WASHINGTON -- More and more issuers are telling buyers up front in bond documents whether they will -- or will not -- provide secondary market disclosure.
While the verdict may not always be what buyers want to hear, the investors say they would rather have the truth than the usual silence, analysts for major investors said in interview last week.
For instance, the Richmond Metropolitan Authority said in a recent official statement that while it is required to provide financial information to the trustee and the senior managing underwriters, none of those parties are "obligated" to forward the information to bond-holders.
"Also, the authority is not obligated to provide additional or more frequent information on its finances or operations to bondholders or any other party," says the official statement for the $157.6 million expressway revenue and refunding bond deal that was sold last May in Virginia.
An even stronger statement came from another Virginia issuer, the Hospital Authority of the City of Petersburg, in the official statement for its $20.26 million offering Oct. 1 for the Southside Regional Medical Center.
While Southside Regional has pledged to provide financial information to the trustee, the statement points out that the trustee "is not authorized" to forward the information to bondholders. In addition, the authority is not obligated to provide information on its finances or operations to bondholders under the deal, the statement says.
But some issues are making it clear in official statements that they will supply secondary market disclosure.
In an official statement last month, Virginia Beach said periodic copies of the city's comprehensive annual financial report will be available to bondholders and investors through national repositories. The document also named the systems currently on line, including the Bond Buyer, Bloomberg Financial Markets, and Kenny S&P Information Services.
Other issuers are inserting language in loan agreements that, while restricting the release of data now, sets the stage for secondary market disclosure in case regulators mandate it in the future.
For example, the Idaho Health Facilities Authority says its hospitals will provide ongoing disclosure "in the event that a law or governmental regulation is adopted" requiring it to do so or if the authority itself decides to mandate it.
"We may mandate it because we feel very strongly that bondholders have a right to have that information," said Neil Moss, executive director of the authority. "Too many hospitals think that because of the competitive nature of health care, they don't have to give that information out. If you have public bondholders out there, they are entitled to know how you're doing."
Dean Pope, a partner with Hunton & Williams in Richmond, which served as bond or underwriter counsel for the three Virginia deals mentioned above, said, "We do not believe it is appropriate for us to push an issuer to undertake any particular program of continuing disclosure.
"[But] because of the growing interest in continuing disclosure, we advise issuers and conduit borrowers to state what continuing disclosure they are obligated by law or contract to make and what they plan to do as a matter of policy," he said.
"The language that we recommend tries to avoid the ambiguity we see in some disclosure," he continued. "It tries to identify exactly what information the issuer will make available and to whom. The market then can make its decision intelligently.
"We believe our role is to describe exactly what promises are made," Pope said. "We have found that most issuers, like the Petersburg Hospital Authority, are perfectly happy to be quite precise and clear on these matters."
"I have to applaud the bond counsel firm who is encouraging this kind of language," said Richard Ciccarone, senior vice president and director of fixed-income research for Kemper Securities and chairman of the National Federation of Municipal analysts standards and practices committee. "This appears to be one bond counsel who appears to be doing something about" the secondary market disclosure problem, he said about Pope.
"The market said clearly that this is what they want to see," he said, citing the results of a recent federation survey of its members. He added that he has not seen anything as direct as the Petersburg language. "It's a buyer beware statement."
The new frankness follows months of pressure by industry groups who have issued a series of voluntary secondary market disclosure guidelines aimed at breaking the information logjam plaguing many sectors of the market.
The National Federation of Municipal analysts last year approved a policy that issuers state up front in documents their intentions about supplying annual reports upon request and other information. The resolution was signed by roughly 170 top analysts.
In April, the prestigious cleveland Clinic knuckled under to pressure to provide bondholders and potential investors with ongoing annual financial statements. The decision followed an intense debate on the issue triggered when Boston-based Putnam Cos. was denied recent financial data about the hospital.
Despite some headway, market participants say they still see little movement in secondary market disclosure, including scant evidence that the market is exacting interest penalties from issuers who do not promise ongoing disclosure.
"Every deal I do, I ask people if they want to do [continuing disclosure]," said a bond lawyer with one prominent firm. "The issuer will say to the underwriter, ~Do I have to?' And the underwriter will say, ~It doesn't appear to affect pricing.' So they say forget it."
Another attorney remarked, "I've talked to issuers about it. Their attitude is ~Until I see it saving me money, I don't want to do it.' It's economic tough times."
Nevertheless, the ice is beginning to thaw, other attorneys say. "A year ago it was not unusual to go to a drafting session, and secondary market disclosure just didn't get mentioned," said Andrew Kintzinger, a bond attorney with Briggs and Morgan in Minneapolis. "Now it is much more typical at drafting sessions [for parties to address the question] early on -- are we going to have continuing disclosure?
"We take the position that whatever the decision is, they disclose it," he added.
The thaw was noted by Securities and Exchange Commissioner Richard Roberts, who said in an Oct. 23 speech he no longer sees a need for regulators such as the SEC to mandate secondary market disclosure for higher-risk securities. But Roberts, whose comments were delivered at the Bond Buyer Municipal Finance Conference in New York, expressed bitterness that bond lawyers are not pushing harder for issuers to pledge ongoing disclosure in official statements.
Kintzinger said, "I think it is becoming increasingly material that if issuers decide not to undertake it, they should so state. I can't say we are seeing any difference in price at this point. But independent of price, I think as more issuers and underwriters are becoming educated on the concerns of the secondary market, they are willing to go forward and incorporate it in transactions."
The official statement for a recent $65 million Massachusetts Health and Education Facilities Authority revenue bond offering for MetroWest Health Inc. says that MetroWest will provide not only annual, but quarterly financial reports, to the authority and to bondholders. Also pledged are patient utilization statistical reports.
"Anything that comes to the authority is considered public and will be released to anyone who asks," added Edward Murphy, executive director of the authority and head of a disclosure task force of the National Council of health Facilities Finance Authorities.
Murphy has been pushing the national council to develop secondary market disclosure guidelines, but the project has been put on hold because of fears that state agencies could not compete with local hospital issuers that would not be subject to similar guidelines.