This is a relatively new structure that has become much more popular the past decade. This can be very cost effective option in certain market conditions and depending on the needs of your organization, especially if you have a borrowing need in the $5 to $30 million dollar range.
Bond issues can be either enhanced or unenhanced. Unenhanced typically means that the investors purchasing the bonds can only look to the borrower and their assets (land and buildings) for repayment. An enhanced bond issue means that there is some other guaranty or outside collateral that is helping to back the repayment obligation. One of the most typical forms of enhancement is a "Letter-of-Credit" ("LOC"). LOC's are typically issued by a highly rated national bank and are set up to provide bond investors with 100% payment of principal or interest should the borrower default on their loan. By having this additional "guarantee" via the enhancement provided by the letter of credit, underwriters such as Ziegler can allow bonds to be sold to a larger variety of buyers and with some unique features such as a floating rate, all driving down your cost of borrowing.
Ziegler typically underwrites in excess of $1 billion per year of LOC bonds for our various nonprofit clients. One of our responsibilities as underwriter is to seek out the best possible LOC options in the marketplace that will drive the lowest cost of capital for your ministry. This type of bond structure can be more efficient than a conventional bank loan in a number of circumstances, the primary one being the requirement of a larger financing need. The underwriting cost structure of an LOC issue typically needs to be spread across a larger borrowing amount. However, for borrowers with needs of $5 million or greater, this is an option worth exploring.
There are some risks involved with an LOC bond issue, including the need to renew the letter of credit and the inability to fix the interest rate for a long-period without using a derivative such as a Swap or interest rate Cap. Consult with Ziegler on whether an LOC bond issue makes sense for your organization. Given the underwriting criteria required for a letter of credit, not all ministries are able to qualify for this type of financing.