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Expanded Uses for FHLBank Letters of Credit
By John Davis, Vice President, Product Development & Business Strategy
Federal Home Loan Bank (FHLBank) members can use FHLBank standby letters of credit to credit enhance non-housing related tax-exempt bond transactions. A provision in 2008 housing legislation amends Section 149 of the Internal Revenue Code to allow a tax-exempt bond supported by an FHLBank standby letter of credit to retain its tax-exempt status. Under section 3023 of the Housing and Economic Recovery Act of 2008, bond issuers can now look to FHLBank letters of credit to support original issuance non-housing related tax-exempt bonds, provided the bond is issued between July 30, 2008, and December 31, 2010, when the new Internal Revenue Code provision is set to expire.
Going forward, FHLBank financial institution members that are aware of a public need in their marketplace can decide whether or not to extend their own letter of credit in support of such a project—knowing that an FHLBank letter of credit may be available to stand behind the member’s credit support for non-housing related tax-exempt financing.
The Bank’s Standby Letter of Credit Program
FHLBank San Francisco members may use standby letters of credit to facilitate a variety of transactions with third parties. A Bank letter of credit can be used to support a tax-exempt bond issuance by providing a credit enhancement for a member-issued letter of credit. Under the Bank’s Standby Letters of Credit program, a member provides the issuer with a letter of credit which the Bank then backs with its own standby letter of credit. The Bank’s standby letter of credit does not insure the bond directly, but rather obligates the Bank to pay the bond trustee, for the benefit of bondholders, if the member fails to fulfill its obligations on its underlying letter of credit. The issuer may then be able to obtain an enhanced credit rating for its bond transaction from rating agencies such as Standard & Poor’s and Moody’s Investors Service, based on the Bank’s AAA rating.
With a Bank standby letter of credit, a local bond issuer—a city, hospital or university, for example—can realize advantages typically available to AAA-rated agencies. Financing for a water or sewer system, wastewater treatment plant, neighborhood park, medical facility, or community college can generally be obtained at lower interest rates, or under more flexible terms, than financing available without a AAA-rating. Meanwhile, the member earns fee income and community goodwill and its customer benefits from the strength of the Bank’s credit rating.
Members that would like more information on using Bank standby letters of credit to support tax-exempt bonds, including pricing, terms, and conditions, may contact their Relationship Manager. Other interested individuals may contact a Bank member in their area to inquire about the Bank’s Standby Letter of Credit program.
Disclaimer
The views expressed in this article are those of the author and do not necessarily represent the views of the Federal Home Loan Bank of San Francisco (Bank). The Bank assumes no liability in connection with any use of this information and makes no warranty or guarantee that the information presented here is current, accurate, or complete. The material is set forth for informational purposes only and (i) does not represent investment or tax advice; (ii) does not constitute an offer to extend credit, a grant, or a subsidy; and (iii) does not constitute investment solicitation or an offer to buy, sell, or exchange a security or other financial instrument. The material cannot be relied upon as tax advice, and any tax related information contained in the material should not be used or referred to in the promoting, marketing, or recommending of any entity, investment plan, or arrangement, and such information is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties under the Internal Revenue Code. The Bank expressly disclaims any obligation to update the information presented in this article.
May 2009
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Expanded Uses for FHLBank Letters of Credit
By John Davis, Vice President, Product Development & Business Strategy
Federal Home Loan Bank (FHLBank) members can use FHLBank standby letters of credit to credit enhance non-housing related tax-exempt bond transactions. A provision in 2008 housing legislation amends Section 149 of the Internal Revenue Code to allow a tax-exempt bond supported by an FHLBank standby letter of credit to retain its tax-exempt status. Under section 3023 of the Housing and Economic Recovery Act of 2008, bond issuers can now look to FHLBank letters of credit to support original issuance non-housing related tax-exempt bonds, provided the bond is issued between July 30, 2008, and December 31, 2010, when the new Internal Revenue Code provision is set to expire.
Going forward, FHLBank financial institution members that are aware of a public need in their marketplace can decide whether or not to extend their own letter of credit in support of such a project—knowing that an FHLBank letter of credit may be available to stand behind the member’s credit support for non-housing related tax-exempt financing.
The Bank’s Standby Letter of Credit Program
FHLBank San Francisco members may use standby letters of credit to facilitate a variety of transactions with third parties. A Bank letter of credit can be used to support a tax-exempt bond issuance by providing a credit enhancement for a member-issued letter of credit. Under the Bank’s
Standby Letters of Credit program, a member provides the issuer with a letter of credit which the Bank then backs with its own standby letter of credit. The Bank’s standby letter of credit does not insure the bond directly, but rather obligates the Bank to pay the bond trustee, for the benefit of bondholders, if the member fails to fulfill its obligations on its underlying letter of credit. The issuer may then be able to obtain an enhanced credit rating for its bond transaction from rating agencies such as Standard & Poor’s and Moody’s Investors Service, based on the Bank’s AAA rating.
With a Bank standby letter of credit, a local bond issuer—a city, hospital or university, for example—can realize advantages typically available to AAA-rated agencies. Financing for a water or sewer system, wastewater treatment plant, neighborhood park, medical facility, or community college can generally be obtained at lower interest rates, or under more flexible terms, than financing available without a AAA-rating. Meanwhile, the member earns fee income and community goodwill and its customer benefits from the strength of the Bank’s credit rating.
Members that would like more information on using Bank standby letters of credit to support tax-exempt bonds, including pricing, terms, and conditions, may contact their Relationship Manager. Other interested individuals may contact a
Bank member in their area to inquire about the Bank’s Standby Letter of Credit program.
Disclaimer
The views expressed in this article are those of the author and do not necessarily represent the views of the Federal Home Loan Bank of San Francisco (Bank). The Bank assumes no liability in connection with any use of this information and makes no warranty or guarantee that the information presented here is current, accurate, or complete. The material is set forth for informational purposes only and (i) does not represent investment or tax advice; (ii) does not constitute an offer to extend credit, a grant, or a subsidy; and (iii) does not constitute investment solicitation or an offer to buy, sell, or exchange a security or other financial instrument. The material cannot be relied upon as tax advice, and any tax related information contained in the material should not be used or referred to in the promoting, marketing, or recommending of any entity, investment plan, or arrangement, and such information is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties under the Internal Revenue Code. The Bank expressly disclaims any obligation to update the information presented in this article.
May 2009
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