A Case Study in IDB Finance: Serving Expanding Manufacturers Through the Use of Industrial Development Bonds (IDBs) By: William Reisner Stern Brothers & Co.

While many of the companies that occupy the U.S. manufacturing sector continue to lose market share to countries such as Asia, one company found a way to accomplish a significant capital project to compete more aggressively in the global marketplace. The company is Stolze Printing and the capital project led to the construction of a modern printing facility and the purchase of a state-of-the-art printing press in Bridgeton, Missouri. The new plant will add manufacturing jobs, provide good benefits and promote local economic development. It will also improve the operating performance of the company and expand its customer base. After considering numerous sources of financing, the company used an industrial development bond (“IDB”) which allowed the company to obtain debt with a tax-exempt interest rate, considerably lower than all other forms of financing.

Stolze Printing was faced with a critical decision, either continue to serve the existing customer-base in a smaller facility with old and outdated printing equipment or expand the business to meet the demands of its customers and the broader marketplace. Fortunately, management was aware of the IDB option early in the decision process. Many local businesses are unaware of their financing options when capital projects are in development stages. Companies often discover the IDB option after conventional bank financing is already in place or cash has been expended beyond the 60-day “look-back” period. This can be a costly oversight for any company.

IDBs are often a perfect financing alternative for businesses facing pressure to lower pricing in order to compete in a global marketplace. According to the company, the amount of interest saved versus a conventional package was in excess of 3%, which now represents additional earnings and added strength to the balance sheet. “Without the industrial development bond, we would have been forced to purchase a smaller building and used equipment,” said Phil Stolze, President of Stolze Printing, when asked about the benefits of the IDB. “Now we have room to grow our business and the equipment in place to meet the demands of the competitive marketplace.”

The final bond sizing was approximately $5,685,000, the proceeds of which paid for securing a new location for the facility, expansion of the core manufacturing process, as well as costs of issuance. Stern Brothers & Co. served as underwriter, and structured the bond as a rated issue with a direct-pay letter of credit supplied by a national banking institution. This structure allows the bonds to trade on the strength of the letter of credit provider rather than relying solely on the credit of the borrower. As a result, the private company has access to lower interest rates through the public markets, with minimal disclosure of proprietary financial information.

CDFA has played a key role in leading the charge to implement legislative initiatives in order to promote local economic development. CDFA successfully lobbied to double the capital expenditure limitation from $10 million to $20 million, spanning a six-year horizon (three years prior and three years subsequent to the date of issuance). With the help of CDFA, the resources are in place and information has been disseminated to many of the local issuers to promote this form of financing. As a result, the job of local issuers to educate their communities is even more important.

This education may include explaining that an industrial development authority or other governmental body issues an IDB, which is repaid by the manufacturing company. The governmental authority serves as a conduit for the project financing, and since no funds are at risk, authorities can authorize the issuance of such bonds without a vote of the local electorate. When these bonds are authorized for a project, all related project expenses occurring 60-days prior to the date of inducement can be repaid through bond proceeds. It is important that all capital project expenditures are subject to a review to ensure that they are eligible for tax-exempt financing. Therefore, the involvement of an investment banking firm early in the process is critical to obtaining the most efficient financing.

CDFA conducted an online survey to measure the impact of the capital expenditure legislation in December 2006. Even though the industry has already noticed an up-tick in IDB activity, Stern Brothers & Co. expects the biggest jump to occur in the first half of 2007, and hopefully continue through the year. The legislation not only expands the playing field by making these funds available to more companies, but it also adds to the marketability of the IDB as an alternative form of financing.

Stern Brothers & Co. hopes that more companies like Stolze Printing can realize the importance of IDBs. We are doing all that we can to promote IDB awareness and application to finance capital projects, when appropriate. In fact, we have added personnel to focus exclusively on the small-issue industrial development bond market, ensuring that this efficient financing option is available to manufacturers. It is our opinion that the new capital expenditure legislation will not only advance tax-exempt bond issuance by state and local authorities, but also provide the framework to expand the domestic manufacturing sector.

About Stern Brothers & Co.
Stern Brothers & Co., member SIPC, is an independent investment bank that specializes in providing its clients with money saving financial solutions and long-term value by completing complex transactions on time. Since its founding in 1917, the firm has been assisting private and public decision makers finance major capital projects throughout the U.S. with timely, well-designed, and low-cost tax-exempt and taxable bond issues. Stern Brothers & Co has offices in St. Louis, Kansas City, Chicago and Tampa. For more information, please visit our website http://www.sternbrothers.com.