5.5.2 Direct Loans

A direct loan or bank loan is a form of alternative financing for public agency issuers and represents a form of debt directly between an issuer and a lender and may be a type of a private placement. Often a direct loan is an extension of credit by a bank or other financial institution to a public agency borrower. The MSRB defines a direct loan “as a loan to a municipal issuer from a banking institution or another lender.” Direct loan “obligations may constitute municipal securities.”91 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 (e.g. Letters of Credit) (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 heavily negotiated.

Because a public agency’s borrowing authorization is generally to issue bonds or notes rather than to obtain loans, a direct loan may be structured as a purchase of a bond issued by the public agency, or the loan repayment obligation may be evidenced by a note executed and delivered by a public agency. In this case, additional bank requirements may be addressed in a separate agreement between the public agency and the bank, often referred to as a “continuing covenants agreement.” A direct loan may also be structured as a direct lease or installment sale agreement. See Section 3.6.1, Financing Leases.