The following information is intended to be general in nature. It is not a statement of tax, securities or other law and should not be construed as either a statement of law or as constituting legal advice.
The main reason for using conduit financing is to obtain the lower interest rates provided on tax-exempt obligations. A reasonable starting place for estimating the savings of tax-exempt bonds is to estimate the rate for conventional financing on the project and reduce that rate by 20%.
Due to the necessity of ensuring compliance with tax law requirements as well as the greater number of required participants associated with a bond issue versus a bank loan, bond financing has higher up-front costs than conventional financing. Although up to 2 percent of bond proceeds can be used for issuance costs, for smaller financings the borrowing company may have to pay some closing costs from other than bond sources. If the term of the bonds is relatively short or the principal amount relatively low, amortization of these costs may outweigh the interest-cost advantage.
Most projects will have cost elements – warehousing requirements, used machinery, planned expansion space, etc. – which will not qualify for tax-exempt financing. Financing of these costs through issuance of WEDFA’s “taxable” bonds in conjunction with the tax-exempt portion can provide an efficient means of completing the total project financing in a single package, with the savings associated with the blended rate. In some circumstances, borrowers will find the interest rate on a taxable bond issue to be lower than conventional bank financing.
Taxable financing will commonly be used only in conjunction with a companion tax-exempt financing. Very large ($40+ million) projects may also benefit from straight taxable bond financing through WEDFA as an option. Because WEDFA is legally a governmental entity, WEDFA’s bonds are classified as “municipal bonds” and may be purchased by a wider market than would be available for normal corporate debt. It must be emphasized, however, that this approach is only cost effective for large projects.
Manufacturing bonds can be used for up to $10 million for a single industrial project. However, there is also a restriction of $20 million on the total capital expenditure by the company in the local jurisdiction in which the financed project is located. This $20 million cap includes all expenditures that can be capitalized under generally accepted accounting principles, even if they are expensed rather than capitalized, and including those funded from sources other than bond proceeds. The period over which these capital expenditures are measured begins three years before and ends three years after the sale of the bonds.
While there is no stated minimum project size for participation in the program, projects less than $2,500,000 may find that the issuance costs, relative to the size of the borrowing, makes other financing options more attractive.
Each borrower stands upon its own creditworthiness; it is important to emphasize that there is no governmental financial support, either direct or indirect, provided by WEDFA or any other governmental entity. WEDFA policies generally require our bonds sold on the public markets to have credit enhancement.
Borrowers may arrange a private placement of the bonds with institutional investors or banking firms. WEDFA staff can provide a listing of firms that have shown an interest in purchasing WEDFA bonds.
Key participants for most transactions include:
Washington Economic Development Finance Authority (WEDFA)
WEDFA acts as the issuing authority for the bond issue. WEDFA
approves the initial action resolution, which allows the project
being financed to be started prior to bond issuance, as well as the
bond resolution and other documents required for bond sale. WEDFA
will also perform certain required actions, such as scheduling and
conducting the required public hearing, obtaining planning
jurisdiction approval and the required allocation from the state’s
volume cap.
Bond Counsel
Bond counsel is a legal firm with special expertise in
municipal bond and federal tax law. Bond counsel provides the legal
opinion that interest on the bonds is tax-exempt under federal law,
that the transaction is legally sound, and that the bonds are valid
and binding obligations. Bond counsel also prepares much of the bond
documentation. Bond counsel is selected by the borrowing company,
subject to WEDFA’s approval. WEDFA staff would be happy to provide a
listing of eligible firms.
Underwriter
The primary role of the underwriter is to
initially purchase bonds from WEDFA, and to re-sell them in the bond
market.
Disclosure Counsel
If bonds which are
being sold to investors by means of a disclosure document (such as an
offering memorandum or official statement), WEDFA will generally retain
its own disclosure counsel to review the document.
Trustee
The trustee is a financial institution that provides fiduciary
and accounting services for the bondholders, and is charged with
generally representing the bondholders' interest. The trustee will
handle all funds associated with the bond sale, receiving all the
monies generated from the bond sale and passing them on to the local
bank for disbursement to the borrowing company. The trustee receives
all principal and interest payments from borrowing companies and
makes payment to the bondholders on predetermined dates. If a
commercial bank or other institutional investor purchases the bonds for
its own portfolio,
it may be permitted to act as its own trustee.
Institutional Investor
An alternative to a letter of credit and sale through an
underwriter on the national bond markets is a private placement with
an institutional investor as a portfolio investment. This
“institutional investor” must be a "Qualified Industrial Buyer" or
QIB.
An institutional investor will apply the same credit standards a bank would in considering issuance of a letter of credit. Since the number of required participants is fewer than for a public offering, issuance costs for a private placement will generally be less. Also, because private placements are not subject to the secondary market disclosure requirements of Rule 15c2-12, fixed rates may be available.
Letter of Credit Bank (LOC)
Historically, many small issue, waste disposal and nonprofit bond issues
have been done using variable rate bonds which are secured by a direct
pay letter of credit provided by a commercial bank. Various market
changes have made this type of transaction far less common.
Currently, most banks prefer to simply buy the bonds if they are
extending credit to the project.
However, WEDFA still is able to issue letter of credit secured variable rate bonds if the bank is willing to do that.
The LOC bank must have a long-term unsecured credit rating in the "A" range or better. The LOC would normally be either the borrowing company's regular primary commercial bank, or have a correspondent relationship with the borrowing company's regular primary commercial bank. Through its letter of credit to the individual borrowing company, the LOC bank provides the credit enhancement, and bears the credit risk of the borrowing company. The LOC bank also acts as loan servicer after the bond proceeds have been disbursed.
WEDFA’s fee structure is as follows:
|
Application Fee |
$750 per application |
|
New-to-WEDFA Refunding and New Money Tax Exempt Bond issues |
0.3% of principal amount of bonds |
|
New-to-WEDFA Refunding and New Money Taxable Bond issues |
0.225% of principal amount of bonds |
|
Refunding/Restructuring Fee for Existing WEDFA Bonds |
0.15% of amount of refunding bonds issued |
|
Ongoing Administration Fee |
.0002 X starting principal balance in each semi-annual calculation period, which begins on each January 1 and July 1 |
In addition to WEDFA's fees, borrowers also must pay the fees and expenses of most other transaction participants. Typical examples of such costs include bond counsel fees, bank counsel fees, title company fees, printing costs for any offering documents, trustee fees and bank fees.
The length of time the financing process takes depends on the project’s progress. WEDFA does most of its bond-related work by special meeting via telephone conference call. These meetings are scheduled on an as-needed basis; there is no need to conform to any preset WEDFA meeting schedule.
Historically, the two factors that have determined the pace of the financing process have been the bank/lender due diligence underwriting process and any unusual permitting requirements (e.g., shoreline permit). The shortest time between application to WEDFA and bond closing has been 17 days; the longest 2 ½ years. WEDFA can usually move as fast as the project and banks can.
Following is an outline of the steps that a borrowing company will go through in the issuance process for bond financing. Although these are listed as discrete steps, in actual practice many of them will occur simultaneously. The time period between the initial contact between WEDFA and the potential borrower and actual bond sale will vary depending upon the status of the project planning as well as other factors. While it could take as little as two months, this time frame would probably be longer, depending upon the progress of the project being financed.
Due to the necessity of ensuring compliance with tax law requirements as well as the greater number of required participants associated with a bond issue versus a bank loan, bond financing has higher up-front costs than conventional financing. Although up to 2 percent of bond proceeds can be used for issuance costs, for smaller financings the borrowing company may have to pay some closing costs from other than bond sources. If the term of the bonds is relatively short or the principal amount relatively low, amortization of these costs may outweigh the interest-cost advantage.
Federal tax law only permits a limited dollar volume of certain types of tax-exempt bonds to be issued in the state in a given year. This dollar amount of “permission” for the state is generally referred to as bond cap/volume cap. Please note this is only an authorization to issue bonds on a tax-exempt basis; there are no actual dollars involved.
In addition to IRBs and “exempt facilities” bonds issued by WEDFA, bonds issued by the state and local housing authorities, student loan bonds and certain other bonds must get an allocation of the state’s bond cap.
Amendments to Rule 15c2-12 of the federal Securities Exchange Act impose disclosure requirements on issuers of municipal debt, including industrial revenue bonds. These amendments require the continuing annual disclosure of key financial and operating data and timely disclosure of certain material events when they occur.
WEDFA recognizes that most of its clients will not wish to make
disclosures of this nature. There are certain exemptions from these
requirements, however, and WEDFA bond issues are usually structured to
take advantage of these exemptions.