CDFA Spotlight: Arkansas Bond Guaranty Program By Stan Provus

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This article reviews one of the nation’s best state-supported bond guaranty programs, the Arkansas Development Finance Authority (ADFA) Guaranties (ADFA Guaranties or Bond Guaranty Program). Future Learning Corner articles will include a review of some of the nation’s most productive loan and bond guaranty programs for business loans.

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The State Legislative Act 505 created the Arkansas Development Finance Authority’s Bond Guaranty Program administered by ADFA in 1985.

The Bond Guaranty of ADFA is a credit enhancement tool utilized for qualified applicants to secure issuance of Industrial Development Bonds (IDBs) by the Authority. The ADFA Guaranty enables borrowers to access lower bond rates for long-term tax-exempt bonds, in turn, providing borrowers with lower interest rate costs. ADFA uses its guaranty primarily on industrial, manufacturing, and agricultural enterprises but the ADFA Guaranty has also secured taxable and destination tourist facility bonds. 501 (c) (3) and governmental corporations also qualify for the program. Bond proceeds are used to finance fixed assets such as land, buildings, machinery and equipment.

Generally, the program guarantee limits are a minimum of $100,000 and a maximum of $4,000,000. Many projects have been financed with costs in the $500,000 to $2 million range. The project portion funded from bond proceeds is limited to 80% (lower of cost or appraised value) for existing facilities or new construction and/or for equipment. For start-up operations the project funded from bond proceeds drops to 70% of qualified expenditures.

The majority of the Authority’s issues are transacted as composite bond issues. With composite bonds projects are grouped together into a single bond issuance in which up-front and annual costs are shared, making the financing more cost-effective regardless of the individual project size. This has enabled the Authority to finance projects as small as a couple of hundred thousand dollars.

Guaranty Structure

Each series of bonds is guaranteed with the ADFA Guaranty. The Authority guarantees both principal and interest sufficient to amortize the indebtedness of the bonds.

The obligations of the Authority as guarantor are limited to available moneys in the Bond Guaranty Reserve Account created and maintained pursuant to Act 505. As of August 31,2001, there were funds on deposit in the ADFA Guaranty Reserve Account totaling $24,285,290. As of this same date, the Authority had about $88.4 million in outstanding bond guarantees (principal amount).

The Authority is required to keep on deposit in the ADFA Guaranty Reserve Account sufficient funds to enable it to make when due all debt service payments guaranteed by it. If necessary to discharge this obligation, the Authority is required to issue its own bonds from time to time under Act 505 in sufficient amounts to insure that there will be available at all times in the ADFA Guaranty Reserve Account the necessary funds. Debt service on these bonds (none have ever been issued by ADFA) to replenish the Guaranty Reserve Account are payable from investment earnings on the State’s Daily Treasury Balances (Treasury earnings)—basically earnings on the State’s General Fund. In 2001 these earnings totaled $100, 091,942.

In the event the Authority issues any of its bonds, the proceeds of which are deposited in the Guaranty Reserve Account, it is required to notify the State Board of Finance as to the amount needed each month to pay debt service on such bonds, and the State Board of Finance is required to set-aside the required amount from Treasury Earnings to pay debt service on such bonds.

By law, the total principal amount of all outstanding bonds which may be guaranteed by the Authority is the lesser of (1) $150,000,000, or (2) an amount equal to ten times the amount currently on deposit in the ADFA Guaranty Reserve Account.

Bond issues secured by the ADFA Guaranty have been rated “A”. Bond insurance has also been used on some issues—wraps the ADFA guaranty.

The ADFA Bond Guaranty Program was created solely through state legislation. A statewide referendum was not required, for among other reasons, there is no direct pledge of General Fund Revenues—only Investment Earnings. It should be noted that there is another smaller Bond Guaranty Program in Arkansas, administered by the State’s Economic Development Department, which maintains a separate Bond Guaranty Reserve Account but has an equal claim on Treasury Earnings, if necessary, for its bonds. In addition, about $3-4 million of Treasury Earnings are pledged first to other purposes. The amount of Treasury Earrings ($74-$100 million between 1998-2001), however, appears more than adequate to cover these claims on Treasury Earnings as well as the potential need to service ADFA Bond Guaranty Reserve Account bonds.

This article is intended to provide accurate and authoritative information in regard to the subject matter covered. The author and CDFA are not herein engaged in rendering legal, accounting or other professional services, nor does it intend that the material included herein be relied upon to the exclusion of outside counsel. CDFA is not responsible for the accuracy of the information provided in this fact sheet. The information provided has been collected from a variety of sources. Those seeking to conduct complex financial deals using the tools mentioned in this document are encouraged to seek the advice of a skilled legal/consulting professional.