Conduit Bond Financing

Application: Project financing

Benefits: Access to capital markets, and potentially, tax-exempt interest rates.

The Clinton County Port Authority (CCPA) can issue bonds on behalf of a borrower for the purpose of making the proceeds available to the borrower for certain projects. CCPA works in partnership with traditional lending institutions and its public partners to provide the most advantageous financing for a project. Ultimately, the financial strength of the transaction is based upon the credit-worthiness of the underlying borrower (and any credit enhancement available in the deal).

Capital Lease Transactions:

A capital lease is a common illustration of conduit bond financing in the context of a large construction project. Under this model, CCPA issues bonds to finance the construction of a project and makes the proceeds available to the borrower to use for construction. The borrower pays off the debt by making lease payments that are structured to fully amortize the principal and interest on the bonds. When the bonds are paid-off, the borrower has the option to terminate the lease and buy the project from CCPA for a nominal amount. This structure has the added benefit of providing an exemption from sales tax on construction material included in the project, further reducing the overall cost of the project.

Tax-Exempt Bonds:

Certain projects may qualify for tax-exempt financing, which significantly reduces the cost of borrowing. Tax-exempt bonds are attractive to bond buyers as the interest earned on the bonds is exempt from state and federal income tax. With the interest being exempt from income tax, investors and lenders require a lower interest rate to achieve an equivalent after-tax return. Therefore, the interest rate is set below market rates, allowing for a lower cost of financing to the borrower.

Projects that may be eligible for tax-exempt bonds include manufacturing, non-profit 501(c)3, governmental operations, and certain TIF-and PACE-backed bonds. Projected savings will vary, dependent upon the value of construction materials as a percentage of total project cost, but borrowers typically realize savings of up to 5% of the total construction cost.