WASHINGTON, May 15 (Reuters) - Standard & Poor’s Ratings Services is pressing U.S. state and local governments to disclose information about loans they take out from banks, which are frequently hidden from public view, saying it will not be able to assign credit scores without the information.
“We require that we are notified and supplied with all relevant documentation related to any private debt, including bank loan financing, that you enter into, regardless of whether the private debt is being rated by Standard & Poor’s,” it said in letters mailed to all of the municipal issuers it rates last week.
“If you enter into such an agreement, and we are not informed in a timely manner and supplied with the documentation, we may, suspend or withdraw your rating in accordance with our published procedures,” it continued in a copy of the letter given to Reuters on Thursday.
In recent years, municipal bond issuers have turned more to direct financing agreements with banks, saying the loans can be cheaper than borrowing in the $3.7 trillion municipal bond market.
The public is often in the dark about the details of the borrowing, with investors and regulators sometimes having to wait for annual statements to learn loans even exist. Issuers do not have to provide offering documents when they take out the loans, and they do not have to tell traders in the secondary market about them.
For more than two years the Municipal Securities Rulemaking Board has tried to combat the dearth of public information about bank loans, but the self-regulatory organization for the market has little authority over the agreements.
S&P estimates that the total amount borrowed from bank years each year is equivalent to 20 percent of debt sold in the municipal bond market.
In a fact sheet released in March S&P said that “because alternative financings may contain events of default or covenants that, in our view, favor the lender over existing bondholders, such financings expose the obligor to potentially detrimental credit factors.”
The agency also expressed concerns about “cross-default provisions” that could accelerate repayment of the loans and transferring the loans to other banks or lenders.
In the fact sheet, the agency said it will make two requests for documentation without penalty, but a third request would result in placing the borrower on CreditWatch. After that, an issuer has 15 days to provide the information or have its rating suspended. (Reporting by Lisa Lambert; Editing by Bernard Orr)