Using Bonds In 5 Easy Steps
While learning about the bond market might not be as fun as watching James Bond fight bad guys and drink martinis (shaken, not stirred), understanding the appeal of your nonprofit to enter the bond market and the potential debts that may be incurred is important when first entering the capital market.
During a session at an AICPA Not-For-Profit Industry Conference titled “Debt Modifications/Extinguishments,” Dennis Morrone, partner-in-charge at Grant Thornton’s National Not-for-Profit and Higher Education Audit Practice, and Craig Becker, associate vice president at Lafayette College, addressed some helpful hints for entering the bond market and restructuring loans to a more attractive interest rate:
- The most common practice for nonprofits issuing bonds is for a municipal issuer of the bonds to loan the proceeds of the respective issuance to another entity through what is known as a conduit bond arrangement. Since the second entity, the nonprofit, is not a municipal entity, the bonds are commonly referred to as “Private Activity Bonds” or “PABs.”
- Fixed-rate, tax-exempt municipal bonds are the most common method of accessing the capital markets for nonprofits. These bonds often provide issuers with an attractive cost of capital and limited risk, often offsetting required issuance fees.
- Debt issuance costs should be deferred and amortized over the life of the debt.
- Issuing callable or redeemable bonds allows your organization, as the issuer of the bond, the privilege of redeeming the bond at some point before the bond reaches its specified date of maturity.
- When negotiating a lower interest rate on a loan for the remainder of its term, the organization pays a $1,000 fee if the transaction is not a troubled debt restructuring.