Bond Guaranty Program
Under the Bond Guaranty Program, the Commission “guarantees” timely payment of principal and interest, up to $5 million principal per bond issue, to the bondholders. This guaranty gives the bonds a better rating, thereby making the bonds more attractive to investors and reducing the company’s cost to borrow money. The applicant must demonstrate to the Commission:
- They can make the required debt-service payments.
- The project provides substantial employment opportunities to Arkansans as a direct result of the project.
- The Commission charges a one-time upfront 5% fee for guaranteeing bond issues.
The Arkansas Development Finance Authority (ADFA) also provides a bond guaranty program that enables a company to obtain competitive, fixed interest rates. The total amount ADFA can guarantee is up to $6 million per borrower; therefore, a business could obtain up to $11 million per project through combining the guaranty programs of ADFA and AEDC. ADFA has the capacity to issue bonds for a single project or for several projects on a pooled basis. The pooled or composite issue allows small businesses needing financing for fixed assets to take advantage of low-interest financing and to share the costs for issuing bonds, an option that gives more financing opportunities which otherwise would not be available.
ADFA can also provide interim financing to approved projects before bond proceeds are available.
Industrial Revenue Bonds
Industrial revenue bonds (IRBs), commonly known as “Act 9 Bonds” in Arkansas, provide eligible existing companies with competitive financing options for property, plant and equipment expenses.
Under Arkansas Act 9 of 1960, cities and counties are authorized to issue IRBs to benefit private companies. Because Act 9 IRBs do not obligate cities or counties to make payment except from project income, the bonds must be underwritten on the financial strength of the company or guaranteed by the Arkansas Economic Development Commission and/or the Arkansas Development Finance Authority.
Interest on tax-exempt issues is normally 80 percent of prime, but this may vary depending on terms of the issue. The primary goal of this financing is to enable manufacturers to purchase land, buildings and equipment to expand their operations.
In addition to tax-exempt industrial revenue bonds, taxable industrial revenue bonds may be used for eligible existing businesses at long-term fixed rates and for manufacturing projects that exceed $20 million in capital costs or do not meet other federal guidelines relative to tax-exempt bond financing. Tourism attractions and facilities may also qualify for taxable bonds.
Businesses that use either tax-exempt or taxable industrial revenue bond financing can negotiate with the local community for property tax relief for eligible businesses in the form of Payment in Lieu of Tax Agreement (PILOT Agreement).
Tax-exempt bonds are regulated by the IRS Code, and any prospective borrower must meet basic requirements to use tax-exempt bonds to finance the project, including but not limited to:
- The firm must be engaged in manufacturing, processing, or other activities directly supporting or related to manufacturing or processing. The project must be for expansion or acquisition of fixed assets that are needed for the manufacturing process.
- The business’s total outstanding tax-exempt bond debt nationwide cannot exceed $40 million.
- The total capital cost may not exceed $20 million for a six-year period.
Taxable bonds can be issued for projects that, for whatever reason, are not eligible for tax-exempt status. Cities, counties or ADFA may issue taxable bonds with no dollar limitation for the acquisition of land, building and equipment for manufacturing, warehousing, distribution, and corporate and management offices for industry. The issuer may then lease the property to a private company, which provides the opportunity, under the necessary approvals and legislative limitations, for the private industry and the local government to enter into a PILOT Agreement. PILOT Agreements may also be used with tax-exempt bond issues. Features include:
- Qualified borrowers are not limited to manufacturing companies
- There are no capital expenditure limitations as there are with tax-exempt bonds
- It is possible to finance the acquisition of used equipment with taxable bonds