Funding the Future: Agricultural Project Finance with Farm Credit Letters of Credit and Tax-Exempt Bonds

The agricultural sector plays a vital role in our economy and food supply, but farmers and agribusinesses often face challenges in obtaining financing for projects and expansions. Industrial revenue bonds can provide an attractive financing option for agricultural projects, especially when backed by a letter of credit from the Farm Credit System. Here are some key benefits of this approach:

Lower Interest Rates: One of the main advantages of using industrial revenue bonds for agricultural projects is the ability to secure lower interest rates compared to conventional bank loans or bonds issued by private companies. Industrial revenue bonds are a form of municipal bond that is issued by local governments on behalf of private enterprises. Under federal tax laws, interest earned by investors on these bonds is exempt from federal income taxes and sometimes state and local taxes as well. This tax exemption causes investors to accept lower interest rates on industrial revenue bonds, making financing more affordable for borrowers. Over a 10–30-year financing term, the interest savings can add up. This can make completing an expansion or upgrade project more feasible.

Flexible Terms: In addition to lower rates, industrial revenue bonds offer much more flexibility than traditional bank loans or other financing options that agricultural businesses might consider. Industrial revenue bonds can be structured with longer maturities, 25-30 years in some cases. They can also be structured with lower annual payments in the early years, through options like capitalized interest. This matches well with the longer useful lives of assets like buildings, storage facilities, and processing equipment common in agriculture. It also accommodates the longer cash cycle times and uncertainty in agriculture. Industrial revenue bonds give agribusiness the flexibility to structure debt in a way that best aligns with the economics of the project.

Enhanced Credit with Farm Credit Letter of Credit:? Obtaining a letter of credit from the Farm Credit System to back an industrial revenue bond issue can significantly enhance the bond’s credit rating and marketability. The Farm Credit System is a nationwide network of lending institutions that specializes in providing financing for agricultural enterprises. It has an excellent credit rating and over one hundred years of experience in making agriculture loans. Having a Farm Credit letter of credit on an industrial revenue bond dramatically improves the credit rating. This expands the market of potential investors and allows borrowers to obtain the lowest possible interest rates. The Farm Credit letter of credit also gives investors added security knowing the bonds have backing from a specialized lender with deep expertise in the agriculture sector. This can make an industrial revenue bond issue attractive to investors even if the borrower itself has more limited resources or credit history.

The Value of Farm Credit System Expertise and Experience:? The Farm Credit System has provided reliable and consistent financing to agricultural producers, cooperatives, and supporting businesses across the country. This history makes Farm Credit institutions ideal partners for securing letters of credit to back industrial revenue bonds for agricultural projects.

The advantages of Farm Credit include:

·???????? Deep knowledge of the economics of different agricultural sectors based on experience with thousands of farm customers.

·???????? Excellent credit ratings

·???????? A cooperative structure that aligns with serving the needs of farming enterprises. Farm Credit institutions only serve rural communities.

Industrial revenue bonds with Farm Credit letters of credit allow farmers to utilize financial markets and expand their enterprises. Tapping Farm Credit’s expertise through an Industrial Revenue Bond/Farm Credit structure can propel projects that may not progress otherwise.

Refunding and Prepayment Flexibility: Two other valuable advantages of using industrial revenue bonds relate to refunding and prepayment flexibility. If market rates decline in the future after an industrial revenue bond has been issued, the borrower often can refinance or “refund” the bonds at the lower rates. This is achieved by issuing new bonds at the lower rates and using the proceeds to call the existing bonds. Farm Credit letters of credit facilitate smooth refunding transactions. Borrowers may also have prepayment flexibility to pay off all or a portion of the bonds earlier if they generate excess cash flow or no longer need all the financing. Prepayments avoid unnecessary interest costs. Flexible call provisions and prepayment options enable borrowers to proactively reduce interest costs over the life of the financing.

Use of Taxable Series:? Use of tax-exempt bond proceeds are subject to certain eligibility rules. For uses which are part of a project, but cannot be financed with tax-exempt bonds, the bonds can be issued in two series – one tax-exempt and the other taxable. For example, the borrower could Include in the taxable series those costs of issuance more than the 2% of par amount permitted under tax-exempt rules.

Stimulating Growth in the Agriculture Sector:? In summary, industrial revenue bonds and Farm Credit letters of credit can optimize financing for agriculture-related projects in many situations. The interest rate savings and flexible terms enable farmers and agribusinesses to undertake expansion projects that might otherwise be unaffordable with other financing options. This stimulates investment and growth across the agriculture sector, supporting projects like:

·???????? Grain storage and handling facilities – projects like grain elevators, storage bins, loading/unloading structures can qualify as agricultural processing facilities eligible for IRBs.

·???????? Dairy processing plants – Facilities for pasteurizing, homogenizing, bottling milk products are eligible as agricultural processing.

·???????? Meat processing plants – Meat packaging/processing plants involved in value-added activities qualify.

·???????? Fruit and vegetable processing – Facilities for washing, sorting, freezing, canning fruits/vegetables are eligible agricultural processing.

·???????? Food manufacturing – Manufacturing of food products derived from agricultural outputs like oils, sugars, flour can qualify.

·???????? Cold storage warehouses – Cold storage facilities for agricultural products like fruits, vegetables, meats, dairy can qualify.

·???????? Agriculture waste management – Projects involving methane generation, biomass, agricultural byproduct processing are potentially eligible.

In addition to these projects, a variety of energy projects, including anaerobic digestion, can use Industrial Revenue Bonds (exempt facility bonds) as a financing tool:

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·???????? Renewable power generation – facilities involved in generating electricity from renewable sources like solar, wind, geothermal, hydropower, biomass are frequently financed with IRBs. This includes utility-scale projects as well as smaller distributed generation.

·???????? Cogeneration plants – Facilities that produce both heat and power from a single fuel source are eligible.

·???????? Alternative fuel production – Projects related to producing fuels like ethanol, biodiesel, hydrogen, etc. from renewable feedstocks can be financed with IRBs.

·???????? Electric transmission lines – Building new power transmission infrastructure to connect generation facilities to the grid can quality for IRBs.

·???????? Energy storage – Battery storage facilities and other energy storage technologies associated with renewable energy may be eligible as pollution control projects.

·???????? Energy efficiency upgrades – Upgrades like high efficiency lighting, HVAC, controls, building automation systems that reduce energy use by over 50% are eligible.

The key is demonstrating the project avoids, reduces, or sequesters pollution emissions. For each project’s eligibility depends on very specific criteria, which makes consulting specialized legal counsel critical when using IRBs.

Communities also benefit from job creation and increased tax revenues that result from growing agricultural enterprises. The unique advantages of this financing structure make it an option worth considering for many agricultural projects seeking lower costs and maximum flexibility.

Keys to Accessing Industrial Revenue Bond Financing:? If you operate a farm or agribusiness and are interested in exploring the use of industrial revenue bonds and Farm Credit letters of credit, here are some key steps to take:

·???????? Evaluate the project details – scope, costs, timeline.

·???????? Discuss with legal and financial advisors and assemble the right team. They can help analyze feasibility and navigate the process.

·???????? Approach your bond counsel to coordinate conduit issuer process. Coordinate approach with conduit issuer after discussing with bond counsel to make sure everyone is on the same page and the project is eligible to be financed.

·???????? Have your financial records and business plan organized. Issuers and lenders will review the creditworthiness and ability to repay.

·???????? Consult with a Farm Credit lending institution and secure firm commitments. It is critical to have a binding commitment letter from a creditworthy institution for a letter of credit backing the Industrial Revenue Bonds prior to embarking on a bond issue. The commitment provides certainty the financing will be available at the desired terms. Farm Credit can pre-approve a letter of credit and advise about the optimal bond terms.

·???????? Be prepared to cover costs of issuance including financial advisors, lawyers, insurance and closing fees – usually 3-5% of the bond principal.

·???????? Monitor market interest rates – Be ready to price and sell the bonds when market rates offer the best terms. They may require flexibility on expected closing timelines.

·???????? Market bonds effectively – The bond underwriter will recommend the optimal approach to generate investor demand for the bond purchase.

·???????? Draw down funds in alignment with the project schedule – avoid paying unnecessary interest by timing drawdowns of bond proceeds to synchronize with the actual pace of construction and expenditures.

·???????? Orderly wind down – if any bond proceeds are unused after project completion, work with the financing team to promptly close out the accounts.

·???????? The financing process usually takes 3-6 months to close an industrial revenue bond and letter of credit.

The time and effort to secure industrial revenue bond financing is worth it for many agricultural projects that cannot be funded conventionally. The benefits include lower interest rates, flexible terms tailored to the project, and enhanced credit with a Farm Credit letter of credit. This can turn previously unfeasible expansions into reality and propel the growth of agriculture enterprises.