By: Linda Port and
A Good Alternative For Certain Small
Health Care Borrowings
Bank-qualified tax-exempt obligations: a better alternative for certain
small bond issues.
A health care institution wants to borrow several million dollars for a new project.
It has investigated the possibility of using publicly offered tax-exempt bonds but
has been told that it is not sufficiently creditworthy to access the public markets
at attractive rates and/or that the costs of issuance and delay involved in a public
offering may outweigh the interest rate advantage of tax-exempt debt. A local bank,
familiar with the health care institution, is prepared to lend the institution money.
However, the conventional loan rates offered by the bank are high. Is there a better
alternative? In certain cases, bank-qualified tax-exempt obligations may be the best
alternative, allowing an institution to access tax-exempt rates more quickly and
with reduced costs of issuance. In effect, this involves a private placement of tax-
exempt bonds with a bank — no underwriting fees, no offering document, and
substantially reduced costs of issuance.
What are bank-qualified tax-exempt obligations?
They are tax-exempt obligations that are issued for 501(c)(3) organizations and
state and local governments by a “qualified small issuer” and which are formally
designated by the issuer as “qualified tax-exempt obligations.” A qualified small
issuer is defined, with respect to obligations issued during any calendar year, as any
issuer if the reasonably anticipated amount of tax-exempt obligations (with certain
exclusions) to be issued during such calendar year does not exceed $10,000,000.
The rules require aggregating the total issuance by certain related issuers.
Why are bank-qualified tax-exempt obligations better than other
Banks are generally not interested in purchasing other tax-exempt obligations
because banks are not allowed to de