Industrial bond financing

Public sector financing can support
private development projects that
will fuel economic growth in communities. The lower interest rates and
longer payment terms characteristic of
programs such as tax-exempt Industrial
Revenue Bonds (IRBs) can be used to
finance a significant part of an industrial
project. Because these projects tend to
be larger in scope and the potential
exists for them to create jobs and expand
a community’s tax base, manufacturers
frequently receive these funds. However,
many companies often do not pursue
government-issued loans due to the
increased complexity of the application
and approval process.

Smart Business talked to Rob Thomas
of PNC’s capital markets group about
IRBs and how manufacturers who are
thinking about expansion can benefit
from this low-cost, flexible financing
solution.

What are Industrial Revenue Bonds and
when are they typically used?

Industrial Revenue Bonds are tax-exempt loans issued by state or local
governments to finance a private company’s expansion, construction or acquisition of manufacturing facilities and
equipment. Local and state governments
support these projects because they can
improve the economic well-being of
a community.

IRBs are issued at rates lower than conventional loans because interest paid on
the bonds is exempt from both federal
and state income tax. The lower interest
rate reduces the cost of financing and
makes projects more attractive to pursue. Additionally, these bonds can
mature in 20 to 30 years as compared to
five to 10 for typical bank loans.

What are some of the criteria for qualifying?

If your project involves manufacturing,
waste disposal/recovery or wastewater
treatment then you probably meet the
qualifications for an IRB. The next step is
reviewing capital expenditures at the project site for the three years prior and
subsequent to the issuance of the bonds,
which must be $20 million or less.

Most public sector loan programs have
specific goals that must be addressed if a
company is to obtain financing. You will
have to put together a project description
and outline how the community can benefit from your project — whether it be
through the creation or retention of jobs,
increasing the tax base or attracting
other businesses to the area.

What are the steps to apply for an IRB?

The process will vary from state to
state, but there are some general steps
you must take in order to obtain a bond.

  • Retain legal counsel experienced in
    the area of IRBs to initiate the process
    with the government agency and provide
    legal documentation.

  • Discuss the project with your lender
    to help you to identify what financing
    structures are best suited to your company and project. An underwriter may also be necessary to include at this point if
    the bonds will eventually be purchased
    for public resale.

  • Contact the government, corporation
    or agency legally authorized to issue
    bonds and start the application process.
    Depending on the state, this can be an
    independent authority, a city or a county.

  • The application procedure for IRB
    financing typically requires 30 days. The
    local agency will approve the project.
    From this point, any expenditure incurred less than 60 days prior to that date
    can be included in the project. The overall process from application to funding
    can take 90 to 120 days. You can use
    interim bridge financing if you need to
    proceed more quickly.

What are other considerations for companies who are thinking about IRB financing?

First, there are some upfront costs
associated with issuing an IRB. These
include ancillary costs like underwriter
fees and additional legal fees. Second,
any assets financed with tax-exempt
IRBs must be depreciated on a straight-line basis. Lastly, the process to issue an
IRB can be complicated; however, the
right selection of experienced counsel
and financial partners will make the
process go more smoothly. And, in most
cases, the benefits gained from 20 years
of interest savings significantly outweigh
these issues.

This was prepared for general information purposes only and is not
intended as specific advice or recommendations. Any reliance on this information is solely and exclusively at your
own risk.