3.7.1 Direct Loans

A direct loan is an extension of credit by a bank or other financial institution to a public agency borrower. The bank may advance all funds at closing or advance funds over time as needed by the borrower, with interest paid only on funds advanced (generally referred to as a “drawdown” loan). Direct loan documents, like credit facility reimbursement agreements (See Section 2.3.2, Credit Enhancement and Liquidity Support), include issuer representations, warranties, covenants, and default provisions more extensive than those in a public offering and tend to be negotiable.

A public agency’s borrowing authorization generally covers issuing bonds or notes rather than obtaining loans. To stay within the agency’s authorization, a direct loan may be structured as a bond purchase issued by the public agency, or a loan repayment obligation may be evidenced by a note executed and delivered by a public agency. In this case, a separate agreement between the public agency and the bank, often referred to as a “continuing covenants agreement,” may address additional bank requirements. A direct loan may also be structured as a direct lease or installment sale agreement.