July 24, 2014 / 12:01 AM / 3 years ago

California requires more disclosure in direct loans to municipalities

July 23 (Reuters) - A law signed by Governor Jerry Brown on Wednesday strengthens California’s disclosure regulations for direct loan transactions between banks and municipalities.

Sponsored by the State Treasurer, the law requires alternative forms of financing such as direct loans be included in existing bank loan transparency regulations. It also speeds up the deadline to file loan disclosures.

“The key objective was to ensure the reporting of direct loan transactions between banks and municipal entities that is a growing segment of the market,” said State Treasurer Spokesperson Tom Dresslar. “There has not been adequate disclosure.”

Non-traditional financing for projects, such as direct loans from banks, is a rising trend in the U.S. municipal market. But this type of borrowing allows public officials to obtain new debt without full disclosure to municipal bondholders, a growing concern for bondholders and rating agencies that do not know the full scope of the issuer’s indebtedness, the bill’s authors argued.

“We believe this puts California in the forefront of an effort to shed some more light on this corner of the market,” Dresslar said.

A new analysis by Standard & Poor’s Ratings Services on Wednesday found the potential for considerable credit risk exposure among alternative financing products like bank loans and direct-purchase debt to municipal issuers. The rating agency highlighted the need for greater disclosure.

Reporting By Robin Respaut; Editing by Cynthia Osterman

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