For certain projects that qualify, Ziegler can underwrite tax-exempt bonds that bear interest rates that can range from 20-40% lower than taxable bonds. Typically, this type of structure is limited to construction or refinancing of capital used for constructing school or educational facilities. There are a number of different structures available.
Your institution never has to worry about refinancing a short-term bank note or rising interest rates. The interest rate you've obtained through the bond issue is fixed for the entire 20 to 30-year term of the loan. For example, refinancing a short-term bank loan during a time of rising or high interest rates can mean higher mortgage payments. Since most non-profit institutions spend all of the money they receive, the additional costs could mean cutbacks on needed programs and services.
Reduce Your Risk
Because of the fixed rates provided with a long-term bond issue, you eliminate a substantial portion of the risk associated with borrowing on a multi-million dollar project. For instance, if enrollment and growth projections are not met, a bank may not be willing to refinance a short-term loan or renew a letter of credit or bank qualified bonds. Additionally, if interest rates have risen, your institution is faced with an increased new mortgage payment that it can't afford. With a fixed rate bond issue, your institution is not exposed to these risks and you know your total cost for financing. You have a fixed-rate, full-term loan, with no balloons.
Is it possible that your institution will need to borrow additional funds for future phases of construction or additional projects? With traditional bank financing you would most likely have to refinance the original loan at the time of the second loan. This may involve additional fees, increased interest rates or prepayment penalties. Subject to certain conditions and credit qualification, fixed-rate bond issues underwritten by Ziegler typically allow additional financing to be added on to the existing loan balance, without changing any of the terms of the original bond issue. Interest rates on the new money would reflect current market rates however.
What about fees for a fixed-rate bond issue?
Bond financing does require your institution to pay underwriting fees, which are used to compensate the brokers who sell the bonds and the underwriter for the risk involved in purchasing the entire issue before bonds are sold. Fixed rate bonds do have underwriting fees that are slightly higher than bank loans or letter of credit backed bonds. However, the fees for a bond issue do not have to be paid with cash at closing, and can be financed over the life of the loan. By paying a little more in the way of up-front costs, your institution "purchases" more attractive loan terms described above. The fees paid on a one-time basis for a bond issue can be a bargain if you add-up the potential future unknown and undisclosed costs on traditional or variable rate financing.
Direct Purchase and Letter of Credit Bonds
These are two different types of tax-exempt bond financing vehicles that can make sense under certain conditions. These vehicles differ from traditional long-term fixed rate bonds in that they require the participation of a single lender, often a commercial bank. These structures are generally short term (1-10 years) but can carry with them lower rates and lower underwriting expenses. They are usually available only to extremely credit-worthy borrowers. You can engage Ziegler to underwrite or place your bonds utilizing the structures described below.
Certain banking institutions are willing to purchase tax-exempt bonds directly for their own account, rather than making a conventional loan. Ziegler would underwrite these bonds on behalf of your organization using a tax-exempt conduit issuer. The bonds themselves would be purchased and owned outright by a commercial bank, and thus structured with common bank loan terms and conditions. Loan terms can range from one to ten years, with an interest rate that may be floating or fixed for a short period of time. The advantage with this structure is that it may result in lower underwriting costs and, initially, a lower rate. The downside with this structure is that the interest rates are not fixed long-term, exposing borrowers to interest rate risk, and the loan term may only be 3-5 years, which exposes borrowers to refinancing risk. This type of financing is usually only available to stronger credits that have some level of significant equity in their property. Ziegler can explore for you whether your organization can utilize this type of financing structure.
Letter of Credit Bonds
Bond issues can be either enhanced or unenhanced. An unenhanced issue typically means that the investors purchasing the bonds can only look to the borrower and its 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 common form of enhancement is a letter of credit (LOC). LOCs 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 LOC, underwriters such as Ziegler can sell bonds to a larger variety of buyers and incorporate some unique features such as a floating rate, all driving down your cost of borrowing. Utilizing an LOC, was an extremely common way to borrow before 2008. Due to changes in the banking market and bank regulations after the financial meltdown, there is significantly less availability of this type of product, hence it is limited to only the most creditworthy borrowers. Ziegler can explore these options for you.