In a report released yesterday, Standard & Poor’s said the overwhelming majority of bank loans it reviewed in 2015 did not have a negative effect on borrowers’ bond ratings, although disclosure is still critical.
It turns out bank loans may not be such a problem after all.
In 2015, S&P reviewed 126 bank loans totaling $5.2 billion. The rating agency reports that only five obligors were negatively impacted.
Bank loans include direct placements, where a lender buys an entire tax-exempt bond issue in a limited offering without a bond underwriter.
The healthcare sector continues to be the most voracious consumer of bank debt. Of the loans reviewed by S&P, hospitals and other healthcare providers secured 43 loans totaling $2.4 billion.
Education came in a distant second with $893 million.
S&P noted that bank debt continues to be a valid option for municipal borrowers for various reasons including low cost of capital and ease of issuance.
Ease of issuance is driven by limited disclosure as most bank loans do not fall under the SEC’s definition of securities.
While less disclosure is clearly a plus for hospitals and other municipal borrowers, it makes it harder for rating agencies to assess how loans and their terms affect a borrower’s overall credit quality.
S&P continues to emphasize the need for hospitals and other municipal obligors to provide them with bank loan documents (see S&P Clamps Down on Bank Placement Disclosure).