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?

The main reason for using conduit financing is to obtain the lower interest rates provided on tax-exempt obligations. A reasonable starting place for estimating the savings of tax-exempt bonds is to estimate the rate for conventional financing on the project and reduce that rate by 20%.

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 or the principal amount relatively low, amortization of these costs may outweigh the interest-cost 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. In some circumstances, borrowers will 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 ($40+ 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 no stated minimum project size for participation in the program, projects less than $2,500,000 may 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 its 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 institutional investors or banking firms. 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 for most transactions include:

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 initially purchase bonds from WEDFA, and to re-sell them in the bond market.

Disclosure Counsel
If bonds which are being sold to investors by means of a disclosure document (such as an offering memorandum or official statement), WEDFA will generally retain its own disclosure counsel to review the document.

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 a commercial bank or other institutional investor purchases the bonds for its own portfolio, it may be permitted to act as its own trustee.

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.

Letter of Credit Bank (LOC)
Historically, many small issue, waste disposal and nonprofit bond issues have been done using variable rate bonds which are secured by a direct pay letter of credit provided by a commercial bank.  Various market changes have made this type of transaction far less common.  Currently, most banks prefer to simply buy the bonds if they are extending credit to the project.

However, WEDFA still is able to issue letter of credit secured variable rate bonds if the bank is willing to do that.

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.

What does all this cost?

WEDFA’s fee structure is as follows:

Application Fee

$750 per application

Issuance Fee

0.3% of principal amount of a bond issued for the first $30,000,000, plus 0.2% of the remaining principal issued above $30,000,000

Restructuring/Refinancing Fee for Existing WEDFA Bonds Issues

0.15% of the principal amount of the bonds for the first $100,000,000, plus 0.1% of the remaining balance of the bonds above $100,000,000

Ongoing Administration Fee

.0002 X starting principal balance in each semi-annual calculation period, which begins on each January 1 and July 1

 

In addition to WEDFA's fees, borrowers also must pay the fees and expenses of most other transaction participants. Typical examples of such costs include bond counsel fees, bank counsel fees, title company fees, printing costs for any offering documents, trustee fees and bank fees.

How long will it take to get the money?

The length of time the financing process takes depends 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 bank/lender 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 ½ years. WEDFA can usually move as fast as the project and banks 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 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. 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 its initial approval.
     
  2. Credit Enhancement/Institutional Investor
    Concurrently, the company should begin negotiations for the purchase of the bonds by an accredited investor (such as a commercial bank). If, after discussion with WEDFA, it appears that bonds could be sold by an underwriter to bond buyers (usually only "qualified institutional buyers" or "QIBs"), the commitment from a bond purchaser may be substituted by contracting with an investment banking underwriter to fulfill this requirement.
     
  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 but 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 generally cannot be so recouped.
     
  4. “All Hands” Meeting
    As soon as practical after passage of the Initial Action Resolution and receipt of the 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 (if required) 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. Public Hearing, Bond Resolution and Closing
    The WEDFA board will conduct the required public (TEFRA) hearing. Usually 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.

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 or the principal amount relatively low, amortization of these costs may outweigh the interest-cost 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/volume 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 other bonds must get an allocation of the state’s bond cap.

What are the required disclosures?

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