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The manufacturer utilized our cost-effective, direct purchase IRB program to purchase a large machining center to replace four older models. Additionally, the new machining center provided additional capabilities and efficiencies needed to support new business. The down payment and installment payments to the supplier of the machining center were planned over a six-month window. The financing covered all costs involved, including purchase price, design costs, engineering, installation and issuance costs. First American’s ability to structure the IRB utilizing a draw down feature (advancing principal as needed) with an interest only period made this investment extremely economic. Our ability to close the bond within 45 days preserved the borrower’s timeline to have the machining center up and operating. Conventional financing was available from the bank and the supplier. However, the cost of financing with the IRB provided a 25% discount over the other options and more than $100,000 in interest savings over the seven-year term of the bond. The payback for the upfront costs of the IRB structure were recouped within nine months of fully funding the IRB. Lastly, we used a forward interest rate swap to lock in the borrower’s interest rate prior to funding.
Proceeds of this direct-purchase bond were used to finance the acquisition of vacant land and construct a 100,000 square foot building. The facility is owned by a real-estate LLC and leased to two affiliated operating companies. The project enabled the operating companies to expand their capacity and capabilities to satisfy customer demand, and the over $800,000 in interest savings attained through the bond allowed them to remain competitive, fund additional capital equipment needs, and create additional jobs. The IRB was structured as a draw-down bond. Proceeds were not funded until required for the project, thereby reducing interest expense. The bonds were interest only during the one-year construction period, then amortized over 20 years. Although the bonds were floating rate, the borrower executed an interest rate swap on a portion of the debt to protect against interest rate risk.
This commercial bakery had recently won contracts to provide products to two new retail chains and needed additional capacity to meet the demand. They planned to purchase an existing 56,000 sq. ft. commercial building for $3,000,000 and then spend an additional $1,500,000 on renovation. The bank proposed using a draw-down 20-year IRB, with interest only payments for 10 years, followed by a 10-year amortization. At the same time, they would accelerate the amortization on the mortgage on their existing facility to pay it off in 10 years. This would allow the company to retire its higher rate conventional debt first and maximize the benefit of the lower tax-exempt rate. This unique structure gave the company over $400,000 in net present value savings while reducing its annual debt service costs by over $35,000.