Two new methods of marketing industrial revenue bonds (IRBs) hold out prospects of helping more growing, small businesses raise financing at below-market rates. Both use commercial guarantees to make the bonds more attractive.
First, the Massachusetts Industrial Finance Agency (MIFA) will sell $25 million worth of the bonds in the first public IRB offering made without government guarantees. Meanwhile, Firemen's Insurance Co. of Newark, N.J., a Continental Insurance Cos. subsidiary, has begun selling private insurance policies to enhance the marketability of IRBs.
Traditionally, most IRBs have been sold singly to local banks. But as a source of capital for small companies, this market has always been limited. So in recent years, several state development agencies began to combine IRBs in pools, giving them the strength to go to public offerings. The Connecticut Development Authority, for example, began such a program in 1973. To make bonds acceptable to public investors, the state pledged to make good on them in case of default.
But many states prohibit state guarantees of IRBs. So last year, MIFA devised a new way to insure that investors will be repaid: It convinced Bankers Trust Co. of New York to back its IRBs with a letter of credit, in exchange for an annual fee of 1% of face value paid by the borrower.
But to the Internal Revenue Service, every tax-exempt bond means lost revenues. Thus in August 1981 it prohibited pooled sales of IRBs, halting both MIFA's plan as well as Connecticut's. But Congress rescinded that ban this August in the Tax Equity and Fiscal Responsibility Act of 1982, allowing MIFA's new method of raising IRB money to proceed.
Meanwhile, Firemen's Insurance Co., together with an independent agent, IDBI Managers Inc. of New York, a subsidiary of Dyson-Kissner-Moran Corp., developed a slightly different way to overcome the reluctance of bankers and other institutional investors to buy IRBs: They began insuring IRBs in individual private placements. Rather than charge an annual premium, they assess a one-time fee that varies depending on the terms of the bond. For a 20-year, $1 million bond carrying 10% interest, the fee would be 7.5% of face value, or $75,000. IDBI Managers has already sold several policies; the insurance earned the bonds an AAA rating from Standard & Poor's.
Bankers Trust's letter of credit also has earned MlFA's bonds an AAA rating (this one from Moody's Investors Service). The MIFA bonds carry a 10-year maturity and will be issued in $5,000 denominations. The interest rate will correspond to what AAA tax-exempt bonds are paying the day the offering goes to market; in August, that was about 11%. Bear Stearns & Co., the underwriter, has committed itself to making a secondary market in the issue.
"The first time you do something is always the hardest," says Robert E. Patterson, MIFA executive director. "Now I expect to see it happen in many states -- if the IRS will just get out of the way."