Best Practices

Bank Loans and Direct Placements

GFOA recommends that governments, considering the possibility of entering into bank loans, develop policies and procedures related to these debt obligations.

The London Interbank Offered Rate (LIBOR) is scheduled to end by June 30, 2023. New agreements should not reference LIBOR.

Bank loans, also known as direct placements, are an important tool in a government’s financing toolkit. For purposes of this Best Practice, the term “bank loans” includes fixed or variable-rate loans with defined maturities and loans or lines of credit that have variable interest rates and flexible payment provisions. Bank loans do not include securities that are offered to the public (competitive or negotiated sale), or privately placed with sophisticated investors (private placement).

Potential advantages of bank loans are that the process for the execution of a bank loan is generally simpler than a publicly offered bond issue, have lower issuance costs, and fewer ongoing compliance requirements. Additionally, bank loans can often be structured in a manner that more closely conforms to specific project or repayment considerations than is the case with publicly offered bond issues. However, because bank loans are typically not executed in an environment that is as transparent as the bond market, an issuer may have limited ability to determine whether the proposed interest rate(s), fees and terms are competitive with a publicly offered bond issue. In addition, while bond ratings and disclosures may not be required at the time of bank loan, information about any bank loan will need to be subsequently provided. Typically, bank loans are of shorter duration (up to 10 years).

Governments, considering the possibility of entering into a bank loan, should develop specific policies and procedures that address the proper legal and financial aspects of using bank loans. Governments also should become familiar with the various types of terms used in these financial products. Governments need to know how bank loans are characterized for legal and accounting purposes, including how they are treated in the government’s financial statements, and what types of disclosures should be made about these loans. State and local laws should be reviewed to ensure these financings are within legal limits and the financing is characterized appropriately.

A Listed Event notice is likely required to be filed on EMMA upon entering into a bank loan. However, GFOA recommends that providing ongoing information about outstanding bank loans is a good disclosure practice and necessary for market participants to assess an issuer’s outstanding debt obligations and general credit quality.

GFOA recommends that policies and procedures related to bank loans include options and means to evaluate other debt alternatives available to it. GFOA also recommends that governments should consult with their municipal advisor and legal counsel if considering the use of bank loans. These professionals should be engaged by the government prior to, and throughout, the negotiations for a bank loan. These professionals can assist with making an assessment of proposed structures, terms and pricing.

Some of the questions that should be addressed before a government pursues a bank loan include:

  • Some of the questions that should be addressed before a government pursues a bank loan include:
  • Has the government retained outside professionals to help determine the legality and fiscal prudency of a bank loan?
  • Does the government have the legal authority by state and local statute to enter into the contemplated financing?
  • Has the government considered or discussed with its professional team the option of issuing bank qualified debt?
  • From a statutory standpoint, is the bank loan considered to be debt, and if so, does it apply against the government’s debt capacity or other considerations?
  • Does a bank loan offer a better solution to the issuer’s needs than a financing offered in the public bond markets? What are the terms that best fit these specific borrowing needs (including fixed vs. variable interest rates)?
  • How will potential bank loan providers be solicited, evaluated, and selected?
  • Is the government using competitive means to obtain a bank loan? How can the government best negotiate the final terms with the selected financing provider?
  • Has the government thoroughly reviewed and discussed the term sheet of the loan prior to its execution, and does the term sheet have comprehensive information about the loan?
  • What is the interest rate on the bank loan? Is it fixed for the term of the loan, or does it change during the term of the loan? Is the interest rate a variable rate with predetermined interest reset dates or an index upon which it is based? Is the interest rate subject to change if the rating(s) on the issuer change? Can the government manage the risk of an increase in the interest rate, and to what extent?
  • Is the loan a fully amortizing loan, or does it incorporate a non-amortizing bullet maturity? Are there term-out provisions for a non-amortizing bullet maturity? How is the debt service schedule structured level or ascending? Can additional debt be incurred by the government, if necessary? If so, what is the formula for determining how much additional debt can be incurred? Is there a coverage ratio requirement in the loan? Are there penalties for prepaying the loan prior to maturity? Are there acceleration provisions? Can the government manage the risk of acceleration?
  • What are the covenants included in the bank loan, and who within the government is responsible for ongoing compliance? Are there certain covenants that the government will avoid, such as acceleration or cross-default?

Disclosure Considerations

Amendments to SEC Rule 15c2-12 for bonds issued on or after February 27, 2019, added two additional listed event notices. As a result, if a government has issued debt on or after February 27, 2019, public disclosure of bank loans or other financial obligations as referenced through a listed event may be required. The disclosure must occur in a timely manner, typically within a few days of entering into the loan. GFOA recommends that, prior to closing on the loan, governments discuss with Bond Counsel or Disclosure Counsel, what will be filed, and who will be doing the filing. See the GFOA Best Practice Understanding Your Continuing Disclosure Responsibilities.

Even ifalisted event notice is not required, GFOA recommends that voluntarily providing ongoing information about outstanding bank loans is a good disclosure practice and necessary for market participants to assess an issuer’s outstanding debt obligations and general credit quality.In addition, rating agencies treat bank loans akin to a bond issue or other long-term debt and will inquire ongoing information forany bank loans the government may have. Without sufficient information about any bankloans and the government’s plans to comply with all covenants, the rating agenciesmay not be able to maintain a rating for other obligations of the issuer.


  • Board approval date: Friday, March 6, 2020