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Re: bonds for P2 financing?




Burt,
        Presumably you are talking about tax-free municipal bonds, that are exempt from Federal taxation, and typically, from state income tax as well, for holders who live within the issuing state.  Generally speaking, bonds that would finance this type of activity would not be issued as general obligation bonds (i.e., backed by the full faith and credit of the issuer, which ususally has taxing power), but rather as industrial  revenue bonds that would be issued by, say, the Pollution Prevention Authority of West Pokemon Township. A potential snag here would be the cats and dogs nature of the underlying loans, and hence extreme uncertainty for  would-be bondolders as to the viability of the revenue stream required to ensure timely payment of interest and ultimate pay-off of principal.  

        From the issuer's point of view, there is the question of caps.  Beginning in the mid-80s, Congress limited the amount of tax-free debt that states could issue in any given year. Around the same time, Congress designated various types of activities as "private-acitivities," and as such, made the bonds "preference items" for purposes of the Alternative Minimum Tax---which in turn makes the bonds relatively less attractive to many (most?) buyers.  Incidentally, almost all bonds for pollution control facilities are preference items for the AMT.

        To be sure, there are many industrial revenues bonds issued in any given year by local industrial or economic development authorities.  But, so far as I know, they finance relatively large projects, such as airports, roads, water and sewer,  a large manufacturing facility, industrial parks, nursing homes, life care communities, various educational facilities, jailhouses, etc.

        Don't get me wrong, the Walt Street Wizards are quite ingenious at securitizing all sorts of future revenue streams.  Hence the "tobacco settlement bonds" issued by Washington, DC, Erie county , NY, and many others.  There are even "rum bonds" issued by the Virgin Islands, which are secured by rum sales from the state-owned rum distillery.  

        Finally, there has been some experience on the taxable side of securitizing small-business loans and peddling the bonds to individuals or institutions, just like FNMA and GNMA do for real estate mortgages.  The Fremont deal was a pioneer. I've not kept up with this wrinkle in the financial markets, so  I can't tell you how it has played out. Please consult your financial advisor.

Ed Weiler, Economist
USEPA, Office of Pollution Prevention
     and Toxics
Washington, DC 20460
Ph: 202.564.8836; Fax: 202.564.8901



Burt Hamner <bhamner@cleanerproduction.com>
Sent by: owner-p2tech@great-lakes.net

10/24/2001 12:16 PM
Please respond to Burt Hamner

       
        To:        p2tech <p2tech@great-lakes.net>
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        Subject:        bonds for P2 financing?



Hi all.  I am trying find out if local governments can use bond financing to support P2 programs.  There is a huge amount of money in socially responsible funds, and I think that investors would really like "green bonds" that support P2.  It is the only way I can think of to direct private capital in large amounts to P2 for small business and it seems reasonably feasible on first look.  Since P2 improves local govt and economy performance, this would tend to improve bond ratings so it is a nice package.  Investors should like them too because the vast majority of Socially Responsible Investment is in stocks.  And of course now all stocks suck, if the investors had diversified with bonds in their portfolios they would be much better off right now. Do you know of any such financing mechanisms or have any suggestions for further inquiry?  
 
Burt Hamner
www.CleanerProduction.Com