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Eligibility and Application Details
Tax-exempt bonds can be issued on a long-term, fixed-interest rate basis with terms typically between 20 to 30 years for good credits. Tax-exempt bond proceeds generally may be used for any of the following purposes: new capital expenditures; refinancing prior debt; reimbursing prior capital expenditures; generating working capital; or third-party bond-related costs such as legal counsel costs, investment banking fees, trustee charges, and rating expenses.
To pursue tax-exempt financing through the CECC, a Catholic educational institution must have a qualifying project, be creditworthy, be a current member of the NCEA, and maintain its membership for the life of loan.
Does my project qualify? The following categories outline what projects can be funded by a CECC Bond.
Category 1 - New capital expenditures
This category includes expenditures for new construction/acquisition of land, buildings, equipment and related infrastructure that will be owned by the school. Generally, and with a few exceptions, the financed property must be used by non-profit groups as opposed to renting space/facilities to for-profit groups. Also, when the bonds are issued, the expectation is that funds will be fully expended within three years.
Category 2 - Refinancing prior debt
It is quite common to use tax-exempt bonds to refinance outstanding taxable debt, bank loan, taxable mortgages, and the like. A caveat is that the proceeds of the debt to be refinanced must have been used for qualifying projects as more fully described in Category 1. CECC Bonds can also be issued to refinance existing tax-exempt bonds that the school may have issued.
Category 3: Reimbursing prior capital expenditures
Certain expenditures made before the issuance of tax-exempt bonds can be reimbursed with proceeds of tax-exempt debt. Examples of reimbursable expenditures include land purchases, architect and engineering fees, site preparation, and surveying. If the school wishes to reimburse itself for these sorts of previous expenditures then it should adopt a “reimbursement resolution” as early in the process as possible.
This reimbursement resolution is easy and simple to draft and is not binding if bonds are never issued. There is no need for a reimbursement resolution for funds expended within 60 days of the issuance of the bonds.
Category 4: Costs of issuance, capitalized interest, and reserves
Up to 2 percent of bond proceeds may be used to pay for third-party, bond-related costs such as legal counsel costs, investment banking fees, trustee charges, rating expenses and the like. If expenses exceed 2 percent of bond proceeds (which often occurs in smaller transactions) then the excess costs may be paid by a borrower contribution or the placement of a small amount of taxable bonds (often referred to as a “taxable tail”) in conjunction with the issuance of the tax-exempt bonds.
Category 5: Various including working capital
Up to 5 percent of bond proceeds may generally be used for purposes (including working capital) not outlined in the other four categories. Interest payable on the bonds for a period equal to the greater of three years or the construction period plus one year can be included (i.e., capitalized) in the use of bond proceeds. This capitalized interest is held by the bond trustee and used to pay bondholders and thus saves the school from the need to pay interest from operations or whatever other source during the capitalized interest period. The debt service reserve (cash reserves set aside by a borrower to ensure full and timely payments to bond holders) funded from bond proceeds cannot exceed the lesser of 10 percent of the bond issue, 125 percent of annual debt service, or the maximum annual debt service. The debt service reserve fund provides a cushion if the school faces temporary financial problems.
CECC Bond Terms
- Repayment period: Tax-exempt bonds are typically amortized over a period of 1–30 years (a 15 or 20 year repayment period is the most common).
- Interest rate: Tax-exempt bonds may be sold using a fixed or a floating (variable) interest rate. A fixed interest rate protects the school if interest rates rise in the future and allows certainty when creating budgets. Fixed interest rate bonds may be sold on a rated or non-rated basis. It is also common that fixed rate bonds are sold in a private placement to one institutional investor.
- Floating rates are often lower than comparable fixed rates, but bear the risk that the variable interest rate may increase over time. The school may eliminate some of this interest rate risk by entering into an interest rate swap or another form of interest rate protection. Typically, floating rate tax-exempt bonds are rated based on the inclusion of a letter of credit from a commercial bank. Therefore, to successfully issue floating rate bonds, the school will need to obtain a letter of credit to secure the bondholders. The investment banker can help in identifying a letter of credit bank.
- Optional prepayment: If the school chooses to prepay some or all of the outstanding tax-exempt bonds because interest rates have decreased, or because it has generated excess funds from operations, capital campaigns or other sources; then it can typically do so at any time without penalty in the floating rate option. However, if the school chooses the fixed-rate option or enters into some form of interest rate protection, then typically there is some lock out period (e.g., 5–10 years) during which the school may not optionally prepay the debt or may only do so with a penalty.
- Security: Tax-exempt bonds are usually secured by a guarantee of the school and a mortgage on the property to be financed.
- Bond amount: There is no maximum bond amount that can be issued, but it is typically difficult to justify a tax-exempt bond issue of less than $3 million (circumstances can vary).
Ready to apply? Access the USCCB letter to Bishops to start the conversation in your diocese!
View CECC Bond frequently asked questions.
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