United States: New Event Notices For Municipal Bond Disclosure

February 27, 2019 is the compliance date for newly adopted Securities and Exchange Commission (the "SEC") amendments to Rule 15c2-12, adding two new event notices. The event notices are aimed at prompting timely, continuing disclosures by issuers and other obligated persons of direct purchases, direct loans or bank placements and other private placements. Along with the new event notices, the amendments define "financial obligation" to capture debt obligations of issuers that are not municipal securities for which a final official statement has been provided to the Municipal Security Rulemaking Board's electronic portal, the Electronic Municipal Market Access ("EMMA") system.

The amendments may affect you if your organization DOES the following:

  • Places Bonds directly with Banks (i.e., direct purchases) without an Official Statement;
  • Enters into Lease-Purchase Financings directly with Equipment Vendors;
  • Enters into interest rate management agreements (swaps, interest rate loans, etc.); or
  • Enters into Intergovernmental Agreements or Interlocal Agreements in respect of, directly or indirectly, debt obligations.

Specifically, the amendments require issuers or other obligated persons to provide event notices to EMMA reporting the:

  • Incurrence of a "financial obligation" of the issuer or obligated person, if material, or agreement to covenants, events of default, remedies, priority rights, or other similar terms of a financial obligation of the issuer or obligated person, any of which affect security holders, if material; and
  • Default, event of acceleration, termination event, modification of terms, or other similar events under the terms of the "financial obligation" of the issuer or obligated person, any of which reflect financial difficulties.

The amendments define "financial obligation" to include (i) debt obligations; (ii) derivative instruments entered into in connection with, or pledged as security or a source of payment for, an existing or planned debt obligation; or (iii) a guarantee of (i) or (ii). The definition of "financial obligation" does not include municipal securities for which a final official statement has been provided on EMMA.

Which "financial obligations"?

The amendments only affect continuing disclosure undertakings entered into on or after the compliance date of the amendments, as specified below. Issuers and obligated persons with a continuing disclosure undertaking entered into on or after the compliance date must file event notices for material "financial obligations" incurred on or after the date such continuing disclosure undertaking is entered into. However, the SEC has made clear that event notices must be filed upon the occurrence of any of the events that reflect financial difficulties, regardless of whether the related financial obligation was incurred before or after the compliance date of the amendments.

Background

In its 2012 Report on the Municipal Securities Market, the SEC expressed concern that issuers and obligated persons were not properly disclosing the existence or the terms of bank loans, particularly when the terms of the bank loans may affect the payment priority from revenues in a way that adversely affects bondholders. In the 2012 Report, the SEC indicated that it was considering amending Rule 15c2-12 to mandate disclosures of new indebtedness not otherwise reported under the Rule. In SEC Release No. 34-80130 (the "Proposing Release"), the SEC noted that, since 2009, issuers and obligated persons have increasingly used direct purchases of municipal securities and direct loans as alternatives to publicly offered municipal securities. The SEC cited its concern that existing bondholders, potential investors and other market participants (analysts, rating agencies) may not have any access or timely access to disclosure about direct placements or other financial obligations. The SEC's objective is ensuring transparency because investors and market participants may lack access or experience delay in access to disclosures about material financial obligations like direct loans or bank placements.

Below, we provide a more detailed description of the new event notices and examine the definition of "financial obligation."

New Event Notice — Incurrence of Financial Obligation or Agreements — "If Material"

A materiality determination must be made by the reporting entity in deciding whether a financial obligation requires an event notice. Similarly, a materiality determination must be made to each of the agreed upon terms — agreement to covenants, events of default, remedies, priority rights or other similar terms — in evaluating whether the agreement requires an event notice. The SEC offers very little guidance as to what constitutes "materiality." Consequently, issuers and obligated persons will need to consult with legal counsel and advisers regarding new financial obligations and whether such obligations are important to current bondholders and potential investors. Similarly, issuers will need to evaluate the materiality of covenants, events of default, remedies, priority rights or other similar terms that they may typically agree to in a bank loan or direct placement to decide if such agreements should be disclosed on EMMA. The SEC offers some examples of what constitutes "material" and triggers event notice: agreeing to covenants that are more restrictive than outstanding bond covenants; agreeing to events of default in a bank loan that differ from those in an issuer's municipal securities; agreeing to acceleration provisions that may create a priority over existing bondholders; entering into a direct placement with a balloon payment at maturity creating refinancing risk that could affect an issuer's creditworthiness.

The amendments require that an event notice of the incurrence of a financial obligation or an agreement to the listed events above should include a description of the material terms of the financial obligation or agreement. The SEC provides the following examples of material terms: date of incurrence, principal amount, maturity and amortization, interest rate, if fixed, or method of computation, if variable (and any default rates), and other terms, depending on the circumstances. Depending on the facts and circumstances, this requirement may be satisfied by submitting a summary of the material terms, a term sheet or other applicable transaction documents such as a continuing covenant agreement.

Definition of "Financial Obligation"

The SEC's definition of "financial obligation," while excluding municipal securities for which final official statements are posted on EMMA under Rule 15c2-12, is broad in its coverage.

  • Debt Obligation is intended to capture short-term and long-term debt obligations under the terms of an indenture, loan agreement, lease or similar contract, such as a direct purchase or a direct loan by a bank. This includes leases entered into as a vehicle to borrow money.
  • Derivative Instrument Entered into in Connection with, or Pledged as Security or a Source of Payment for, an Existing or Planned Debt Obligation captures any swap, security-based swap, futures contract, forward contract, option, any combination of these instruments or any similar instrument to which an issuer or obligated person is a counterparty, provided that such instrument(s) is related to an existing or planned debt obligation. This includes instruments that are related to an existing or planned debt obligation of a third party if such instruments are designed to hedge against the risks of a related debt obligation.

Issuers should consult with their counsel regarding developing, or amending, municipal securities disclosure policies and procedures to provide how an issuer may determine which of its obligations may constitute a "financial obligation" under the Rule amendments.

New Event Notice for Events "Reflecting Financial Difficulties" Under "Financial Obligation"

Current Rule 15c2-12 already contains two event notices "reflecting financial difficulties": unscheduled draws on debt service reserve funds and unscheduled draws on credit enhancements. However, the SEC points out that investors and market participants may lack access to information regarding defaults, acceleration, termination, modification of terms or other similar events under the terms of a financial obligation (i.e., other than a municipal security) that reflect financial difficulties.

  • Default includes monetary defaults, such as a failure to pay debt service, and non-payment defaults, such as a failure to comply with specified covenants.
  • Event of acceleration in tandem with a default if reflecting financial difficulties could impact an issuer's liquidity and creditworthiness.
  • Termination event could include a termination fee payable by the issuer or obligated person under a swap agreement.
  • Modification of terms includes modifications that reflect financial difficulties of the issuer or obligated person, including negotiation of covenant changes that may provide priority rights with respect to existing bondholders. This event is intended to be broad and includes a written or verbal waiver of a deal provision.
  • Other similar events includes events arising under the terms of a financial obligation that reflect financial difficulties of the issuer or obligated person. These events, although not specifically set forth elsewhere in the Rule, are still relevant to investors and other market participants in making an assessment of the current financial condition of the issuer or obligated person.

Such event notices should include a description of the event and the consequences of the event, if any.

Compliance Date

The compliance date for the new amendments is February 27, 2019. Issuers and obligated persons should expect heightened due diligence by underwriters, municipal advisers, analysts and rating agencies regarding the disclosure of bank loans, direct placements and other financial obligations described above.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions