1. Issuer Considerations – Bank Loans
Moderators:
David Erdman, Capital Finance Director at Wisconsin Capital Finance Office
Ellen Evans, Deputy Treasurer at Washington Treasury Office
Speakers:
Peg Henry, Deputy General Counsel at Stifel Financial Corp.
Renee Boicourt, Managing Director at Lamont Financial Services

2. Introduction Market Volume Trends
Terminology: Bank Loans, Direct Placements, Direct Purchase
Offers both benefits and challenges for issuers and their advisors (MA’s and Counsel)
Regulatory structure is unsettled

3. Agenda for SEC Open Meeting on March 1, 2017
“The [SEC] will consider whether to propose amendments to Rule 15c2-12 under the Securities Exchange Act of 1934, which would amend the list of event notices that a broker, dealer, or municipal securities dealer acting as an underwriter in a primary offering of municipal securities, must reasonably determine that an issuer or obligated person has undertaken, in a written agreement or contract for the benefit of holders of the municipal securities, to provide to the Municipal Securities Rulemaking Board. The proposed amendments would add two event notices relating to certain financial obligations incurred by issuers and obligated persons.”

4. Terminology
Bank Loan: A loan from a bank to a government that is not a security.
Direct Purchase/Direct Placement: A security of a government purchased by a bank in a private placement.

5. The Players Bank Loan Players:
Direct Purchase/Direct Placement Players:
Government
Bank
Bank or Other Investor
Municipal Advisor
Bank Counsel
Bond Counsel
Government Counsel
[Placement Agent]

6. Regulatory Framework - Differences Between Loans and Securities
All federal and state securities laws apply to securities, but not to bank loans.
Securities transactions must be reported to the MSRB, and continuing disclosure rules apply.
Your financial advisor may not help you place a security under MSRB Rule G-23.
Municipal advisor rules apply to advice on securities, but not bank loans. SEC rule and MSRB Rule G-42.

7. How to Distinguish a Bank Loan from a Security?
In Reves v. Ernst & Young, the U.S. Supreme Court said that a loan evidenced by a note is presumed to be a security.
Exceptions include:
consumer financing,
home mortgages,
small business loans,
accounts receivable,
loans for ordinary operations.

8. Loan v. Security (cont.)
Loans bearing a “strong family resemblance” to the loans on the previous slide are also not considered to be securities.
Key factors in “family resemblance” test:
motivations of the buyer and seller,
plan of distribution,
reasonable expectations of the investing public, and
existence of alternate regulatory regime.

9. Loan v. Security (cont.) Motivations of the Buyer and Seller
Financing of substantial assets indicates a security.
Correcting cash-flow difficulties indicates a loan.
Plan of Distribution
A CUSIP indicates a note is likely to be traded and is a security.
Lack of a CUSIP indicates a loan.
Reasonable Expectations of the Investing Public
Is the note called a “bond” or are loan documents used?
Are loans legal under state law?
Existence of Another Regulatory Scheme
Federal banking regulators regulate bank loans

10. Source of Information on Loans v. Securities
MSRB Notice (September 12, 2011).

11. Potential Benefits of Bank Loans
Cost of Funds
Short-term vs. long-term market
Transaction Costs
Disclosure Burden
Voluntary EMMA Disclosure on a bank loan transaction vs. breadth of a POS for a securities transaction
Challenge of accurate securities market disclosure during periods of rapidly developing credit events (budget developments, legislation, litigation)

12. Potential Benefits (cont.)
Ratings
Time and fees
Uncertainty of rating outcome
Lender’s view of credit quality may be more favorable than rating
Sectors and security structures subject to recent criteria changes
Willingness of lender to look forward vs. back – acquisition financings, e.g.
Bank loan prepayment flexibility vs. call optionality, especially shorter than 10 years

13. Challenges Price discovery, ensuring competition
Soliciting Interest, RFQ, RFP approaches
Bundle with Underwriting RFP
Control the Term Sheet
Indicative pricing – spread to an index vs. lender’s “secret sauce”
Role of MA and regulatory challenges
MA cannot serve as Placement Agent
Less delegation to MA; issuer hands-on in negotiation
MA compensation structure

14. Challenges (cont.) “Customary Covenants” Cost pass-through for:
Tax-rate changes
Regulatory changes affecting bank capital reserves
Relationship vs. transactional
Federal Tax Reform increases risk
Transferability – Secondary market trading, participation
Can the instrument be sold to another lender/investor?
Right to pre-pay

15. Key Credit Issues – Public Market Investor and Rating Agency Focus
Alignment with Issuer’s interests
What exactly is parity debt?
Mortgages, liens, title vs. public debt
Remedies vs. public debtholders
Acceleration, Term-out
Establish at point of RFQ, solicitation of interest
Issuer’s term sheet - Just say no
Interest rate step up as a remedy can be more benign from parity investor and issuer POV
Bullet maturities, puts, rollover risk
Call windows for refinancing

16. GFOA Best Practice on Understanding Bank Loans
Develop policies and procedures on legal and financial aspects of using bank loans.
Become familiar with various types of terms used in bank loan documents.
Understand how bank loans are treated on financial statements.
Understand types of disclosures made about bank loans.
Assess whether state and local laws permit bank loans.
Consult with financial advisors and legal counsel.

17. GFOA Best Practice (cont.)
GFOA recommends asking the following questions about bank loans.
Is bank qualified debt or other public debt a better solution than a bank loan?
Does a bank loan apply against a government’s debt capacity?
How will the bank loan provider be solicited, evaluated, and selected?
Is the bank loan fully amortizing or a bullet? What is the debt service structure?
Are there restrictions on issuing additional debt? Does the bank loan have priority?
Is the interest rate risk of variable rate debt manageable?

18. GFOA Best Practice (cont.)
GFOA recommends voluntary disclosure of information about bank loans, especially if a government has other debt outstanding, using EMMA or issuer websites.
loan amount and date incurred
final maturity date of the loan
debt service schedule
interest rate method of calculation, if variable
use of loan proceeds
legal security and source of payment
covenants, events of default, and remedies
term-out provisions, payment acceleration, other non-standard terms
any other important information

19. EMMA Disclosure
Recent Change to MSRB’s EMMA System designed for easier filing and locating of Bank Loan disclosures.