DEBT COVENANT DISCLOSURES AND THE IMPACT OF SEC RULE 144A

In April 1990, restrictions on the resale of privately placed securities by security brokers and institutional buyers were removed when the SEC adopted Rule 144A. Under the old regulation, Rule 144, buyers of private debt could not resell before a holding period of several years. In this paper, we examine changes in disclosure brought on by Rule 144A. We selected a random sample of 75 firms and assessed the current environment for disclosures of their debt covenants. We then simulated the effects of the shift to private markets for financing. We found that disclosures required by the material contract provisions of Item 601.b of SEC Regulation S-K, as well as Generally Accepted Accounting Principles (GAAP), made up most of the deficiencies in the availability of debt covenant information. However, investors face additional search costs in becoming informed about private debt if information intermediaries choose not to report on the covenants in private debt. The Financial Accounting Standards Board (FASB) faces the question of whether to advocate expanded disclosure or to rely on information intermediaries to increase their disclosures on private debt agreements.