5.5.3 Alternative Financing Considerations

Standard & Poor’s Global Ratings (S&P) groups direct lending under the term “alternative financing.” They define it as “[D]ebt other than traditional long term fixed rate debt, notes, variable rate demand bonds, and commercial paper commonly sold in the U.S. municipal market. Alternative financing typically includes bank loans, direct purchase bonds, and other types of privately placed debt.”92 The emergence of the alternative lending market undoubtedly provides benefits to issuers by offering diversification and, often times, new sources of capital. Issuers should recognize, however, that the structural character of these loans may differ from the traditional forms of borrowing they have used in the past. Specifically, many of these loans contain covenants that lead to acceleration,93 create demands on liquidity, or contain cross default provisions for other outstanding debt of the borrower. These claims may subordinate the claims of other lenders even if those lenders negotiated terms with the borrower before the latter borrowing in the alternative market. Issuers must understand that these provisions may trigger a disclosure obligation, requiring them to recognize the implications of the covenants in their direct loans on other outstanding debt. CDIAC addresses some of the risks associated with alternative financings as well as disclosure and reporting considerations when using direct loans.94

Private placements and alternative financings are reportable forms of debt to CDIAC under California Government Code Section 8855.