Letters of Credit Webinar

8/9/2019 Letters of Credit Webinar

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New uses and structure for Federal Home LoanBank Letters of Credit can help communities byproviding credit enhancements for tax-exemptbonds and improve cost of capital.


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LC Structure, Usage, Benefits

AGENDA

Overview

Introduction of Presenters

Doug Iverson

Senior VPDirector of Marketing, FHLBI

Mark PascarellaLending Officer, FHLBI

Thomas PetersonPartner

Ice Miller

Denise Yvette Barkdull

PartnerIce Miller

Steven Kennedy, Jr.Vice President

Lancaster Pollard

Swiss Village Overview

Questions & Answers


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Arthur and Gloria Muselman Wellness Pavilion Swiss Village, Berne, Indiana

About Swiss Village

Opened in 1968

Continuing care facility offering independent living tofull nursing home care with many on-site services suchas banking, barber and beauty shops, and library

350 residents; 340 employees

About the Pavilion

Named after a couple who were active residents ofSwiss Village and supporters of the wellness program

21,200 square feet, aquatic center, child care, kitchen

Exercise room which can also be rented by publicfor events such as receptions and club meetings

Pavilion used by both residents and community.Community pays membership fee which is used tocover operation costs

Opened January 2009


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Arthur and Gloria Muselman Wellness Pavilion Swiss Village, Berne, Indiana

Funding

A pledge drive has raised $3.7 million to date.Goal is $4 million.

FHLBI letters of credit to support bond issuance

> First Bank of Berne - $4.8 million

> Bank of Geneva - $2.2 million

Investment bank - Lancaster Pollard & Co.,Columbus, OH


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Standby Letters of Credit

About FHLBank Standby Letters of Credit

Issued on behalf of FHLBI member institutions

Cost effective way to improve credit rating oftransaction and/or to provide credit enhancement

On July 30, 2008, Housing and EconomicRecovery Act of 2008 (HERA) signed into lawpermitting FHLBanks to issue LCs to backtax-exempt, non-housing bonds

> LC legislation championed byRep. Sander Levin (D-MI)

This expanded authority set to expire onDecember 31, 2010


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FHLBI can issue LCs to assist members with

Residential housing finance

Community lending eligible for FHLBIsCommunity Investment Program

Asset/liability management

Liquidity or other funding


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Types of Standby LCs

Traditional Standby: FHLBI guarantees payment tobeneficiary on behalf of member

Confirming: Member issues an LC that isguaranteed by FHLBI

Direct Pay: FHLBI is drawn on directly by beneficiaryto make recurring payments, typically part of abond financing


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Standard Fees

Standby, Confirming, and Direct Pay:37.5 BPS annually, beginning with settlement date

Community Investment Program (CICA):20 BPS annually, beginning with settlement date

Transaction Fee of $50 for all draws

If FHLBI uses outside counsel, fee to be paid by member

Early termination fee of up to $5,000 may apply


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On the Regulatory Front:

Regulator has been asked by another FHLBanks to clarifyif new authority under HERA must also qualify for CommunityInvestment Program (CIP)

To date we have not received an opinion from

our regulator

If the regulator were to require project to meet CIPcriteria, one of the following conditions would have to be met:

> Housing projects for households up to 115% AMI> Projects creating or preserving jobs

> Small business loans> Projects providing services to a qualified area> Income limits do not apply to projects in eligible areas (empowerment zones, brownfields, enterprise communities)


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Other Specifications

Standby LCs limited to maximum term of 20 years

Member must collateralize total amount of Standby LCsand includes Standby LCs in calculating a memberscapital stock requirement.

For more information, please call

Mark Pascarella, Lending Officer

317.465.0457

or

Brian McCoy, VP, Advances Manager

317.465.0503

The FHLBI is not a financial, investment, or tax advisor and does not make anyrepresentations as to such regarding the use of Standby LC. It is the members

sole responsibility to research the legal ramifications of using FHLBI Standby LC

and the effect it may have on the taxable status of a bond issuance.


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Tax-exempt Bonds & How They Work

Role of Federal Home Loan Bank

Borrower contracts with bank to provide an LCguaranteeing payment on bonds

With LC, bonds are marketable because bondholder reliessolely on credit of bank providing the LC

FHLBank can offer any member an LC usingFHLBanks high credit rating


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Role of the Federal Home Loan Bank

Role of Federal Home Loan Bank continued

FHLBanks LC to secure bonds will provide

> Ready access to bond market

> Higher credit rating (and therefore lower interest rate)than member can achieve on its own credit

Member and Borrower enter into credit(or reimbursement) agreement

> Borrower agrees to reimburse member for anypayment made on bonds

> Member takes security and places any necessary

financial and debt restrictions on borrower


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Role of the Federal Home Loan Bank

Is this program new?

No, but recent federal legislation expanded the useof the FHLBank LCs

Historically, the FHLBanks could provide LCs onlyfor bonds issued to finance acquisition or construction

of multifamily housing FHLBanks now authorized to issue LCs to supportall varieties of tax-exempt bonds


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Who can use Tax-exempt Bonds?

Traditionally, tax-exempt bonds may be issuedto finance capital costs of acquisition, constructionand equipping of

> manufacturing facilities

> solid waste disposal facilities (or portions of facilitiesdealing with the solid waste produced by a facility)

> multifamily rental housing facilities

Recently enacted Federal Stimulus Bill changes all the rules


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The New Who

Essentially, any business enterprise can qualify fortax-exempt borrowing to fund capital expenditures

> Recovery Zone Facility Bonds

> $15 billion authorized to be issued nationwide

> Allocated to states and suballocated to counties/largemunicipalities based on job losses

> Each state to receive a minimum of $135 million

Manufacturing definition expanded now covers intangibles

Heartland Disaster Bonds - $3.2 billion to Indiana as a resultof the flooding in Spring 2008

> Any business that suffered a loss is eligible


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How Do Bonds Work?

Tax-exempt bonds issued by governmental entity,such as city, town or county or by statewide entitysuch as Indiana Finance Authority ("Issuer"), theMichigan State Housing Development Authority or any

other statewide issuer" Bonds sold to market through underwriter or

placement agent

Proceeds of bonds then lent to borrowing entity ("Borrower")for use on capital expenditures for qualifying project



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How a letter of credit works.



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If you have a potential project and wouldlike to discuss its eligibility, contact:

Denise [email protected]

Thomas Peterson

[email protected]



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LC Benefits, & Observations

Benefits to FHLBank Members

Community investment Provides opportunity forlocal financial institutions to invest directly intocommunity-based projects

New business opportunity Enables local institutions to

provide clients access to AAA-rated tax-exempt capital;places them on more level playing field with larger,rated institutions

Retain and grow local business relationship Mitigates riskassociated with larger institution providing debt capital; as aresult taking over depository and other ancillary services


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Benefits to FHLBank Borrowers

Maintain and strengthen local banking relationships Clients can access AAA- rated tax-exempt capital via localrelationships, ensuring continuity with local contact

Community investment borrowers LC fee is staying

local, rather than leaving community to non-local institution



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General Observations

Members lending limit restrictions may be overcomeby including multiple members in deal

If multiple members involved, one lead member iskey to structuring efficiencies

AAA-rated FHLBank LC is trading extremely well intodays financial markets; enhanced interest inflight to quality financial environment

Collateral posting requirements appear to be primarydeterrent to members using LCs



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Name: Denise Yvette BarkdullPosition: PartnerLocation: Indianapolis OfficePhone: (317) 236-5803Fax: (317) 236-5819E-Mail: [email protected]

Assistant Name: Corinne Cook-OliverAssistant Phone: (317) 236-2215Assistant E-Mail: [email protected]

Undergraduate School:Bachelor of Business Administration in Finance, Boise State University, Graduated in 1994

Graduate School:Master of Business Administration, Indiana University Kelley School of Business,Graduated in 1997

Law School:Indiana University School of Law Bloomington, Graduated in 1997

Admitted to Practice:Indiana

Mini Biography:Denise Barkdull assists state and local governments with taxable and tax exemptfinancings for direct governmental purposes, as well as economic development withintheir region. Ms. Barkdull provides counsel for, among other things, airports, solidwaste disposal facilities, single family and multi-family housing, municipal gas utilitiesand manufacturing facilities.

Biographies


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Name: Thomas W. PetersonPosition: PartnerLocation: Indianapolis OfficePhone: (317) 236-2494Fax: (317) 592-4731E-Mail: [email protected]

Assistant Name: Jan GluthAssistant Phone: (317) 236-2254Assistant E-Mail: [email protected]

Undergraduate School:University Diploma, with high honors, Darwin College, University of Kent,Canterbury,England, Graduated in 1982

A.B in Economics, Duke University, Graduated in 1983

Law School:Duke University, Graduated in 1986

Mini Biography:Thomas Peterson has served as bond counsel to state and local governmentsfor over 22 years. Mr. Peterson has also served as special counsel to the Federal HomeLoan Bank of Indianapolis in the development of their Letter of Credit program.

Biographies


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Steven W. Kennedy Jr., Vice President, is Lancaster Pollards investment

banker in charge of Indiana and Illinois. Lancaster Pollard is a national

investment banking and financial services firm that specializes in

providing capital funding and financial advisory services to the health

care, senior living, affordable housing and private education sectors. In

addition to underwriting tax-exempt bond offerings, Lancaster Pollard

provides organizations a complete range of funding options through its

FHA/GNMA/USDA/FNMA-approved mortgage lender subsidiary.

Since joining Lancaster Pollard in 2001, Mr. Kennedy has devoted 100% of

his efforts to providing health care organizations with financial advisory

and capital funding solutions. He has been instrumental in bringing tomarket a variety of financing structures totaling in excess of $500 million

and was named Lancaster Pollards National Healthcare Banker of the

Year in 2007. Prior to joining Lancaster Pollard, Mr. Kennedy worked for

United States Senator Richard G. Lugar (Indiana) in Washington D.C.

Mr. Kennedy earned his MBA from the Fisher College of Business at The

Ohio State University in Columbus, Ohio. He received bachelor degrees

(magna cum laude) in economics and political science and a certificate in

organizational studies from Denison University in Granville, Ohio. He

holds a General Securities Representative license, Series 7, and is a

frequent speaker on capital funding for community health care providers.

Biographies

Letters of Credit Webinar

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