The environment in North Carolina for local government 160A-20 installment financing has changed over the past 12 months. Here are some notable developments —
- We have a lot of potential lenders. Lenders come in and out of the market, and sometimes a lender will limit the type of collateral or loan term it’s interested in — but there’s a healthy supply of money when you’re looking to borrow. Your credit quality and factors internal to the lender still make a difference, but there is a long list of financing sources who’d at least like a chance to read your financing RFP.
- The RFP process is changing. Some lenders need time to take your RFP through their credit approval process — so try to leave two full weeks between the release of your RFP and the proposal due date. Our friends at the financial advisory firm First Tryon Advisers note that your RFP should state an expected maximum amount of money you’d want to borrow, because for some lenders increasing the loan amount requires a brand-new internal approval process. First Tryon also suggests you should not hesitate to ask for proposals on a range of options when that makes sense for your project – different financing terms or amounts, for example, or separate bids on short-term personal property and long-term property. It is not hard for the lenders to put different rates on different structures once the credit process is complete.
- “Bank-qualified” status is less important. Several of our active lenders are non-bank lending institutions (usually affiliates of banks) and therefore indifferent as to whether your loan meets, or does not meet, the $10 million annual limit for a “bank-qualified” loan. So if you have a loan that’s bumping up against the $10 million level, let it float up to where the deal size needs to be. And don’t think that just because you’ve already exceeded the limit that you have no good options for bank-loan financing in the remainder of the calendar year.
- Rates from banks have gone up. With the enactment of the tax cut act in late 2017, banks get less of a benefit from tax-exempt lending. Many banks are still active lenders, but tax-exempt rates from banks have increased relative to other market rates.
- Public offerings are increasingly a competitive option to bank financing. Because of the relative increase in bank rates and continued strong demand among bond buyers, local governments are finding more and more that putting their installment financings into the public markets (in the form of “limited obligation bonds,” or “LOBs”) gives them a better deal than a bank financing. A LOBs financing brings some additional complexity, work for the staff and up-front costs. Lower interest rates in the LOBs market, however, can result in a lower total cost of financing, and 20-year financing is essentially always available for LOBs (even when banks are only offering shorter terms). In 2018, we saw several LOBs issues under $10 million that would have been planned as bank placements in 2017.
The lending environment is always changing. Check with your bond counsel or financial adviser as you start a financing process to see how changes may affect your plans.