Why a TEBL? Market Potential - MEDFAS
Tax-Exempt Bank Loans (TEBL) vs. Industrial Development Bonds (IDB)Bankers and especially Chief Lending Officers are focused on increasing commercial loans outstandings. Community Bankers sometimes find it difficult to compete with money center banks with low cost deposits. The following is a program that can help community bankers as well as regional bankers compete for manufacturing business clients.The main questions we try to answer is whether there is a tool to compete for profitable, good quality, manufacturing credits that use most banking services? Tax exempt bank loans – a government-sponsored federal program encourages banks to offer lower interest rates on bank loans for manufacturers. Simply telling manufacturers about this program could save manufacturers MILLIONS of dollars and make it much more likely they’ll want to work with your bank. Most people who are familiar with tax exempt financing for manufacturers refer to it as Industrial Development Bonds or IDBs. For a number of reasons that we discuss below, IDBs do not work for manufacturers who are expanding and seeking financing for their projects. A useful alternative to IDBs for manufacturers is a Tax-Exempt Bank Loan (TEBL) The truth is in many cases a TEBL is the better option, and one that’s a win-win-win for economic development organizations, lenders, and manufacturers.Why a TEBL? Market PotentialIn 2015 the U S Treasury allocated $37 Billion among all states divided up by population size. At the same time, there was an additional $50 billion of unused allocation from previous 2 years so a total of $87 billion of potentially low cost capital available. Pennsylvania received $1.3 billion in allocation from the U S Treasury for 2015 and had unused allocation from previous years of about $3.0 billion for a total of $4.3 Billion in usable allocation. Like most states, PA over the last 5 years has used very little of this allocation. In 2014 PA used only $29 million in allocation to help manufacturers expand. See attached reports for both State and National statistics.Why a TEBL? In short, under a TEBL, a local community bank, regional bank, or money center bank funds the loan for a manufacturer. The loan is tax exempt, meaning the bank does not have to pay federal and in most cases state income tax on the interest earned. Lenders can then pass on these tax savings in the form of an interest rate reduction to manufacturers.If you were trying to attract manufacturers to your bank and could offer them financing rates of up to 40% less than other banks, would that make your job easier? Of course it would! The best part is that your yield would remain the same as if you did not discount the rate by up to 40%!Why not an IDB?Under an IDB the Bond Market funds the debt. This bond can be taxable or tax exempt. Bond Market transactions are actually more complicated and more costly than TEBLs. In a bond offering you have to pay:An underwriterA trusteeA remarketing agentA letter of credit bank (annual fee)Upfront feesThe letter of credit cost alone can be 1.5% to 2.0% annually. That’s the same as a lender offering an interest rate 1.5-2% higher than their competitors. In a TEBL you do NOT need an underwriter, a trustee, a remarketing agent, or a letter of credit bank. TEBLs are not as complicated as a bond deal since a TEBL is simply a commercial loan with a tax-exempt interest rate. Bankers love getting the loan outstanding on the books.The problem with letters of credit Banks don’t like offering a letter of credit, a requirement of IDBs. As a bank the problem is the fee they earn on a letter of credit is fairly low, while they are taking on ALL the credit risk. The actual bond holder isn’t taking any of the credit risk. Under recent regulations, banks now have to set aside reserves to cover these letters of credit – another blow to a bank’s profitability for a letter of credit issuance. Finally, banks make money converting deposits into loans. But a letter of credit just locks up a bank’s cash, making it an unprofitable and unattractive option for them. For all these reasons IDBs are increasingly unworkable to finance a manufacturers’ expansion.Who’s Helping Manufacturers?That’s the dilemma. No One Is! Most Capital Market Bankers know about tax exempt financing but aren’t talking to manufacturers about it. Why? Because Capital Market Bankers like larger loans, ($30 to $300 million) and by law a tax exempt loan to a manufacturer cannot exceed $10 million. On the other hand, most Commercial Lenders are very interested in loans of $10 million or less. Unfortunately most commercial lenders are not aware that they can even offer a manufacturer a tax exempt loan. The result is no one, neither the capital market bankers nor the commercial lenders are telling the manufacturers about the opportunities available with tax exempt financing.The math of a tax-exempt bank loanOn a traditional commercial loan, a bank charges, say, 4% interest on that loan. On a $1,000,000 loan for one year, the bank earns $40,000 in interest (of course a regular loan would amortize over a much longer period, like 25 years). If they’re paying 35% in taxes, from that $40,000 they pay $14,000 in taxes and keep $26,000 as Net Interest Earned.With a TEBL, the bank doesn’t pay any income taxes on the interest they receive, so as long as they can still make that $26,000, they’re just as happy. The manufacturer is MUCH happier as they’re saving a lot of money. The interest rate they need to charge on that $1,000,000 to make $26,000 is, of course, 2.6%. Because of the lower interest rate, the debt service coverage ratio the bank uses improves and makes for a better credit quality. ?Traditional Commercial Loan?Tax Exempt Bank Loan????Loan Amount $ 1,000,000.00 ? $ 1,000,000.00 Interest Rate4.00%?2.60%Interest Earned $ 40,000.00 ? $ 26,000.00 Taxes Paid $ 14,000.00 ? $ - Net Profit $ 26,000.00 ? $ 26,000.00 ????Manufacturer's Savings $ - ? $ 14,000.00 And remember, that’s only for a single year – which would never be the case with a manufacturing loan like this. Over a typical 25 year loan period, a manufacturer who borrows $10 million is looking at roughly $2.7 MILLION dollars in savings. Why aren’t banks offering TEBLs?If the bank makes the same amount of money and can offer a much more attractive interest rate to a manufacturer, why aren’t they offering more of them?Turns out most banks have no idea that the bank can offer a manufacturer a tax exempt loan.In the meantime all of that tax exempt financing money goes unused. (See CDFA 2013 report and PA DCED 2014 Allocation report) Manufacturers are forced to pay higher rates of interest for no good reason. Banks and Economic Development organizations are losing out on an exciting competitive advantage they could be using to attract new business.What can we do?Education is key. Starting at the state and local level including bankers associations and economic development agencies. One to two hour workshops along with commercial bankers . If the American Banker Association or a group of State Banking Associations started introducing training programs for commercial lenders, the program would take off because it truly is a win-win for bankers and manufacturers.TEBLs vs. IDBs (Summary)Tax Exempt Bank Loan (TEBL)Industrial Revenue Bond (IDB)Funded by commercial banks. Less complicated does not require trustee, Remarketing agent, underwriter. Lower transactional cost . Commercial bankers welcome smaller transactions $750,000 to $10 million. Banks no longer view letters of credit as Profitable and would rather not issue. New regulations require banks to set aside reserves for letters of credit.No national banking association providingEducation on TEBL for Commercial lenders.Funded by Bond Market.More complicated requires trustee, remarketing agent, and underwriter. Higher transactional cost.Capital Markets not interested in smaller transactions, prefer transactions over $30 million.Bond market requires a letter of credit or transaction will not close. ................
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