Request for Interest: USDA Rural Development Interim Loan Program Financing Solutions

09 Oct Request for Interest: USDA Rural Development Interim Loan Program Financing Solutions

The Indiana Bond Bank (“Bond Bank” or “IBB”) requests responses from prospective firms to partner with the Bond Bank to serve as purchaser, underwriter, or placement agent for its Interim Loan Program (“ILP”) operated in partnership with the United States Department of Agriculture – Rural Development (“USDA-RD”).  Please click the link below for full information on this Request for Information.

Indiana Bond Bank -RFI USDA-RD ILP (October 9 2018)

 

Q&A’s (To Be Updated as Received)

 

Q1. In the past, the TOS purchased the notes, but from now on, you are looking for a bank to purchase, or an underwriter to place or underwrite the program, and the TOS won’t be involved anymore?

Q2:  You mention that 2019 will be better than all 3 years combined.   Do you have a current estimated amount for expected for 2019?

Q3:  Does USDA-RD require that the interim financing rate match the permanent financing rate?

Q4:  Can you provide any clarity on your ability to continue using TOS for purchase of IBB Notes under this program?

Q5:  Is this the 90% USDA-RD Guarantee Program?

Q6:  What exactly is the RFI asking for?

Q7:  If a bank were to purchase the IBB notes, wouldn’t those be non-bank-qualified because IBB is issuing over $10M during a calendar year?

Q8:  What is the underlying collateral during the construction phase? 

Q9:  If construction goes off the rails (e.g., a contractor goes bankrupt), would USDA-RD step in to pay off the interim financing?

Q10:  Would IBB be open to running this like IBB’s HELP program, where the bank would make the loan directly to the QE and IBB plays the role of facilitator?

Q11:  What monitoring is done – either by USDA-RD or IBB – during construction?  Does monitoring occur all at the end or during each draw?

Q12:  Would IBB assign the QE loan to the bank as security?

Q13: Can IBB, as a conduit, manage and report arbitrage earnings?

Q14: Can you provide cash flows for the last year?   We want to see evaluate whether an option would be better than what you are currently doing.

Q15: Is it a correct reading of the RFI that IBB does not have a specific solution in mind?

Q16: Is the policy that IBB match the permanent USDA rate?

Q17: The permanent rate chart has a wide range of rates – from 1.625% to 3.875%.  How and when were those set?

Q18:  Does IBB currently close in a pooled structure?

Q19: If bank lent direct to QE, would that be bank-qualified or non-bank-qualified?

Q20: Because all banks will be pricing to same indices, how will IBB make a decision under this RFI?

Q21: Since this is an RFI, should we assume IBB will follow this up with a formal RFQ or RFP?

Q22:  What type of value offering do you expect to see from respondents?  For example, more traction and increased participation with QEs?

Q23:  What licensures are required to respond to this RFI?

Q24:  The RFI says IBB is looking for a “purchaser, underwriter or placement agent”.  What if I am not one of those?

Q25: What if we need the names of specific QE to provide specific pricing in our response?

Q26: To be clear, the IBB will provide each of the QEs the same interest rate each QE below. In other words, when it’s time, QE 1 will get a rate from IBB at 1.625% and QE 14 will get a rate of 3.5% from the IBB? 

Q27: Could each QE have different maturity lengths? 6 months? 1 year? Two years? Is there a max? Or minimum length?

Q28:  I assume that IBB has always been able to borrow from TOS for less than the QE rate every time?

 

Q1: In the past, the TOS purchased the notes, but from now on, you are looking for a bank to purchase, or an underwriter to place or underwrite the program, and the TOS won’t be involved anymore?

A: Correct, TOS currently purchases the notes.  Yes, we welcome ideas which have the effect of eliminating or reducing the TOS role.   To your point, those ideas could involve bank purchase or placement through an underwriter.  The elimination or reduction of the TOS role is not dispositive for us; rather, it would be up to the respondent to demonstrate that this elimination/reduction has a positive impact the program as a whole.  We are evaluating on overall program health versus program participants.

Q2:  You mention that 2019 will be better than all 3 years combined.   Do you have a current estimated amount for expected for 2019?

A:  Calendar 2018 is projected to finish at or better the prior 3.  (See table below).  This is contingent upon deals in the pipeline that are projected to close in 2018 actually closing in November and December.  If they do not, they would be expected to close early 2019.

Dates (Duration) QE Served ILP Amount
Nov 14 to Oct 17 (3 years) 12  $57,162,863
Nov 17 to Dec 18 (1+ year) 14  $56,362,900

 

In terms of future annual pipeline,  much comes down to the timing of when projects are ready for construction.  The USDA-RD obligates approximately $40 million in WEP funds to Indiana communities annually.  We have seen communities be ready for construction financing in the 18-36 month range post-obligation.  For example, money obligated in October 2018 by USDA-RD may not hit IBB’s pipeline radar until October 2020, when the community has progressed through the USDA project phases and is closer to go.  

That is why you do not see a correlation between the annual allocation (~$40M) with the most recent one+ year (Nov 17-Dec 18 projections (~$56M).  A secondary factor which might contributing to that are the number of CmF deals we fund in a given year.  USDA-RD usually brings fewer CmF deals needing interim financing, and of those offered, not all CmF recipients qualify as “QE” under the Bond Bank statute.  (CmF is broader than WEP). 

Q3:  Does USDA-RD require that the interim financing rate match the permanent financing rate?

A:  Matching the permanent financing rate is a current policy of the IBB’s ILP program. 

Q4:  Can you provide any clarity on your ability to continue using TOS for purchase of IBB Notes under this program?

A:  TOS remains able and willing to purchase the IBB notes in this program.  There is no change from the TOS side prompting the RFI.  Simply IBB opening the program to private sector alternatives. 

Q5:  Is this the 90% USDA-RD Guarantee Program?

A:  No, USDA-RD is doing the direct lending on the permanent side.  While this RFI is focused on the interim financing piece, if you have ideas where IBB could also serve as the long-term lender under the 90% Guarantee Program, we are open to those.

Q6:  What exactly is the RFI asking for?

A:  We are looking for proposals to serve as purchaser, underwriter, or placement agent for its Interim Loan Program.

Q7:  If a bank were to purchase the IBB notes, wouldn’t those be non-bank-qualified because IBB is issuing over $10M during a calendar year?

A:  The IBB Notes will not be designated as “qualified tax-exempt obligations” for purposes of Section 265(b)(3) of the Internal Revenue Code of 1986, as amended.

Q8:  What is the underlying collateral during the construction phase? 

A: IBB does not take collateral during the construction phase.  IBB relies on USDA-RD’s staff specialists and engineers review of a project’s final plans and specifications, and construction bids and other terms set forth in the letter of conditions, together with the USDA-RD’s commitment to extend the long-term loan to the QE as documented by  the USDA-RD take-out letter.

Q9:  If construction goes off the rails (e.g., a contractor goes bankrupt), would USDA-RD step in to pay off the interim financing?

A:  It is important to note that IBB will not close on the interim financing without a commitment letter from USDA-RD indicating that the QE has met all of the requirements set forth in the Letter of Conditions.  And for that to occur, USDA-RD’s staff specialists/engineers have reviewed a project’s final plans and specifications and construction bids.  IBB recognizes that despite all the due diligence, nothing is guaranteed and there is always a risk that the QE runs into an issue once construction starts.  If it is a short-term issue, IBB would extend the term of the interim financing note.  For a long-term issue, or one that stops the project completely, USDA-RD would work with the QE to move the project to completion.  However, there is no legal commitment that USDA-RD would step in to pay off the interim financing.  In that unlikely scenario, the IBB would work with RD and the QE to arrange alternative financing in order to pay the original interim financing when due.

Q10:  Would IBB be open to running this like IBB’s HELP program, where the bank would make the loan directly to the QE and IBB plays the role of facilitator?

A:  IBB is open to all ideas under RFI, including a restructure of the program such as discussed.  Please be sure the proposal articulates how the new structure adds value to the QE, IBB and USDA-RD. 

Q11:  What monitoring is done – either by USDA-RD or IBB – during construction?  Does monitoring occur all at the end or during each draw?

A:  The expenditure of proceeds and construction progress is monitored throughout the interim financing period.  At closing on the interim loan, all proceeds of a QE loan are held in a construction account maintained by the IBB’s trustee (Huntington Bank).  Each disbursement request from a QE must be reviewed and approved by the responsible USDA-RD specialist in order to ensure that the funds are being spent on an eligible project cost.  The Trustee will not disburse funds from the construction account without the written approval of the USDA-RD specialist.

Q12:  Would IBB assign the QE loan to the bank as security?

A:  This is already contemplated in the existing program structure.  The IBB notes are authorized and secured under a trust indenture, which creates and establishes a trust estate to secure the IBB notes.  At closing on the interim loan, the QE executes a bond anticipation note (“BAN”), as evidence of the loan to the QE.  The BAN is registered in the name of the IBB.  Under the terms of the trust indenture, the IBB then pledges and assigns the BAN to the trust estate as security for the IBB notes.

 Q13: Can IBB, as a conduit, manage and report arbitrage earnings?

A:  Yes, IBB would be able to accommodate this.  As noted in one of the previous questions, at closing on the interim loan, all proceeds of a QE loan are held in a construction account maintained by the IBB’s trustee (Huntington Bank). 

This would allow IBB to monitor the investment earnings on those funds that would accrue prior to their expenditure.  Moreover, each disbursement is reviewed/approved by USDA-RD to ensure that it is for an eligible project cost, which would provide IBB an accurate summary as to the date of the expenditures.

Q14: Can you provide cash flows for the last year?   We want to see evaluate whether an option would be better than what you are currently doing.

A: The following data might help on a going-forward basis.  The following is a list of QE who have been obligated a USDA-RD permanent loan.   This is a spreadsheet provided by USDA-RD, which represents the current universe of QE who will need the ILP program when they reach construction readiness (see CmF caveat).   The spreadsheet does not indicate timing; in other words, QE 13 may proceed to construction before QE 1. 

As chart shows, the take-out (permanent financing) rates range from 1.625% to 3.875% (WEP) and 3.5% to 3.875% (CmF).  Under current policy, the IBB provides the QE an interim rate equal to the take-out rate.  IBB currently borrows funds at the 1 year BVAL or MMD rate. 

 

 

Borrower WEP/CmF RD Interest Rate at Obligation
QE 1 WEP 1.625% $          12,552,000
QE 2 WEP 1.625% $          10,841,000
QE 3 WEP 2.750% $             5,226,000
QE 4 WEP 2.000% $             2,591,000
QE 5 WEP 2.000% $             2,130,000
QE 6 WEP 2.000% $             8,679,000
QE 7 WEP 2.000% $             3,512,000
QE 8 WEP 2.000% $          12,888,000
QE 9 WEP 2.625% $             2,453,000
QE 10 WEP 3.500% $             3,909,000
QE 11 WEP 2.750% $             4,185,000
QE 12 WEP 2.125% $             2,104,000
QE 13 WEP 2.125% $             3,892,000
QE 14 WEP 3.500% $             2,445,100
QE 15 WEP 2.125% $                810,000
QE 16 WEP 2.125% $             1,228,000
QE 17 WEP 2.375% $             2,114,000
QE 18 WEP 3.875% $             2,305,000
QE 19 WEP 2.375% $             8,344,000
QE 20 CmF* 3.875% $                668,333
QE 21 CmF* 3.875% $             1,134,800
QE 22 CmF* 3.500% $          11,789,500
*CmF QE may, but not required to, take interim funding from IBB.

Q15: Is it a correct reading of the RFI that IBB does not have a specific solution in mind?

A:  Correct.  IBB has refined the program, and feels like it is now primed for solutions which other providers might be able to offer.

Q16: Is the policy that IBB match the permanent USDA rate?

A: Yes

Q17: The permanent rate chart has a wide range of rates – from 1.625% to 3.875%.  How and when were those set?

A:  USDA-RD announces its permanent rates on a quarterly basis.  Weblinks are posted in the RFI to most recent rates.  Permanent transactions which USDA obligates in that quarter are set at the corresponding rate.  In terms of when: IBB does not receive the obligated date with the pipeline, but based on history, it is likely that some QE in the pipeline were obligated in 2016. 

Q18:  Does IBB currently close in a pooled structure?

A:  Yes, this summer, IBB moved to a monthly pooled closing to improve program predictability and efficiency.  Under the prior model, each QE set its own closing date.  A quarterly pooled closing was discussed but determined to be too infrequent for QE.

Q19: If bank lent direct to QE, would that be bank-qualified or non-bank-qualified?

A:  In that case, it would be up to the bank to determine, on a QE by QE basis, whether the loans were designated as “qualified tax-exempt obligations” for purposes of Section 265(b)(3) of the Internal Revenue Code of 1986, as amended.

Q20: Because all banks will be pricing to same indices, how will IBB make a decision under this RFI?

A:  The first half of the question may pre-suppose that all responses take the same approach.  Because the RFI is structured intentionally to allow a variety of proposals, from small tweaks to complete remodels, that may not be a valid assumption.  The second half of the question asks about decision-making: in terms of decision-making, IBB will first assess what comes in under the RFI – the number of responses and the proposals.  If a variety of different types of responses come in, of many different types, IBB will likely separate like with like, and evaluate within affinity groups.  If IBB indeed receives many responses that propose the same structure with the same pricing, IBB may use respondent interviews to further discuss proposals and assess each respondent’s experience and history with the structure proposed.

Q21: Since this is an RFI, should we assume IBB will follow this up with a formal RFQ or RFP?

A: No.   IBB recognizes that RFI, RFP and RFQ may cover similar but different concepts depending on the industry, and apologizes for any confusion resulting from our use of “RFI”.   To be clear, IBB plans on making a decision based on the responses provided to this RFI.  As such, IBB strongly encourages respondents to focus on the substance of what is being asked, rather than the document name.  Please provide all detail and information you would want IBB to consider. 

Q22: What type of value offering do you expect to see from respondents? For example, more traction and increased participation with QEs?

A: The nature of the applicant’s response will be dependent and unique to each value offered. We would like for each respondent to determine their own value offering. Specifically to your example, the number of USDA-RD loan recipients is the universe of the eligible program participants, so attracting more QE to the program is not a service required.

Q23: What licensures are required to respond to this RFI?

A: There are no requirements on holding specific licensures in regards to submission of a response. With that said, activities that are being offered by the respondent that require licenses pursuant to Indiana or Federal law should be appropriately obtained.

Q24: The RFI says IBB is looking for a “purchaser, underwriter or placement agent”. What if I am not one of those?

A: IBB will accept proposals from any interested respondent, in addition to the roles listed. In your response, please be clear on your firm’s role and its capacity in that role. Please articulate how your firm in that capacity will add value to the program.

Q25: What if we need the names of specific QE to provide specific pricing in our response?

A:  Consider providing IBB the methodology or framework for how you would approach the program, being as detailed as possible.  This RFI is not only for the current year program, but focused on larger question of how might IBB build a program framework today that meets needs of both today’s known QE and tomorrow’s unknown QE.  For example, the program must work in 2021, when some number of QE who are unknown today (not yet been obligated funds from USDA-RD) come to IBB to close interim financing.  

Q26: To be clear, the IBB will provide each of the QEs the same interest rate each QE below. In other words, when it’s time, QE 1 will get a rate from IBB at 1.625% and QE 14 will get a rate of 3.5% from the IBB? 

A: Yes, under current structure of the program, IBB provides each of the QEs the same interest rate as their RD permanent rate, even if QE with 2 different rates close in the same month.  

Q27: Could each QE have different maturity lengths? 6 months? 1 year? Two years? Is there a max? Or minimum length?

A: Yes, each QE could have different maturity lengths as long as the term was long enough to allow a QE to complete construction.

Q28:  I assume that IBB has always been able to borrow from TOS for less than the QE rate every time?

A: Not always, no.  TOS is providing us a rate at the time of interim closing, which could be 18-24 months after the obligated permanent rate.  In a rising rate environment, that can result in IBB subsidizing the transaction to get to the rate.

6 Comments
  • Barry Grossman
    Posted at 16:10h, 11 October Reply

    Under the current program how is the construction loan administered from a funding and draw stand point?

    Is the debtor under the notes the QE or is it the Bond Bank?

    Are the notes collateralized in any way?.

    • Mark Wuellner
      Posted at 13:03h, 17 October Reply

      At closing on each transaction, the proceeds from the sale of the IBB’s note are loaned to the QE by depositing a portion of the funds into a construction account held by the IBB’s trustee (i.e., Huntington) for the benefit of a participating QE, and $20,000 of such funds into a costs of issuance account held by the IBB’s trustee to pay the IBB’s costs of the program. Each disbursement request from the construction account by a QE must be reviewed and approved by the responsible USDA-RD specialist in order to ensure that the funds are being spent on an eligible project cost. The Trustee will not disburse funds from the QE’s construction account without the written approval of the USDA-RD specialist.

    • Mark Wuellner
      Posted at 13:04h, 17 October Reply

      Is the debtor under the notes the QE or is it the Bond Bank?

      A: As the issuer of the note to be purchased by the bank, the IBB would be the borrower/debtor. The IBB, in turn, will use the proceeds of the IBB note to fund a loan to the QE, which loan is evidenced by the QE’s bond anticipation note

    • Mark Wuellner
      Posted at 13:05h, 17 October Reply

      Are the notes collateralized in any way?

      A: The IBB notes are authorized and secured under a trust indenture, which creates and establishes a trust estate to secure the IBB notes. At closing on the interim loan, the QE executes a bond anticipation note (“BAN”), as evidence of the loan to the QE. The BAN is registered in the name of the IBB. Under the terms of the trust indenture, the IBB then pledges and assigns the BAN to the trust estate as security for the IBB notes. Furthermore, the trust estate includes all funds and accounts established under the Indenture, and would include moneys held in the construction account prior to disbursement.

  • Barry Grossman
    Posted at 19:32h, 12 October Reply

    Going Forward how will a prospective purchaser know what the rate will be for the notes that they will be purchasing? Since the rate to the QE must be the same rate as the RD long term rate. Will the IBB make this rate known at the time of offering and are their any provision for rate adjustments between the RD and QE for a particular long term loan that would effect the Construction loan rate offered on the IBB Notes?

    • Mark Wuellner
      Posted at 13:21h, 17 October Reply

      A rate will be known at time of closing.

      Correct, current policy is that the interim rate match the permanent rate. In terms of pipeline, IBB and USDA-RD use the project’s construction bid expiration date as an estimate for what month the project is likely to close. As projects move closer to that date, USDA-RD field staff working directly with the QE have a good estimate of which month the project will be ready for closing. IBB knows for certain which QE will be participating in a particular month’s pool on the deadline for the submission of the Notice of Intent to Participate (dates set forth on ILP page of website). The IBB will notify the bank of the specific QE’s participating in monthly closing (and the rate borne by a participating QE’s BAN) at least 10 days prior to a scheduled IBB monthly closing date.

      No, there are no provisions for rate adjustments between RD and QE for an event described in the question. A project’s permanent financing from USDA-RD could close with a different rate than that at obligation in 2 circumstances that IBB is aware of: (1) cost overruns (In the event of a cost overrun funded by USDA-RD, the amount of the overrun will be obligated at the then-current permanent rate schedule and would be known prior to RD authorizing a QE to proceed with construction financing), and (2) USDA-RD’s permanent rates at closing are lower than those at obligation (USDA-RD commits to provide the QE the lower of their published rates at obligation or closing. In a declining rate environment, this could result in the permanent rate being lower than the one in the pipeline spreadsheet.) In the former case, IBB current policy is to issue the interim note at a pro rata blended rate between originally obligated rate and the overrun rate. (e.g. if $100,000 obligated at 1% and $100,000 obligated at 2%, IBB’s interim note would be for $200,000 at 1.5%).

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