School or community college districts planning a publically offered bond issue this year and beyond, take note! As of February 27, 2019, the securities disclosure rules have changed, and public agencies must thereafter commit to disclosing to the bond market information relating to private placement financings and other similar obligations, if material, when such obligations are incurred.
For over 20 years, school districts, community colleges, and other public agency issuers of publically offered municipal debt have been required to supply bond investors with timely annual financial reports and other operational information, and to provide prompt notice upon the occurrence of certain listed events (colloquially known as “material events”) affecting the debt or the debt issuer over the life of the bonds. Material events include events such as redemption of bonds, bond payment delinquencies, rating changes, and bankruptcies. This requirement is placed on a debt issuer, like a school district, when it signs a continuing disclosure agreement or “CDA” as part of the Security and Exchange Commission’s Rule 15c2-12. An underwriter may not proceed to underwrite an issuer’s debt until it has confirmed that the issuer is prepared to deliver a CDA compliant with Rule 15c2-12, which provides a level of transparency to the investing market.
As a result of the market participants’ push for even greater transparency, Rule 15c2-12 has been amended to add two new reporting events to the list of material events relating to “financial obligations” of the issuer.
On and after February 27, 2019, an issuer must sign a CDA in accordance with Rule 15c-12 that, in addition to the annual reports and other historic “material events,” also commits the issuer to promptly report on the following two new events:
- 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 an obligated person, any of which affect security holders, if material.
- Default, event of acceleration, termination event, modification of terms or other similar events under a financial obligation of the issuer or obligated person, if any such event reflects financial difficulties.
Rule 15c2-12 defines financial obligation as (i) a debt obligation, (ii) a derivative instrument 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 intention is for bond issuers to provide information about financial obligations they incur that are not public offerings or debt issuances offered under an Official Statement. Financial obligations would probably include such transactions as lease financings or private placement transactions which have not traditionally been subject to market disclosure at the time they occur, if material. As to the details of what must be reported when such a financial obligation is incurred, the SEC gives little guidance but provided the following example of terms that may be included in an event notice for a material financial obligation:
- date of incurrence,
- principal amount,
- maturity and amortization,
- interest rate (if fixed) or method of computation (if variable), and
- any default rates and/or other terms, if deemed a “material term.”
While the above terms may suffice to satisfy Rule 15c2-12, complex transactions would likely require additional disclosures, as one must determine what else may be considered material to a reasonable investor when making an investment decision. Municipal issuers of debt should consult with bond counsel or disclosure counsel for guidance as to when an event is material under Rule 15c2-12, and the extent of the disclosures required.
Existing CDAs are not affected by the Rule 15c2-12 amendments. Reporting of the incurrence of financial obligations applies on a prospective basis, once a new CDA is signed on or after February 27, 2019. However, regardless of when a financial obligation is incurred, if a default or other event reflecting financial difficulties under any financial obligation occurs and the issuer has entered into a CDA on or after February 27, 2019, an event notice is required to be filed regarding that default.
If your District or its Dissemination Agent have any questions regarding the application of these new rules, please contact us directly for assistance.