Disclosing direct bank loans

Hospitals last year turned to direct bank loans to limit risk from another short-term vehicle to finance capital spending, known as variable-rate demand bonds. Now, the body that oversees transparency in the tax-exempt market is asking borrowers to voluntarily disclose direct bank loans to investors.

The plea, announced by the Municipal Securities Rulemaking Board this week, acknowledges that rules largely do not require such disclosure, but says the information would help promote “a fair and efficient market.”

The direct bank loans have proved to be a popular alternative to variable-rate demand bonds. In a report released this week by Moody's Investors Service, analysts said the market for variable-rate bonds began to shrink three years ago, in part thanks to access to direct bank loans, and will likely continue to do so.

Variable-rate demand bonds often require bank credit support to attract investors, particularly money market funds in search of highly rated investments, Moody's said. Weakened banks have weakened the credit strength of the bonds, however, and the threat of further bank-credit stress represents a risk for the market, according to the ratings agency. Bank downgrades (Moody's has 11 banks under credit review) could leave borrowers with higher interest rates or no investors willing to buy their bonds.

That could be a particular problem for hospital borrowers that have weak credit or more limited cash reserves.

There is also a wave of bank support that will expire in the coming year, Moody's said. Bank support deals are short-term and during the early months of the credit crisis, many borrowers entered into bank-credit support deals that are now coming due.

Still, borrowers managed to navigate a similar crush of expired bank support in 2011, the ratings agency said. One quarter of borrowers rated by Moody's with expiring bank credit support exited the market. That included 9% that secured bank loans.

The Municipal Securities Rulemaking Board, in its request for voluntary disclosure of bank loans, proposed a few details about what such reporting should include. That includes the par amount, lender, purpose of the loan, default events and remedies, among other details.

You can follow Melanie Evans on Twitter: @MHmevans.