New uses and structure for Federal Home Loan Bank Letters of Credit can help communities by providing credit enhancements for tax-exempt bonds and

Transcription

1 New uses and structure for Federal Home Loan Bank Letters of Credit can help communities by providing credit enhancements for tax-exempt bonds and improve cost of capital. 1

2 LC Structure, Usage, Benefits AGENDA Overview Introduction of Presenters Doug Iverson Senior VP Director of Marketing, FHLBI Mark Pascarella Lending Officer, FHLBI Denise Yvette Barkdull Partner Ice Miller Steven Kennedy, Jr. Vice President Lancaster Pollard Thomas Peterson Partner Ice Miller Swiss Village Overview Questions & Answers 2

3 Arthur and Gloria Muselman Wellness Pavilion Swiss Village, Berne, Indiana About Swiss Village Opened in 1968 Continuing care facility offering independent living to full nursing home care with many on-site services such as banking, barber and beauty shops, and library 350 residents; 340 employees About the Pavilion Named after a couple who were active residents of Swiss Village and supporters of the wellness program 21,200 square feet, aquatic center, child care, kitchen Exercise room which can also be rented by public for events such as receptions and club meetings Pavilion used by both residents and community. Community pays membership fee which is used to cover operation costs Opened January

4 Arthur and Gloria Muselman Wellness Pavilion Swiss Village, Berne, Indiana Funding A pledge drive has raised $3.7 million to date. Goal is $4 million. FHLBI letters of credit to support bond issuance > First Bank of Berne - $4.8 million > Bank of Geneva - $2.2 million Investment bank - Lancaster Pollard & Co., Columbus, OH 4

5 Standby Letters of Credit About FHLBank Standby Letters of Credit Issued on behalf of FHLBI member institutions Cost effective way to improve credit rating of transaction and/or to provide credit enhancement On July 30, 2008, Housing and Economic Recovery Act of 2008 (HERA) signed into law permitting FHLBanks to issue LCs to back tax-exempt, non-housing bonds > LC legislation championed by Rep. Sander Levin (D-MI) This expanded authority set to expire on December 31,

6 Standby Letters of Credit FHLBI can issue LCs to assist members with Residential housing finance Community lending eligible for FHLBI s Community Investment Program Asset/liability management Liquidity or other funding 6

7 Standby Letters of Credit Types of Standby LCs Traditional Standby: FHLBI guarantees payment to beneficiary on behalf of member Confirming: Member issues an LC that is guaranteed by FHLBI Direct Pay: FHLBI is drawn on directly by beneficiary to make recurring payments, typically part of a bond financing 7

8 Standby Letters of Credit Standard Fees Standby, Confirming, and Direct Pay: 37.5 BPS annually, beginning with settlement date Community Investment Program (CICA): 20 BPS annually, beginning with settlement date Transaction Fee of $50 for all draws If FHLBI uses outside counsel, fee to be paid by member Early termination fee of up to $5,000 may apply 8

9 Standby Letters of Credit On the Regulatory Front: Regulator has been asked by another FHLBanks to clarify if new authority under HERA must also qualify for Community Investment Program (CIP) To date we have not received an opinion from our regulator If the regulator were to require project to meet CIP criteria, one of the following conditions would have to be met: > Housing projects for households up to 115% AMI > Projects creating or preserving jobs > Small business loans > Projects providing services to a qualified area > Income limits do not apply to projects in eligible areas (empowerment zones, brownfields, enterprise communities) 9

10 Standby Letters of Credit Other Specifications Standby LCs limited to maximum term of 20 years Member must collateralize total amount of Standby LCs and includes Standby LCs in calculating a member s capital stock requirement. For more information, please call Mark Pascarella, Lending Officer or Brian McCoy, VP, Advances Manager The FHLBI is not a financial, investment, or tax advisor and does not make any representations as to such regarding the use of Standby LC. It is the member s sole responsibility to research the legal ramifications of using FHLBI Standby LC and the effect it may have on the taxable status of a bond issuance. 10

11 Tax-exempt Bonds & How They Work Role of Federal Home Loan Bank Borrower contracts with bank to provide an LC guaranteeing payment on bonds With LC, bonds are marketable because bondholder relies solely on credit of bank providing the LC FHLBank can offer any member an LC using FHLBank s high credit rating 11

12 Role of the Federal Home Loan Bank Role of Federal Home Loan Bank continued FHLBank s LC to secure bonds will provide > Ready access to bond market > Higher credit rating (and therefore lower interest rate) than member can achieve on its own credit Member and Borrower enter into credit (or reimbursement) agreement > Borrower agrees to reimburse member for any payment made on bonds > Member takes security and places any necessary financial and debt restrictions on borrower 12

13 Role of the Federal Home Loan Bank Is this program new? No, but recent federal legislation expanded the use of the FHLBank LCs Historically, the FHLBanks could provide LCs only for bonds issued to finance acquisition or construction of multifamily housing FHLBanks now authorized to issue LCs to support all varieties of tax-exempt bonds 13

14 Tax-exempt Bonds & How They Work Who can use Tax-exempt Bonds? Traditionally, tax-exempt bonds may be issued to finance capital costs of acquisition, construction and equipping of > manufacturing facilities > solid waste disposal facilities (or portions of facilities dealing with the solid waste produced by a facility) > multifamily rental housing facilities Recently enacted Federal Stimulus Bill changes all the rules 14

15 Tax-exempt Bonds & How They Work The New Who Essentially, any business enterprise can qualify for tax-exempt borrowing to fund capital expenditures > Recovery Zone Facility Bonds > $15 billion authorized to be issued nationwide > Allocated to states and suballocated to counties/large municipalities based on job losses > Each state to receive a minimum of $135 million Manufacturing definition expanded now covers intangibles Heartland Disaster Bonds - $3.2 billion to Indiana as a result of the flooding in Spring 2008 > Any business that suffered a loss is eligible 15

16 Tax-exempt Bonds & How They Work How Do Bonds Work? Tax-exempt bonds issued by governmental entity, such as city, town or county or by statewide entity such as Indiana Finance Authority ("Issuer"), the Michigan State Housing Development Authority or any other statewide issuer" Bonds sold to market through underwriter or placement agent Proceeds of bonds then lent to borrowing entity ("Borrower") for use on capital expenditures for qualifying project 16

17 Tax-exempt Bonds & How They Work How a letter of credit works. 17

18 Tax-exempt Bonds & How They Work If you have a potential project and would like to discuss its eligibility, contact: Denise Barkdull denise.barkdull@icemiller.com Thomas Peterson thomas.peterson@icemiller.com

19 LC Benefits, & Observations Benefits to FHLBank Members Community investment Provides opportunity for local financial institutions to invest directly into community-based projects New business opportunity Enables local institutions to provide clients access to AAA-rated tax-exempt capital; places them on more level playing field with larger, rated institutions Retain and grow local business relationship Mitigates risk associated with larger institution providing debt capital; as a result taking over depository and other ancillary services 19

20 LC Benefits, & Observations Benefits to FHLBank Borrowers Maintain and strengthen local banking relationships Clients can access AAA- rated tax-exempt capital via local relationships, ensuring continuity with local contact Community investment borrower s LC fee is staying local, rather than leaving community to non-local institution 20

21 LC Benefits, & Observations General Observations Members lending limit restrictions may be overcome by including multiple members in deal If multiple members involved, one lead member is key to structuring efficiencies AAA-rated FHLBank LC is trading extremely well in today s financial markets; enhanced interest in flight to quality financial environment Collateral posting requirements appear to be primary deterrent to members using LCs 21

22 Biographies Name: Denise Yvette Barkdull Position: Partner Location: Indianapolis Office Phone: (317) Fax: (317) Assistant Name: Corinne Cook-Oliver Assistant Phone: (317) Assistant Undergraduate School: Bachelor of Business Administration in Finance, Boise State University, Graduated in 1994 Graduate School: Master of Business Administration, Indiana University Kelley School of Business, Graduated in 1997 Law School: Indiana University School of Law Bloomington, Graduated in 1997 Admitted to Practice: Indiana Mini Biography: Denise Barkdull assists state and local governments with taxable and tax exempt financings for direct governmental purposes, as well as economic development within their region. Ms. Barkdull provides counsel for, among other things, airports, solid waste disposal facilities, single family and multi-family housing, municipal gas utilities and manufacturing facilities. 22

23 Biographies Name: Thomas W. Peterson Position: Partner Location: Indianapolis Office Phone: (317) Fax: (317) Assistant Name: Jan Gluth Assistant Phone: (317) Assistant Undergraduate School: University Diploma, with high honors, Darwin College, University of Kent, Canterbury,England, Graduated in 1982 A.B in Economics, Duke University, Graduated in 1983 Law School: Duke University, Graduated in 1986 Mini Biography: Thomas Peterson has served as bond counsel to state and local governments for over 22 years. Mr. Peterson has also served as special counsel to the Federal Home Loan Bank of Indianapolis in the development of their Letter of Credit program. 23

24 Biographies Steven W. Kennedy Jr., Vice President, is Lancaster Pollard s investment banker in charge of Indiana and Illinois. Lancaster Pollard is a national investment banking and financial services firm that specializes in providing capital funding and financial advisory services to the health care, senior living, affordable housing and private education sectors. In addition to underwriting tax-exempt bond offerings, Lancaster Pollard provides organizations a complete range of funding options through its FHA/GNMA/USDA/FNMA-approved mortgage lender subsidiary. Since joining Lancaster Pollard in 2001, Mr. Kennedy has devoted 100% of his efforts to providing health care organizations with financial advisory and capital funding solutions. He has been instrumental in bringing to market a variety of financing structures totaling in excess of $500 million and was named Lancaster Pollard s National Healthcare Banker of the Year in Prior to joining Lancaster Pollard, Mr. Kennedy worked for United States Senator Richard G. Lugar (Indiana) in Washington D.C. Mr. Kennedy earned his MBA from the Fisher College of Business at The Ohio State University in Columbus, Ohio. He received bachelor degrees (magna cum laude) in economics and political science and a certificate in organizational studies from Denison University in Granville, Ohio. He holds a General Securities Representative license, Series 7, and is a frequent speaker on capital funding for community health care providers. 24