Bank Qualified Debt/Small Issuer Exceptions
In 2019, Representatives Terri Sewell (D-AL) and Tom Reed (R-NY) introduced H.R. 3967, the Municipal Bond Market Support Act of 2019, to expand access to financial resources for local governments, non-profits and other public serving entities that issue relatively smaller amounts of tax-exempt debt. The bill would increase the annual limit on designating bank qualified bonds from $10 million to $30 million, permanently peg the limit to inflation, and apply the new limit to the individual borrower, as opposed to any conduit issuer borrowers might work through.
By making the proposed changes in the bill more tax-exempt bonds can be deemed as “bank qualified”, allowing borrowers that issue less than $30 million per calendar year to forgo traditional underwriting processes. These changes would expand access to resources for many public serving infrastructure projects & services including schools, hospitals, roads and more.
- Since bank-qualified bonds were created in 1986, the program’s $10 million cap has not kept pace with inflation or the cost of labor, land and materials associated with most public infrastructure projects.
- Increasing the cap to $30 million not only brings the program into the modern age but also enables smaller governments to increase the amount of bank-qualified bonds they can issue and realize corresponding cost savings.
- Small issuers selling these bonds directly to banks decreases debt issuance costs for governments by an estimated 25-40 basis points because smaller, less-frequent issuers do not have to pay higher yields to investors due to investor unfamiliarity with the issuer’s jurisdiction; and these small issuers do not have to pay transaction costs associated with traditional bond sales.
Click here for GFOA’s Bank Qualified Debt resource page.