Moody's Investors Service became the latest to report that transparency in the municipal market has been diminished by the growth of bank loans and private placements.
The rating agency's annual review of 2013 audits filed to date identified over 100 bank loans with the 10,000 issuers it rates - a number Moody's hasn't published before, Timothy Blake, managing director of public finance, said in an interview. He said Moody's is still in the process of collecting and going over the audits.
Like other rating agencies such as Standard & Poor's that have brought attention to the transparency issues surrounding direct loans, Moody's identified the acceleration clauses in some loans as a potential cause for concern.
"Acceleration clauses are probably the key risk because that's where issuers' liquidity can be subtly hit," Blake said. "We have downgraded issuers that have taken on public deals with acceleration, or provide deals with acceleration."
Moody's wrote in the report that its credit assessment reflects the expectation that acceleration will be used as a remedy when available, although certain lenders, wary of losing business with issuers, may refrain from accelerating debt.
Blake said that Moody's sees potential refinancing as a significant risk as well.
"If you have a private placement that has a mandatory tender or maturity coming up near term, that's a refinancing risk and if [refinancing does not occur], issuers' liquidity could get hit," he said.
Moody's wrote in the report that direct loans are often structured with bullet maturities or mandatory tenders that cannot be met out of cash flow but require financing, and that in long-term fixed rate debt structures debt is amortized over the life of the financing out of annual cash flow.
"There is generally no requirement that the issuer access the market to repay the debt," the report said. "In contrast, failure by the issuer to arrange extension of its loan or alternative financing can result in depletion of liquidity and severe cash flow pressure."
Blake said that the report was just released as part of Moody's ongoing research schedule. He said that Moody's has publishing on the topic of direct loans beofre and that "no particular event" drove the report's publication.
"The report is our observations on the risk of private financing, and we do it to inform our investors as well as other market participants," he said. "We don't do it to seek to change behavior."
