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Industrial Development Bond

For businesses seeking long-term, low-interest rate financing for the construction or improvements of manufacturing facilities, Industrial Development Bond (IDB) financing is available both at the state and local levels. IDB financing is typically structured as public sales in the nation’s bond markets or sold as private placements with interested investors. In the case of publicly sold IDBs, credit enhancements in the form of letters of credit is often provided by local banks, insuring that a favorable interest rate to the borrower will result from the sale of bonds. Interest rate may be fixed or variable.

How Does It Work?

• The borrower applies to a local development authority (LDA) for an inducement of the project.
• The LDA holds a public hearing in the jurisdiction where the project will be built.
• The borrower’s creditworthiness is analyzed and appropriate credit enhancement is arranged.
• Bonds are issued and sold, proceeds of the sale are disbursed to the borrower as a loan, and issuance fees are paid. (Up to 2% of issuance costs may be financed through an IDB sale.)

Credit standards for IDB borrowers vary according to issuing authority and type of issuance:

• Public placement through local issuer: Borrower must meet minimum debt standards for the bonds.

Advantages

• Below-market interest rate financing generated through the sale of tax–exempt bonds.
• Long-term, low-payment financing, with term matched to the useful life of the assets financed.
• Comprehensive use of funds for manufacturing- related improvements, including purchase of land, construction or purchase and renovation of buildings, and purchase of new equipment.
• Up to $10 million available for each eligible project.

Disadvantages

• State and federal limitations placed on IDB financed projects remain in effect until
  the bonds are retired.
• Issuance costs may limit the attractiveness of IDB financing for amounts below $3 million.