker/Dealer
Activity
MA Firm Best Practices §
Consult with legal counsel regarding MA role helping agencies secure PPs
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Develop written policies/controls to ensure we are not acting as broker/dealers
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Process to evaluate & document if an issue meets
an exemption from being a federal security
(Supreme Court’s “Reves case test”)
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Clarify MA role in contracts with clients
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If not using a Placement Agent
• Use publicly available lists of lenders to extent possible
• Have issuer solicit RFPs
• MA assists issuer with development of RFP, follow up, & evaluation of proposals, & negotiation
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If contracting with a Placement Agent
• Clarify role of Placement Agent vs. MA;; can RFP for Placement Agent
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Easy to get indicator rate or actual bids to determine if it makes sense to move forward with a PP or instead issue bonds
Good RFP Practices
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If developing RFP for client, be thorough
• Identify key terms and conditions
• Identify repayment security and key legal terms
• Identify credit strengths & provide supporting data (RFP is also a marketing document)
• Proactively address credit concerns
• Identify areas of potential flexibility or preferences
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Provide potential lenders with adequate info and time so they can conduct a preliminary credit analysis & get comfortable with the credit
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Consider calling potential lenders to explain the financing & address concerns
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Treat all potential bidders equally
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Reasonably wide distribution (limited competitive sale)
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Document process
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Provide feedback to responders
RFP Evaluation & Documentation
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Summarize key terms in a matrix
• Can help identify info holes to follow up on
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Compare proposals on an all-­in cost basis
• Different lenders require different fees
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Identify unique legal requirements
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Some lenders willing to negotiate terms
• Especially if the decision hinges upon their flexibility
• E.g. Can you match the other bank’s 5-­year call provision
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Determine best approach for legal documentation
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Disclosure
• Voluntary disclosure to EMMA (clarify if one-­time disclosure)
• Make sure client discloses in financial statements
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Issues for Consideration
Rates & Terms
Legal Security
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Interest rates & day count
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Legal provisions
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Fixed or variable interest rates and put provisions
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Coverage requirements
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Priority of payments
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Repayment term & structure
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Additional debt test
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All-­in cost & debt service
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Reserve requirement
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Prepayment provisions
Lender Ability & Requirements
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Purchaser’s experience Other
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Purchaser’s capabilities
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Exemption from SEC registration
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Other lender requirements
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Legal documentation
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Voluntary disclosure
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MSRB Webinar on enhanced EMMA bank loan disclosure process
Thursday, Oct-­13 at 3:00 -­ 4:00 pm (Eastern)
Bank Perspective §
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PPs = great financing alternative Evolving market
Willing to negotiate
Internal changes over time
Differing credit parameters
PP provider capabilities
Interest rates
Feedback helpful
Thank you!
Heidi Amspaugh, CIPMA, Umbaugh
[email protected]
Alex Handlers, CIPMA, Bartle Wells Associates
[email protected]
Jeff Sharp, Capital One Public Funding LLC
[email protected]
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