Wells Fargo may see a boost in the number of small issues it underwrites after embarking on a new venture with the Alaska Industrial Development and Export Authority, known as AIDEA.
Going forward, Wells Fargo will underwrite bonds issued by AIDEA in a new small-issue bond program and sell them primarily in private placements with institutional investors, said Jim McMillan, deputy director of credit and business development at the authority, last week.
AIDEA has traditionally issued bonds in the $10 million range or higher, but some projects are smaller, said Jim Wrigley, senior vice president of public finance at Wells Fargo, in an interview Monday. This program puts together cost-effective ways for AIDEA to fund these projects. Were putting it together as a program with a promise of continuity, Wrigley said. We hope to increase the number of small issues out of Alaska, he added, declining to quantify expectations for future underwriting in the program.
Wells Fargo has not worked with AIDEA as an underwriter in the last ten years, according to Thomson Financial data.
AIDEA has not seen robust issuance in recent years due to the nature of its existing bond program, McMillan said. It is an existing program with limitations in terms of who uses it because of the fixed costs, he added. Because of the high fixed costs and minimum costs, any deal that is less than $10 million did not make any sense, he said.
One barrier to issuance of smaller deals was providing standard documentation. In the past, borrowers using AIDEA had to provide documentation for each deal, which led to increases in their costs. Wells Fargo has now agreed to accept boiler plate documents that can be used for bonds sold through AIDEA, McMillan said. To that end, a borrower is only required to file all the necessary documents for its first deal. For each subsequent deal the borrower will be required to fill in the terms and conditions of the deal, such as interest rate payments and maturity, McMillan noted.
With the agreement with Wells Fargo, AIDEAs bond counsel has agreed to waive the minimum fee and follow a fee schedule. The fixed costs to borrowers had included minimum cost from bond counsel for legal work performed. The fee is dependent on the size, but runs about $15,000 for fixed rate-bonds and $20,000 for variable-rate bonds, McMillan said.
Most of the issues under the new program will be private placements, which will also help to reduce the work-load for bond counsel because the borrower will not need to have a separate official statement, McMillan said. The elimination of excess documentation and the utilization of private placement now make smaller deals potentially feasible, he added.
Its good for small borrowers who in the past would have liked to take advantage of it, but it was cost-prohibitive, McMillan said, adding that he expects that the majority of borrowers will be 501(c)(3) organizations.
So far AIDEA has agreed to sell in January $1.2 million in tax-exempt revenue bonds on behalf of Alaska Public Telecommunications Inc., or APTI, a non-profit public broadcasting company. We decided to use the Alaska Public Telecommunications Inc. deal as a catalyst for establishing a small issue sub-program, McMillan said. More transactions will come forward because of the deal with APTI, McMillan said.
The novelty about the AIDEA program is that Alaska will use only one conduit issuer for the bonds, Wrigley said. In other jurisdictions outside of Alaska, programs often utilize different conduit issuers for different market sectors, such as housing and industrial development, he added. Wells is active in 28 other states. The firm will monitor the success of this novel program in Alaska and possibly look at replicating it in other states, Wrigley said.
McMillan noted that prior to the Tax Reform Act of 1986, the agency had a strong issuance pace. The act, however, disqualified categories of projects from tax-exempt status. The agency was issuing pooled bonds and within these pooled bonds were transactions that were less than $1 million, he said. After the passage of the act, issuance was no longer cost-efficient for many borrowers, he added.
