Friday, December 12, 2008

Credit Crisis?

Closed a $6M deal today for a 501(c)(3) organization in east Texas (behind the Pine Curtain). It was a bond issue for a municipality (oversimplified but you get the tax consequences) that will use the funds to finance expansion and refurb of the 501(c)(3)'s facility.

Three weeks ago the single bank that was going to buy the bond failed. We wrestled with deciding between taking the new deal of the bank (that took over the assets of the failed bank) or a crazy credit swap with another would be creditor (I was against).

My position prevailed and my client got exactly the same deal as under the previous bank's offer...basically 4% over 12 years. Granted, my client has impeccable credit credentials but the idea that money isn't out there seems least anecdotally.


Stephanie said...

I'm embarrassed to admit I don't understand the deal. The nonprofit needs money for a building project. But they don't just borrow the money from the bank directly. Somehow the city and bonds are involved. Help me out, please.

Scooter said...

Governmental units can issue bonds on which the interest is tax free to investors so that the rate of return on a muny bond is essentially equivalent to a regular bond.

In other words, IBM issues a bond that pays 6% but the interest is taxed to the investor/lender so the real rate of return (after taxes) is 4%. If a municipality can borrow at 4%, this obviously benefits the local taxpayer. The muny bond concept saves the local taxpayers the 2% difference when taxes eventually go to pay the bondholders the interest and principal.

Some 501(c)(3)s get to glom on to this benefit because they serve the local community. They act, in effect, as an arm of the local municipality even though they are charging their clients/customers/residents (BUT not making profit for investors like IBM). In my client's case, it runs a local assisted living facility.

Stephanie said...

How does the "glomming" part work? Does the City issue the bonds? or does the 501(c)(3)? I mean, is the City a party in the midst of your deal? or do you accomplish this bonding without the City involved, but as if your 501(3)(c) were the City?

Scooter said...

The muny sets up a city owned entity that issues the bond (I'm not really sure how all that works but it is a separate entity/subsidiary owned by the city). That entity issues the bond that is backed by the creditworthiness of the ultimate borrower (my client) and the deed of trust (mortgage) of the borrower.

Ultimately, the muny's subsidiary is liable but is also asset-less.

It is pretty complex. Normally, the straight loan transaction involves two sets of counsel--one for the lender and one for the borrower (me).

In these deals there is a third atty--"bond counsel." Her role is to ensure that the issuer of the bond/subsidiary of the muny dots all the i's so that the muny has no exposure, only the asset-less subsidiary is exposed.

Essentially, the entire transaction is a complicated mess to give a community something that is supposed to be beneficial in a way that is cheaper than what a "for profit" company could provide by avoiding the taxes.

Stephanie said...

Yikes. Very complex. How many hours of billable time for you? And do you do these things often?

Scooter said...

My side really isn't that complex. I'm just a dirt lawyer after all. I do the loan docs and make sure all the other docs work with mine and each other. It's just a big puzzle more than anything else. I do about four to eight of these a year.

I'd say the fees average about $15k per deal on my end but about $45-$60k when you add in lender's counsel and bond counsel's fees, which my client also pays.