When Lenders Put a Muzzle on Borrowers

Companies hide from shareholders information about loans — more than likely to appease banks

The bedrock of U.S. securities laws is the requirement that public companies disclose all important information to their shareholders on a timely basis. But new research by UCLA Anderson’s Daniel Saavedra suggests there’s a catch: When it comes to details about companies’ bank loans, disclosure rules may take a back seat to bankers’ desire for secrecy.

In a working paper, Saavedra set out to examine how often companies redact information about their bank credit agreements from financial documents that must be filed regularly with the Securities and Exchange Commission. In prior research into loan agreements, Saavedra had noticed that information he deemed significant wasn’t showing up in some companies’ SEC filings. “That got me interested,” he said in an interview.

It turned out that the problem of missing information was far more widespread than Saavedra had imagined. From a sampling of 2,204 loan contracts that companies disclosed to the SEC between 1995 and 2012, Saavedra found that 73% of the documents had at least some information redacted. The high percentage surprised him, he said in an interview — even while knowing that lenders often negotiate with their borrowers the right to “review and make suggestions about what loan-related information should be made public.”

Saavedra’s study focuses on two forms of information redaction. In one common situation, a company decides to restrict disclosure of some or all of the fees charged by its lenders. Instead of sharing the information in public documents, the fee data are disclosed in a separate document or letter that isn’t available to the public, the study says.

Banks can charge companies a host of fees for arranging loans: “origination” fees, for example, as well as “auditing” fees, loan-monitoring fees and late-payment fees. When added up, Saavedra writes, the total charges can be “material,” the word the SEC uses to describe information that shareholders should know.

A second form of redaction occurs when the SEC grants a firm’s request to withhold certain information in its loan-contract filings with the agency, the study says. Yet Saavedra found that while 73% of the loan contracts in his sample were redacted, “Less than 1% of the debt contracts stipulate that the SEC has granted the borrower’s request to withhold information,” the study says. In other words, it appears that information often is withheld without explicit SEC approval.

Why would banks encourage companies to withhold loan information? For one, bankers naturally want to protect their loan profits by making it more difficult for competitors to offer better terms, the study says. Likewise, banks have no interest in allowing their other borrowers to see potentially more favorable loan terms, which those borrowers might try to use to negotiate better terms for themselves.

Companies, meanwhile, have good reason to acquiesce to lenders’ redaction requests: it keeps credit flowing. Saavedra’s study of loan agreements found that borrowers that redacted loan information were likelier to keep going back to the same lender for additional credit, compared with the 27% of sample borrowers without redacted credit agreements.

Are many companies simply choosing to take the risk of violating SEC disclosure rules by redacting loan information? Saavedra allows that a likely corporate defense for withholding data would center on the issue of what constitutes “material” information. “I am not a legal expert in this area, so I want to be careful here,” he said in an interview. “However, it is fair to say that all material information should be disclosed to the public if the SEC hasn’t granted a request to redact information.” For a clearer picture of the significance of the information that is held back, “We would need to have access to the not-disclosed fee letters,” he said.

“My research can only conclude that firms often withhold potentially material information without the SEC’s granting a request for confidential treatment,” Saavedra said.