The median deal over the course of three and half months to use a temporary exemption that allows municipal advisors to arrange certain private placements is much smaller than the maximum allowed $20 million.
New figures came out from the Securities and Exchange Commission this week on the use of its temporary exemption, which allows muni advisors to facilitate certain private placement deals without needing to register as broker dealers. . From Aug. 1 to Sept. 30, the median issuance principal amount was $2,253,500.
The median amount is on the low side, said Larry Kleeman, MA at the Ranson Financial Group LLC.
“This shows that, in practice, the exemption will be reserved for use on smaller issues,” Kleeman said.
Issuers will usually find the best interest rates with public offerings, Kleeman said, and as a deal size gets smaller, the higher costs of a public offering mean bank placements make more sense.
The temporary exemption was put into place in June until the end of this year and allows MAs to engage in certain solicitations on behalf of issuer clients. It is is subject to a variety of conditions to protect investors such as limiting qualified providers to banks, banks affiliated with credit unions and banks engaging in commercial lending and financing activities, such as an equipment lease financing corporation. MAs that use the temporary exemption must provide notice to staff in the SEC Division of Trading and Markets, which is where the data comes from.
The temporary exemption ends on Dec. 31, 2020.
The new data represents the first robust look at private placements under the exemption, as the previously-released June 16 - July 31 data included only three transactions, all under $1 million in size.
The growth in the number of issuances and principal amount is not surprising, a securities lawyer said, given credit pressures that many issuers feel due to COVID-19. The median amount of $2.2 million also makes sense, he said because smaller issues could cost more if they use a broker-dealer.
If the issuer wanted to engage with a broker-dealer to place bonds, they would place them with a lower interest rate than with an independent MA, he said. The larger the principal amount, the more cost-effective it would be to use a broker-dealer.
“The smaller the deal size, the more cost-conscious the issuers will be on cost of issuance,” he said.
Thirty-five issuers relied on the temporary exemption from Aug. 1 to Sept. 30, up from just two in the second half of June and all of July. The lowest aggregate principal amount was $400,000, The highest aggregate principal amount was $19,110,000.
However, the number of deals is still small next to the private placement market as a whole. As of September 30, there were $16.77 billion of reported private placements, according to Refinitiv.
Broker-dealers were largely disappointed when the temporary exemption was announced, saying that the SEC should not permit MAs to act as placement agents without registering as broker-dealers.
“The approximately $83 million bonds issued under the exemption — we can't know the actual number because the SEC doesn't publish all relevant data — is about 1/1000th of the total issuance during that period,” said the Bond Dealers of America. “Hopefully this additional evidence will convince the SEC to repeal the exemption or let it lapse after December.”
The $83 million stems from a rough estimate of multiplying the median amounts with the number of issuances, BDA said.
The American Securities Association calls the temporary exemption an ineffective program.
“This information bolsters our objection to the TCE as an ineffective program designed to appease certain special interests who lobbied for a carve-out from regulation to offer the same services as broker-dealers without any of the compliance and capital obligations,” said Chris Iacovella, ASA CEO.
"As we have said on numerous occasions, allowing MA's to provide services to their clients and identify low cost financings is a win-win to the market and state and local governments," said Susan Gaffney, executive director of the National Association of Municipal Advisors.
Tim Sutton, director of bond pricing at BakerTilly, said the increase in deals using the temporary exemption was unsurprising.
“Municipal advisors were probably trying to put together policies and procedures, once we got the exemptive order,” Sutton said. “The sale cycle can be so long on municipal bond deals.”
David Erdman, Wisconsin’s capital finance director, expects more use of the temporary exemption as local governments assess the effects of COVID-19
“We’re now starting to see what the impacts on local budgets are from COVID-19,” Erdman said. “Every month that goes by gives us more data to utilize and to plan from.”
In August, the Securities Industry and Financial Markets Association brought a lawsuit against the SEC, arguing that the temporary exemption was not subject to a proper regulatory procedure and creates an "uneven playing field" benefiting non-dealer MAs at the expense of dealer firms.
A municipal advisor said that lawsuit could cause the SEC to not extend the temporary exemption past its expiration date of Dec. 31, 2020.
