TAX-EXEMPT BOND FINANCING

Bond financing should be explored as an option by a not-for-profit institution, taking into account the timing need for project funds, the size of the anticipated borrowing, and the credit quality of the borrower. Typically, a bond issue with a par amount above $5 million would be cost effective for a bond issue, and the larger the transaction, the lower the overall costs of borrowing. CHEFA staff is ready to assist you with the components and timing of a bond transaction, the associated costs, and alternative financing options.

How CHEFA adds value

CHEFA facilitates the process among the many parties involved in a bond transaction, and stands ready to help you however we are able. We can provide support with the following:

• Coordination of bids for services such as investment bankers, trustee banks and verification agents.
• Review and analysis of debt structure proposals, loan covenants, security pledges, credit enhancement, credit ratings and marketing of the bonds.
• Our staff actively participates in the pricing structure and process for every transaction issued through the Authority.

Tax-Exempt Bond Issue Structure

Your project can be structured as a fixed or variable rate issue, or as a private placement offering, and our staff can help analyze these options and variations to structure an attractive bond offering, and to meet the project and borrower's requirements.

FIXED RATE STRUCTURE

Fixed Rate Insured

Credit enhancement (guaranty) from a municipal bond insurance company is required for a fixed rate insured transaction. Note that bond insurers have become more selective recenly. Examples of municipal bond insurers include:

• AMBAC, Assured Guaranty, CIFG, FGIC, FSA, MBIA, Radian, and XL Capital

Fixed Rate Stand Alone Issue

Requires obtaining credit rating(s) from a nationally recognized rating agency. CHEFA's policy is not to issue stand alone bond issues for health care institutions.
Examples of rating agencies are:

• Moody's
• Standard & Poor's
• Fitch

Characteristics of Fixed Rate Bonds

• Sold in $5,000 denominations
• Maturities range from 1 year to 30 years
• 10-year Call Protection
• Purchasers include

- Institutions (mutual funds, money market funds) for longer maturities, 10 to 30 years
- Retail ("Mom & Pop") for shorter maturities, 1 to 19 years

• Interest paid to bondholders semi-annually

Benefits of a Fixed Rate Structure

• Locks in interest rate for the life of the of the loan
• Predictable debt service payment eases budgetary process
• Does not usually encumber unrestricted monies
• Minimizes financing timetable
• If bond insurance is available, provides lowest cost of funds for fixed rate issues

Disadvantages of Fixed Rate Financing

• Foregoes potentially lower debt service
• Availability of Credit Enhancement
• Unenhanced lower rated issues are relatively expensive

VARIABLE RATE STRUCTURE

A variable rate structure Requires credit enhancement from a Letter of Credit Bank with the highest short-term rating (A-1, P-1).

Provides guaranty and liquidity. Examples of letter of credit banks include:

• Allied Irish
• Bank of America
• Chase
• Citizens Bank
• Wachovia

Characteristics of Variable Rate Bonds

• Sold in $100,000 denominations
• Interest rate is reset on a weekly basis
• Final maturity - 30 years
• No call provisions - Bonds may be paid off at any time
• Purchasers mainly include:
  • Institutions (mutual funds, money market funds)
  • Very few retail (high net worth individuals)
• Interest paid to bondholders monthly

Benefits of a Variable Rate Structure

• Increased financing flexibility, particularly if future bond issue is contemplated
• Provides lowest cost of capital when bond insurance is unavailable; variable rates have averaged 3.61% for the past year
• Interest rate swap may be available to fix the interest rate for a period of time, usually 5 years but at a premium
• May allow higher amount of borrowing
• Reduced underwriting costs, but annual LOC and remarketing fees
• Historically low interest rates

Disadvantages of Variable Rate Financing

• Subjects the Institution to interest rate risk (but swap may be an option), tax risk and counterparty risk
• Requires a bank liquidity facility (ongoing fees); maximum 5 year term (does not match term of the issue)
• Without swap, may require budgeting adjustments due to monthly interest rate resets
• LOC (and/or swap) makes for relatively complex transaction which may take longer and result in increased transactional fees
• Remote risk of failed remarketing

AUCTION RATE SECURITIES

Auction Rate Securities are a form of floating variable rate, and typically all of the securities have long-term nominal maturities of 25-30 years. All of the securities reset their interest rates at 7, 28, or 35 day intervals. However, is important to understand that there is a default coupon rate on all these securities.

Most dealers use a competitive bidding process known as a Dutch Auction to reset interest rates. Prospective buyers need to be aware of what will happen should an auction fail.

Owners of Auction Rate Securities have the option to do any one of the following:

• Hold an existing position regardless of what the new rate might be.
• Bid to hold an existing position at a specific rate.
• Sell an existing position regardless of the rate set at the auction.

PRIVATE PLACEMENT PROGRAM

CHEFA's Private Placement Program is available to borrowers that may be unable to access the capital markets through a credit enhanced bond issue.

Characteristics of a Private Placement structure

• Bonds are sold directly to a qualified investor
• Similar to EasyLoan program

Benefits of a Private Placement Structure

• Neither credit enhancement nor credit ratings are required.

Disadvantages of Private Placement Financing

• Interest rates may exceed conventional financing rates.