BONDS 101 Daniel M. McRae, Partner Seyfarth Shaw LLP 1075 Peachtree St., N.E., Ste. 2500 Atlanta, GA 30309 404.888.1883 404.892.7056 fax dmcrae@seyfarth.com.

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Presentation transcript:

BONDS 101 Daniel M. McRae, Partner Seyfarth Shaw LLP 1075 Peachtree St., N.E., Ste. 2500 Atlanta, GA 30309 404.888.1883 404.892.7056 fax dmcrae@seyfarth.com dan@danmcrae.info May 2015

GETTING STARTED Why bonds? 2 | © 2015 Seyfarth Shaw LLP

BEST WAY TO BORROW MONEY The interest on bonds issued by a development authority (industrial development revenue bonds, or IDBs) is either federally taxable or federally tax-exempt. Federally tax-exempt bonds are more desirable. Advantage of tax-exempt financing Lower interest rate Longer term Greater marketability More availability of interest-only capitalized interest Smaller bond issues more do-able 3 | © 2015 Seyfarth Shaw LLP

WHY DON'T WE DO THAT ALL THE TIME? THE IRS MAKES IT HARD WHY DON'T WE DO THAT ALL THE TIME? 4 | © 2015 Seyfarth Shaw LLP

TAX-EXEMPT BONDS INTEREST ON PRIVATE ACTIVITY BONDS NOT FEDERALLY TAX-EXEMPT UNLESS THERE IS AN "EXEMPTION" EXEMPTIONS ARE HARD TO FIND COMPLIANCE WITH OTHER TAX RULES REQUIRED HERE ARE A FEW “small issue” manufacturing bonds Qualified 501(c)(3) bonds for federally recognized nonprofits Exempt facility bonds 5 | © 2015 Seyfarth Shaw LLP

TAXABLE BONDS Most development authority bonds are federally "taxable" Bonds for title for incentives But taxable bonds can be a good financing tool Example- "floaters" with community bank letter of credit confirmed by FHLB "taxable floaters" if manufacturing bonds Affordable housing bonds can be tax-exempt 6 | © 2015 Seyfarth Shaw LLP

SHOW ME A PICTURE WHAT A BOND DEAL LOOKS LIKE TO AN UNDERWRITER 7 | © 2015 Seyfarth Shaw LLP

A PUBLIC BOND DEAL USUALLY NO FA THIS IS YOU- THE DEVELOPMENT AUTHORITY THIS IS THE UNDERWRITER THIS IS A LEASE, NOT A LOAN, IF THERE IS ABATEMENT THIS IS A BANK THAT PROVIDES AN LOC SOURCE- STERN BROTHERS. COMMENTARY ADDED. 8 | © 2015 Seyfarth Shaw LLP

PRIVATE IS FASTER, CHEAPER No- Underwriter, LOC Bank (bank buys bond directly), FA, rating agency, trustee, lawyers for them SOURCE- STERN BROTHERS. COMMENTARY ADDED. 9 | © 2015 Seyfarth Shaw LLP

WHAT'S TRENDING Private placements- Larger community banks are now interested in development authority bonds Especially if they are tax-exempt Longer terms 10-15 years Fixed rate or subject to adjustment 10 | © 2015 Seyfarth Shaw LLP

HOW FAST IS FAST? BOARD MEMBERS MEET TWICE- TO ADOPT THE INDUCEMENT RESOLUTION, AND TO ADOPT THE BOND RESOLUTION APPLICATION SHOULD COME BEFORE INDUCEMENT RESOLUTION DON'T FORGET THE VALIDATION ALLOCATION USUALLY BUILT INTO SCHEDULE. PRIVATE PLACEMENT USUALLY 60-90 DAYS SOURCE- STERN BROTHERS. COMMENTARY ADDED. 11 | © 2015 Seyfarth Shaw LLP

WHAT KIND OF BONDS ARE THESE? CAN YOU SPEAK "BOND"? WHAT KIND OF BONDS ARE THESE? 12 | © 2015 Seyfarth Shaw LLP

DO YOU SPEAK “BOND”? AND CAN YOUR DEVELOPMENT AUTHORITY ISSUE BONDS LIKE THESE? THIS … IS THE OPPOSITE OF…THIS REVENUE BOND Yes. Only revenue and other collateral from the private company is at risk. No repayment obligation on the part of the development authority, the city, the county or the State. Caveat: Some Constitutional development authorities. GENERAL OBLIGATION BOND No (with contract revenue bonds, the IGA is pledged) "BANK QUALIFIED” Except for some situations involving qualified 501(c)(3) bonds, most development authority bonds are not “bank qualified”, or “BQ” (doesn’t mean banks can’t buy them; means banks don’t get a carrying charge deduction) NOT “BANK QUALIFIED” Yes 13 | © 2015 Seyfarth Shaw LLP

DO YOU SPEAK “BOND”? AND CAN YOUR DEVELOPMENT AUTHORITY ISSUE BONDS LIKE THESE? THIS … IS THE OPPOSITE OF…THIS FLOATING RATE Yes (letter of credit normally required) FIXED RATE Yes 14 | © 2015 Seyfarth Shaw LLP

FLOATING RATE SOURCE- STERN BROTHERS. COMMENTARY ADDED. 15 | © 2015 Seyfarth Shaw LLP

FIXED RATE SOURCE- STERN BROTHERS. COMMENTARY ADDED. 16 | © 2015 Seyfarth Shaw LLP

"THESE BONDS ARE TRIPLE A!" NO THEY'RE NOT! "THESE BONDS ARE TRIPLE A!" 17 | © 2015 Seyfarth Shaw LLP

WHAT DOES “INVESTMENT GRADE” MEAN? HINT- IT’S GOT NOTHING TO DO WITH DUN & BRADSTREET. YOUR PROSPECT IS ALMOST CERTAINLY NOT “AAA”. THERE ARE ONLY THREE TRIPLE A COMPANIES IN THE US TODAY- Microsoft Corp., Johnson & Johnson and Exxon Mobil Corp. IN THE TERMINOLOGY USED BY S&P AND FITCH, FOR EXAMPLE, INVESTMENT GRADE IS A RATING OF BBB- THROUGH AAA (MOODY’S IS THE OTHER MAJOR RATING AGENCY, AND HAS ITS OWN TERMINOLOGY) IF THE BONDS ARE SECURED BY A BANK LETTER OF CREDIT, THE BANK’S LETTERS OF CREDIT MUST BE RATED INVESTMENT GRADE ON THE STRENGTH OF THE LETTER OF CREDIT, THE RATING AGENCY WILL ASSIGN A RATING TO THE BONDS (THE SAME RATING AS THE LETTER OF CREDIT) 18 | © 2015 Seyfarth Shaw LLP

WHERE DO I GO FROM HERE? CONCLUSION 19 | © 2015 Seyfarth Shaw LLP

CONCLUSION HOW TO FINANCE THE PROJECT? INDUSTRIAL DEVELOPMENT REVENUE BONDS USED TO BE THE ONLY ANSWER NOW, THERE IS NO ONE ANSWER BUT WHEN ONE DOOR CLOSES … OTHER DOORS OPEN GOOD LUCK WITH ALL YOUR NEW BOND OPPORTUNITIES! 20 | © 2015 Seyfarth Shaw LLP

CHECK THIS OUT MORE INFORMATION 21 | © 2015 Seyfarth Shaw LLP

QUESTIONS? If you have any questions or comments on this presentation, please do not hesitate to let me know. Daniel M. McRae, Partner Seyfarth Shaw LLP 1075 Peachtree Street, N.E. Suite 2500 Atlanta, GA 30309 404.888.1883 404.892.7056 fax dmcrae@seyfarth.com dan@danmcrae.info 22 | © 2015 Seyfarth Shaw LLP

REFERENCES THIS PRESENTATION AND OTHER REFERENCES CAN BE DOWNLOADED AS FOLLOWS: November 2013- P3 for D-B: “How the Public Sector and Design-Builders Can Survive and Thrive in the P3 World” August 2013- “P3- Understanding Public/Private Partnerships” May 2013- “P3- Public/Private Partnerships Done Right” November 2012- "In-Sourcing Capital: EB-5 Loans and Equity; NMTC Tax Credit Equity; and Non- Recourse Project Finance Bonds“ August 2012- “Bonds 101” June 2011- "TIFs and TADs in Tough Times“; TIFs and TADs Questions and Answers January 2011 - “Introduction to Tax-Exempt Bonds” August 2010 – "Bonds For Title“ at http://danmcrae.info/whitepapers February 2013 – Quick Takes: “Projects – Money Comes Knocking” June 2011 – Quick Takes: “Easy Equity – the NMTC and EB-5 Programs” January 2011 – Quick Takes: “After ARRA – What Bonds Can We Use Now to Finance Projects?” at http://danmcrae.info/quicktakes 23 | © 2015 Seyfarth Shaw LLP

ADVICE This presentation is a quick-reference guide for elected and appointed officials and their staffs, company executives and managers, economic developers, participants in the real estate and financial industries, and their advisors. The information in this presentation is general in nature. Various points which could be important in a particular case have been condensed or omitted in the interest of readability. Specific professional advice should be obtained before this information is applied to any particular case. Any tax information or written tax advice contained herein is not intended to be and cannot be used by any taxpayer for the purpose of avoiding tax penalties that may be imposed on the taxpayer. (The foregoing legend has been affixed pursuant to U.S. Treasury Regulations governing tax practice.) 24 | © 2015 Seyfarth Shaw LLP