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George Hohmann: Bond demand vanishes

CHARLESTON, W.Va. -- Businesses and investors typically covet federal tax-exempt bonds. Businesses can potentially save millions of dollars because tax-exempt bonds generally carry a lower interest rate than taxable issues. Investors don't have to pay federal tax on the interest they receive.

Historically the demand for bonds free of federal tax has been so great, the Internal Revenue Service (the loser when such bonds are issued) tells each state every year the maximum amount of bonds free of federal tax they can issue.

The states can approve bond issues for projects that qualify, up to the authorized amount. In West Virginia, all requests for such bond issues must be approved by the state Economic Development Authority. (The state and the development authority are not on the hook for any of the bonds. The bonds are the responsibility of the companies that back them. It's the companies who must pay investors the principal and interest.)

Last year the IRS allocated a maximum of $277.8 million in tax-exempt bonding authority to West Virginia. But the state Economic Development Authority approved only one tax-exempt bond issue -- $2.7 million to Collins Hardwood Limited Liability Co., to help the company expand its sawmill in Richwood.

This year the IRS assigned a total of $284.6 million to West Virginia. But there were no takers.

David Warner, the state development authority's executive director, said at the Board of Directors' meeting Thursday (its last meeting this year): "For the first time in my 25 years, we did not receive any requests this calendar year for the allocation of tax-exempt debt. I'm not sure what conclusions I can draw from that except industrial and manufacturing activity is down. I can say it's down on a national basis."

Marie Prezioso, director of public finance for Raymond James in the company's Charleston office, noted last year that there could be several reasons for slack demand:

* Qualified projects may have received an allocation in the past and are using it;

* The spread between taxable and tax-exempt bond interest rates has narrowed;

* Some companies may have decided to sell taxable bonds to avoid restrictions imposed by a tax-exempt issue; and

"It could be the economy. Maybe some people don't want to take on any new debt, even if it is tax-exempt."

Just a few years ago, tax-exempt bonds helped finance numerous big projects, including the $3 billion Longview Power plant in Monongalia County and pollution control equipment at power plants owned by American Electric Power and its subsidiary, Appalachian Power.

In fact several years ago requests for bonds routinely exceeded allocations and the parties agreed on how to divide the amount available.

As required by law, the state development authority transfers unused bond allocations to the West Virginia Housing Development Fund, which has up to three years to use it or lose it.

Reach George Hohmann at business@dailymailwv.com or 304-348-4836.

 


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