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Negotiating the terms and conditions of a multi-million dollar loan is a huge responsibility for a religious institution, and the subtle differences between financing alternatives can be very confusing. Bank of the West understands the challenges you face, and can help you understand your options so that you can fulfill your stewardship responsibilities. The following information will help you evaluate some of the costs and consequences associated with various financing alternatives.
- Banks are the most common source of financing for religious institutions today. However, most banks typically sandwich religious institution loans between commercial and other for-profit loans. As a result, the loan terms, conditions and ongoing covenants may not be appropriate for a religious institution.
- Many banks that tout experience in religious institution lending continue to require religious institutions to comply with loan covenants that are typically associated with for-profit commercial businesses. Liquidity requirements, minimum debt coverage ratios, and limitations on capital expenditures may limit your organization's autonomy. Look for a bank that demonstrates a thorough understanding of religious institution operations, and will not treat your religious institution like a commercial business.
- Bond companies often suggest that the higher fees associated with their product are mitigated by the ability to amortize them over the 15 to 20 year term of the bond offering. While such a scenario is conceivable, in our experience, these bond offerings almost never remain intact for the entire 15 to 20 years. In fact, religious institutions usually retire their debt early with capital pledge receipts, refinance at a lower rate, or restructure debt in conjunction with a subsequent building phase within a 5 to 10 year period. Regardless of the reason, when you prepay the bonds early, the fees and cost you paid up-front are actually spread over a shorter term. Consequently, the actual annualized cost often proves significantly higher than anticipated.
- Bank of the West encourages religious institutions to be conservative when evaluating the cost effectiveness of a bond offering. For example, your religious institution may plan to prepay the debt via proceeds from one or more Capital Stewardship Campaigns. Or, your plans may include a subsequent building phase. Begin by identifying the earliest date by which either of these scenarios may play out. Then, estimate the effective cost of bond financing by fully amortizing the bond company's fees over this shorter time duration.
- Some bonds are issued on a "Firm Underwriting" basis. This means the bond company commits to buy all of the bonds, thereby providing the religious institution a guarantee the loan will be fully funded. The cost for this guarantee can be very high, ranging from 4.5% to 6.5%. In contrast, bank costs are typically much lower, charging 1% to 1.5% for a guaranteed loan funding.
- Many bond offerings are underwritten on a "Best Efforts" basis. This means the bond company will not guarantee that the bonds will be sold or that your loan will be fully funded. The underwriter simply commits to offer the bonds for sale. Slow bond sales may jeopardize the completion of your project. Further, some builders may be reluctant to execute a contract due to the uncertainty of funding. When these issues are raised it is common for Best Effort bond companies to offer to arrange short term financing, or a "bridge loan" with a third party financial institution. Make sure you understand the additional application requirements, loan fees, interest costs, documentation expenses, covenants, and conditions associated with the bridge loan.
- Bond companies can be inflexible. If unanticipated project costs are incurred mid-stream, or if the religious institution simply needs financing for buses or computer systems, the religious institution may feel handcuffed. The long regulatory lead-time and the relatively high minimum fixed costs associated with a subsequent bond offering render small loan requests impractical.
- You should anticipate other cost and disclosure issues related to bond offerings. For example, before you can accept proceeds from the sale of bonds, securities regulators will require you to provide the investor with a public disclosure document known as a prospectus. Disclosure requirements may include several years of audited financial statements prepared by a Certified Public Accountant. This up-front accounting expense is substantial and time consuming. Also, don't overlook the cost of printing and mailing the bond prospectus. Finally, be sure to ask your insurance company if your Directors and Officers liability coverage includes protection against any investor allegations of misrepresentations in the prospectus.