Frequently Asked Questions

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.

Why use conduit financing?

Tax-exempt conduit bonds have, in the past, had an all-in annual borrowing cost of several percent below prime! For a qualifying project, it's the cheapest money around!



What are the negatives of bond financing?

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, amortization of these costs may outweigh the interest-rate advantage.



What is “taxable” financing?

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. Also, prime-based borrowers will sometimes 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 ($60+ 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.



Is financing restricted to projects of a certain size?

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 not a stated minimum project size for participation in the program, projects less than $750,000 often find that the issuance costs, relative to the size of the borrowing, makes other financing options more attractive.



What are the creditworthiness requirements?

Each borrower stands upon their 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 an institutional investor or banking firm. WEDFA staff can provide a listing of firms that have shown an interest in purchasing WEDFA bonds.



Who are the participants in the financing process?

Key participants on the financing team include:
•    Borrowing company
•    Letter of credit bank or institutional investor purchasing the bonds
•    WEDFA, as issuing authority
•    Bond counsel
•    Underwriter (for public sales and some private placements)
•    Trustee (if applicable)



What are the roles of each participant?

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 purchase bonds from WEDFA, and to re-sell them on the national bond market. In order to qualify for exemption from SEC Rule 15c2-12, bonds sold through an underwriter on the national bond markets will usually have a short-term variable interest rate. If the bonds are being purchased by institutional investors, the services of an underwriter would not usually be required.

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 an institutional investor purchases the bonds for their own portfolio, they may act as their own trustee.

Letter of Credit Bank (LOC)
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. If the bonds are placed with an institutional investor, a letter of credit may or may not be required.

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. The interest rates will generally be higher than can be achieved by a public sale, however.



What does all this cost?

WEDFA charges a $750 non-refundable application fee and an issuance fee equal to 3/10s of 1 percent of the principal amount of the bonds. There is no annual fee. The borrower is also responsible for the fees and costs of certain other parties involved in the transaction, including bond counsel.  Frequently these costs are paid from bond proceeds.



How long will it take to get the money?

The length of time the financing process will take is dependent 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 LOC bank/placement source 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 ¼ years. WEDFA can move as fast as the project can.



What are the steps in the process?

Following is an outline of the steps that a borrowing company will go through in the issuance process for an industrial revenue 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.

1. Preliminary Discussion and Application

Representatives of the company seeking funding should contact WEDFA to discuss details of the proposed project. Contact with WEDFA staff can be made through the company's local economic development organization, banker, bond counsel or directly, as appropriate. If the project appears to meet eligibility requirements, the company should then submit an application to WEDFA with the application fee. WEDFA will then schedule a special meeting to consider adoption of an initial Action Resolution.

2. Credit Enhancement/Institutional Investor

Concurrently, the company should begin negotiations for either the issuance of a letter of credit from an investment grade bank in support of the bond issue or the purchase of the bonds by a qualified institutional investor. A commitment letter from the LOC bank/institutional investor will be required before the issuance process can be started.

3. Initial Action Resolution
The WEDFA board will consider passage of an Initial Action Resolution. This is a very important step. It does not commit the company to anything, however, all eligible costs incurred after a date 60 days prior to the Initial Action Resolution's approval may be funded through a tax-exempt bond issue. Costs incurred before that date cannot be so recouped.

4. “All Hands” Meeting

As soon as practical after passage of the Initial Action Resolution and receipt of the LOC/institutional investor commitment letter, either WEDFA or the underwriter will schedule an “all hands” conference call to discuss what needs to be done by each of the participants and set a timetable.

5. Documentation
Bond counsel and underwriter/institutional investor’s counsel will start working on the bond documents (the loan agreement, trust indenture, bond purchase agreement and others) and circulating them to the participants for comments.

6. Bond Cap Allocation and Local Approval

WEDFA will submit an application for required bond cap and request an approving resolution from the local planning jurisdiction. WEDFA will also arrange for publication of the legal notices for the required public hearing.

7. Bond Resolution and Closing
The WEDFA board will conduct the required public (TEFRA) hearing. Following that hearing, the board will consider the Bond Resolution approving the sale of the bonds. Closing occurs as soon after the bond sale as practicable – usually within two weeks. At closing, the funds for the loan to the borrowing company are obtained and placed on deposit with the Trustee (if applicable) for further disbursement.



When do I begin to incur costs?

The first step in the bond issuance process is the issuance of an Initial Action Resolution (frequently known as an Inducement Resolution) in support of the project by WEDFA. Issuance of this resolution does not commit either the company to proceed further with the project or WEDFA to ultimately issue the bonds. It’s basically a date stamp. All eligible costs that are incurred after a date 60 days prior to the issuance of an Initial Action Resolution can subsequently be recouped from bond issuance. Costs incurred before that date cannot. Because of this date-stamp effect, it’s important to have the Initial Action Resolution issued as early in the process as possible.



What are the negatives of bond financing?

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, amortization of these costs may outweigh the interest-rate advantage.



Is there a bond cap allocation?

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.  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 bonds issued by the mid-Columbia public utility districts must get an allocation of the state’s bond cap. WEDFA has always been able to get a full allocation of its IRB bond cap requests.



What are the required disclosures?

Amendments to Rule 15c2-12 of the federal Securities Exchange Act imposed new 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.