Changes to Rule 15c2-12 and Their Effect on Issuers’ Continuing Disclosure Requirements
By: Max Wilkinson
Last year, the SEC announced its plans to amend Rule 15c2-12. This proposed amendment recently took effect at the end of February 2019. Rule 15c2-12 requires underwriters of municipal securities to determine that issuers and obligated persons have entered into an agreement to provide continuing disclosure information to the MSRB on an ongoing basis. Besides the annual disclosure postings required under these agreements, additional disclosures of “reportable events” are also required, and the recent amendment to the rule adds two additional reportable events to the requirements of new continuing disclosure agreements going forward. These events are related to the incurrence of financial obligations by issuers and obligors beyond standard, publicly issued municipal securities.
What Additional Disclosures are Required?
The first, and most significant, additional disclosure required under the amended Rule 15c2-12 is the requirement to disclose the incurrence of material financial obligations of the obligated person or issuer party to the continuing disclosure agreement. Additionally, agreement to new covenants, events of default, remedies, priority rights, or other similar terms to a financial obligation must be disclosed as well if they may be material to existing security holders. While the definition of materiality in this context has been debated at length in the lead-up to the implementation of the amended rule, it is clear that new bank loans and direct purchase bonds, which have historically been exempt from public disclosure requirements, will be required to be disclosed when incurred. The relevance of other obligations such as small capital leases is less certain, and may vary depending on the size of the obligation and the institution, but many market participants have advocated for erring on the side of caution and disclosing any obligations that an issuer or obligor believes may be potentially relevant to investors.
Additionally, defaults, events of debt acceleration, termination events, term modifications, or similar events under the terms of the aforementioned obligations that reflect financial difficulties must be disclosed as well. These situations will likely arise for a smaller number of institutions than those entering into bank loans, direct purchases, or other financial obligations, but in the event that such financial difficulties do occur, it is important to be aware that disclosing them will be necessary in the future.
When Do New Disclosure Obligations Take Effect?
The amendment to Rule 15c2-12 officially took effect on February 27, 2019. However, the amended rule only applies to new continuing disclosure agreements entered into after that date (with these generally only coming as a result of new bond issues priced after February 2019). As such, the majority of issuers will not need to worry about providing additional disclosures in the immediate term, particularly as existing bank loans and financial obligations are not required to be disclosed. Voluntary disclosure of such obligations on EMMA has been and remains an option for issuers not yet subject to the new requirements. However, once an issuer or obligor brings a new issue to the capital markets, the continuing disclosure agreement for that issue will incorporate the amended rule 15c2-12, meaning that disclosure of subsequent financial obligations or events reflecting financial difficulties that occur after the new bond series closes will be required. The rule requires that disclosures of these reportable events be filed within 10 days of their occurrence, meaning that there is little room for delay when it comes to posting these notices regarding new debt obligations or events reflecting financial difficulty.
Takeaways From the Amended Rule
With bank loans, direct bank purchase bonds, and other forms of nonpublic financial obligations growing in prevalence in the bond market in the wake of the financial crisis, the potential for investors to be unaware of key information regarding the debt load and credit portfolio of issuers and obligors has increased significantly due to the lack of required disclosures for such instruments. This amendment to Rule 15c2-12 was primarily aimed at dealing with this issue by expanding transparency around nonpublic debt and financial obligations. While it does not retroactively address existing undisclosed financial obligations, the adjusted rule’s effects will impact more and more issuers over time as they continue to issue municipal securities requiring the additional disclosures.
For all municipal issuers, providing accurate and timely disclosure to the market is an important task, and maintaining up-to-date knowledge of your continuing disclosure requirements is key to prevent late or incomplete filings. If you have issues or questions regarding your continuing disclosure obligations, please feel free to reach out to your Blue Rose advisor and we will be happy to assist you.
About the Author: Max Wilkinson, Analyst
Max joined Blue Rose in September 2016. He provides financial modeling, analytics, market data and research in support of the delivery of capital planning, debt and derivatives advisory and reinvestment services to Blue Rose clients. He holds a B.A. in Economics from Yale University and is a Series 50 licensed municipal advisor representative. Max can be reached at firstname.lastname@example.org.
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Comparable Issues Commentary
Shown below are the results of two negotiated, tax-exempt public higher education issues from the state of Arizona that sold in the month of April. Arizona State University, rated Aa2/AA (Moody’s/S&P), and the University of Arizona (“Arizona”), rated Aa2/AA- (Moody’s/S&P), priced their Series 2019A bond issues on April 2nd and April 23rd, respectively. Both issued all or a portion of the 2019A issues as green bonds, and each priced the deals in conjunction with a 2019B issuance as well (with Arizona State’s 2019B Series issued on a tax-exempt basis while Arizona’s 2019B bonds were taxable).
Both universities sold their bonds solely for new money purposes. Arizona’s 2019A bonds will serve to finance a “Student Success District” project, which primarily consists of facilities improvements such as gym and library renovations/additions, the new Student Success Building (which represents the “green bond” portion of the financing), and additional campus redevelopment and linkages. The proceeds of Arizona State’s 2019A green bonds (along with a portion of the 2019B issue) are allocated to two projects – the Interdisciplinary Science and Technology Building and the Hayden Library Reinvention project.
The two deals priced into relatively stable markets, with MMD unchanged across the curve during Arizona State’s pricing on the 2nd and moving in 0-1 bp increments for Arizona’s pricing on the 23rd (increased by 1 bp from 2020-2022, unchanged from 2023-2027, and reduced by 1 bp from 2028-2049). Both transactions were structured with similar final maturities as well (25 years for Arizona and 24 for Arizona State), with Arizona’s transaction serialized completely through its 2044 maturity while Arizona State’s issue was serialized through 2041 with two term bonds in 2043. Pricing results between the two universities were highly correlated, with comparably couponed maturities within 1 bp of one another on an uninterpolated basis except for one 2043 maturity. Interestingly, the “green bond” designation appeared to have little to no impact on pricing, at least for Arizona State, as its 2019B tax-exempt issue priced identically to the 2019A green bonds across the board apart from the different term structure utilized on its later maturities.
Each of the two universities used a standard 10-year par call structure for their 2019A deals, and opted for fairly similar coupon structures for their transactions as well. Both primarily elected to sell 5% premium coupons, with only a few deviations – Arizona used 4% coupons for its serial maturities in 2035-2036 and 2043-2044, while Arizona State utilized a bifurcated term maturity in 2043 with both 5% and 4% coupons. However, the debt service structures of the two deals differed significantly – Arizona opted to sell both its 2019A and taxable 2019B deals on a purely level debt service basis, while Arizona State utilized a “step-up” debt service structure for its 2019A bonds with total annual debt service increasing each year by between $250K – $350K.