In 2002, the Regional Port Authority Study Committee (which included Dr. Joseph Alutto, a current CFCFA Board member) was tasked with analyzing the possibility of combining the Columbus Airport Authority and Rickenbacker Port Authority. In the resulting report, the committee made three recommendations. The first two were related to the two airport entities; the third was to create a separate port authority to provide financing opportunities for economic development. This was the impetus behind the creation of the Columbus-Franklin County Finance Authority (CFCFA) and Central Ohio Regional Bond Fund (CORBF, or Bond Fund).
CFCFA was established on March 21, 2006, by legislative action of Columbus City Council and the Franklin County Board of Commissioners. Its purpose: to provide special financing capabilities. Not long thereafter, the CORBF was formed. The first bond issuance was a $3 million, 6%, 28-year TIF-backed bond for public improvements in the Harrison West project.
Establishing the Bond Fund required capital, transactional experience, technical expertise, and trusted professional advisors. As we reflect on the origins of the CORBF, we turn to Michael DiPerna who has served as a key partner and advisor to CFCFA from the beginning.
In this interview, DiPerna discusses the early days of CFCFA and the CORBF, the function and purpose of bond funding, the different markets we serve, and much more. We appreciate the value and insight he brings to the work we do. On the heels of an incredibly busy year, we’re proud to remember how it all started.
– CFCFA President Patty Huddle
What is an investment grade bond fund, and why does it matter to borrower?
Michael DiPerna: When an entity wants to issue debt or bonds into the capital markets, they must have an investment grade, national credit rating. Big buyers of debt, like Fidelity, Prudential, and others, will only buy investment-grade products for their portfolios. It is very difficult to sell unrated debt, and if you do, it is at a much higher yield. For example, the City of Columbus and the State of Ohio have strong “AAA” ratings by national rating agencies, so they can sell bonds to raise funds for capital improvements
But only 5% of all debt issuers in the United States have a rating. Which means 95% of organizations that need financing cannot sell debt in the national markets, which provide long-term, fixed-market rates. The alternative sources of funds often have shorter terms with adjustable interest rates. With a debt issuance that is credit enhanced by the CORBF, you can sell bonds or have access to 100% of all capital market investors in the United States. CFCFA’s CORBF has a credit rating of A- by S&P Global, which puts the fund among the 5% of rated debt issuers
How does the bond fund actually work?
When CFCFA agrees to finance public infrastructure or corporate client, we receive a revenue pledge from a borrower as either:
- A special assessment;
- Payments in lieu of taxes (PILOTs) or minimum service payments for Tax Increment Financing (TIF) transactions;
- Corporate revenues.
We in turn pledge these revenues to our Bond Fund. The CORBF bonds issued carry the A- investment grade rating and can be marketed to investors that purchase the bonds at a fixed rate and term. CFCFA can then loan bond proceeds to the borrower who did not otherwise have access to the capital marketplace.
In other words, the Bond Fund offers the opportunity to take these unrated revenue obligations and wrap the rating of this Bond Fund around them for sale to 100% of all the bond investors in the United States.
So that’s the overarching benefit of the Bond Fund. It’s an investment-grade vehicle that allows us to sell investment-grade debt in the capital markets and fund projects at long-term, fixed rates. It provides access to the capital markets most entities cannot achieve themselves – or would never have never been able to monetize those revenues in the first place.
What’s the history of the Central Ohio Regional Bond Fund?
DiPerna Advisors helped create nearly all investment-grade port authority bond fund vehicles in the state of Ohio, including the Toledo Port Authority in 1988, Cleveland in 1997, and those in Dayton, Cincinnati, and Summit County. Around 2005, when Rickenbacker Port Authority merged with the Columbus Airport Authority, we helped officials spin out a new financing authority, which became CFCFA in 2006. Before that, financing projects were limited to airport-related deals.
We worked with different resources to raise capital for the initial bond reserves. Mike McMennamin of Huntington Bank at the time was a pivotal partner. Mike was the Chair of the Regional Port Authority Study Committee and he recognized the need and opportunity. Mike and I went to New York City, sat down with Standard & Poor’s, and explained how this new port authority would create an investment-grade bond program similar to Toledo and Cleveland. And they said, “Everything looks great, you should proceed.”
So we created the Bond Fund reserve fund, which both Columbus and Franklin County put money into, and we obtained a Letter of Credit from Huntington Bank. With an initial $10 million in reserves, we closed our first financing project in 2007. And boom, we were off and running.
How did the city and county finance economic development projects prior to the Central Ohio Regional Bond Fund?
They were doing very few – that was the point. They couldn’t use general obligation debt to support private deals. They needed an economic development financing agency to fill that role. They did a few independent, one-off deals when we could find someone to support the bonds. To receive a national rating, you had to have either the city or the county back the transaction with non-tax revenues. Otherwise, you had to go hat in hand, asking a rated entity to back your deal. Now, with this vehicle, we had an investment-grade vehicle for credit-enhanced transactions of economic development importance for the Central Ohio region. It is a beautiful thing and still is, but many people still don’t know about it.
The credit rating made everything possible. Of course, we still had to be very careful to choose borrowers who would not default on their obligations. That could derail everything we created.
Let’s talk about use of the Bond Fund as a financing tool. What are the ideal circumstances for tapping into that potential? Why would someone use it?
Typically, when you sell a bond it’s long-term, with a fixed interest rate, and the annual debt service is predictable. Versus going to an alternative source to borrow money for six years on a 30-year amortization, and in six years, your rate’s adjusted.
CFCFA finances a lot of public infrastructure with Tax Increment Financing (TIF), where we recapture payments in lieu of taxes (PILOTs) to pay for that infrastructure. We finance the infrastructure today with bonds we issue and collect the payments in lieu of taxes out into the future based on the new assets being built. Those TIF revenues from the property are a predictable number each year. Therefore, we can match the TIF revenues to the bond debt service. This is called match funding, which means we can maximize the monetization of the TIF revenue stream which results in a larger up-front bond issue.
The beauty of this program is, we’re not in competition with banks. We’re actually helping the banks because we’re financing the public infrastructure. The banks in turn finance the private assets like the building or houses or office buildings or warehouses. It is difficult to pay for infrastructure through the rents generated from a project. It doesn’t pencil out. The rents are paying the debt on the project plus the equity return to the investor. For infrastructure, CFCFA’s CORBF provides a way to pay for it.
We created a structure to pledge TIF repayments to the Bond Fund. They go in unrated and come out rated. We can sell debt at a very marketable interest rate and maximize the amount of money we can deliver to the developer and community to build the infrastructure.
What kinds of infrastructure can be financed through CFCFA?
Many things: garages, streets, water and sewer, utilities, even public greenspace in some cases, you name it. Infrastructure is a perfect match for these funds.
The types of deals that are a perfect fit for the Bond Fund are long-term, fixed-rate, with a TIF incentive from the community.
Is there a typical borrower?
Here’s what I always say: Anyone who can pay us back, we’ll take a look at you. Seriously. It could be a private developer or a nonprofit – anyone who can prove to us: we put your obligated revenues in our Bond Fund and you’re going to pay us back. And if there’s any doubt, we don’t want to put it in the fund. Why? Because if there’s a default by the borrower, the Bond Fund still has to pay the Bond obligations to the bondholders and that would deplete the Bond Fund reserves, potentially putting the rating at risk. The CORBF is a risk averse vehicle. CFCFA does have other direct loan products that may have greater flexibility.
And your role is to analyze those who seek a deal?
That’s our role. But there’s never a perfect analysis. Our role is to judge whether that obligation is going to be there for 30 years. That’s how we structure every single deal. I like to say, we structure every deal defensively. That’s what my firm does for all the major port authorities in Ohio and two programs at the Ohio Department of Transportation and one at the Ohio Department of Development. So we’ve done probably 600 to 800 deals in these programs. Have we missed a few? Yes. Has there ever been a default on a bond deal we’ve been a part of? Zero.
Have you ever had to tap into the reserves?
Yes, but never to the point where we’ve lost or even decreased our rating. And that’s the key.
Who should be using the Bond Fund and isn’t?
Good question. A lot of people aren’t using it, maybe because they don’t know about it. Some developers, potentially. Many nonprofits aren’t using it because they may not know about it. Some may be concerned about fees, but they shouldn’t be. Honestly, I look at all these potential projects and I think every one of them should be using the Bond Fund. It’s important to constantly get the word out.
What is the underwriting criteria typically for a Bond Fund issuance?
The ability to read financials. That’s it. We analyze that ability. For example, let’s say someone wants to build a corporate headquarters. They would show us the financial results of their corporation for the last five years. We analyze that, and if we say, “These guys have made money consistently for five years. They have a great product. They have great management,” we’re going to lend them money for the next 15 years based on history. So that’s the analysis my firm would go through. We look at history.
When it’s tax-increment driven, we look at future value and ask, “Are you going to be able to generate the tax revenue that you say you are, from the increased value in that new asset being built?” We evaluate a lot of projected financial models to come to a conclusion.
What is the difference between a conduit bond transaction versus a Central Ohio Regional Bond Fund transaction?
Risk. With a conduit bond, CFCFA is taking no financial risk. They’re just an issuer of bonds. Only certain entities are allowed by law to issue tax-exempt bonds: political subdivisions of the state of Ohio, such as cities and counties, townships and port authorities. For example, CFCFA issued conduit bonds for infrastructure at Grandview Crossing and the developer located a buyer (investor) and sold the unrated bonds that were issued and everyone was happy. That buyer takes all the risk. Whereas when CFCFA finances something with bonds from the CORBF, the CORBF has credit risk in the deal, limited to the reserves pledged. We are lending the money we raised in the capital markets from the sale of our bond to the borrower. The repayment we collect from the borrower is used to repay the investor who purchased our bond(s) to raise the capital for the loan. You can see the significant increase in risk given the multiple layers of a CORBF issuance.
Is the Bond Fund ever used as the entire capital stack for a project, or is it always just a portion of it?
There is a different mix of capital all the time. We might do 90% of the financing and the owner puts in 10% equity. Other times, we’re 15% of the capital stack or we’re 60%. There’s often a blend.
How long does it typically take to get through the process?
Usually 90 to 120 days. From the time they knock on the door of CFCFA to the time we provide the money to the trustee.
How often do you decline to participate? When the analysis just doesn’t pencil out?
Often transactions do not make financial sense. Again, there are primarily two needs of capital in this world. There are the Microsofts and P&Gs, who can raise or borrow capital from many sources. Therefore they want cheap capital, grants or below market rate loans, as opposed to a startup company. They are simply looking for any source of capital. Those are the bookends: it’s either cheap capital or access to capital. We provide access to capital for qualifying borrowers.
Unfortunately, in order to maintain the financial integrity of the bond portfolio, the startup may not be a good fit. What does fit is something with a confirmed or predictable, long-term pledge of repayment. That’s what we look for as a repayment source. This includes a history of corporate earnings or asset valuations for the basis of TIF and NCA transactions
You and CFCFA can take some credit for a lot of projects being built in central Ohio and around the state. Are there any projects you’re personally really proud of, that the Bond Fund was associated with?
Many. And they go way back. Remember CheckFree (a pre-internet electronic banking transfer company)? We worked with them. Others include Cheryl’s Cookies, Kahiki Foods, Bridge Park, Grandview Crossing, Quarry Trails, and the UA Gateway projects.