Stern, St. Louis County Launch New Bond Program

From the February 4, 2005 print edition of the St. Louis Business Journal
Companies can save up to $1 million on a $5 million, 20-year loan
By Bonita L. Tillman

Small and medium businesses in St. Louis County have a new funding source to help expand their companies.

The St. Louis County Economic Council and Stern Bros. & Co. have introduced a new Growth Bond Program that offers low-cost taxable bonds to companies with capital improvement projects valued at more than $2 million.

"Traditionally, companies interested in expanding go to the bank to borrow funds through a conventional loan program," says Don Estell, president of Stern Bros. "This program costs them less because of a floating interest rate."

Under the Growth Bond Program, bonds are issued at the taxable bond rate, currently 2.6 percent. With additional fees, the final rate usually runs about 1.25 percent to 1.5 percent less than standard bank loans available now.

Although the taxable bond rate can change in the Growth Bond Program, the spread between traditional bank loans and those in the program remains fairly consistent, said Ron Braun, senior vice president of Stern Bros.

Companies also can convert the floating bond rate to a fixed rate for all or part of the debt and for any period of time, making it flexible as the company's financial status changes.

The Growth Bond Program requires the borrowing company to secure a letter of credit from a participating bank. All banks are eligible to participate in the program. Banks partnering in the program benefit by helping a client save money and earning a fee for providing the letter of credit.

"It could be very attractive for banks, because they don't have to use their cash on-hand to issue bonds for businesses," Braun said.

Up until a few years ago, almost all companies could issue tax-exempt bonds for industrial development, Estell said. However, when federal laws tightened, manufacturing companies were unable to access the tax-exempt bonds.

While large companies can issue their own low-cost taxable bonds for projects, most small and medium-size companies don't have the resources to do the same. But the new Growth Bond Program is another option, Stern Bros. officials said.

"Some companies aren't even aware they can still issue bonds on a taxable basis," Estell said.

A company could save $600,000 on a $2.5 million loan or $1 million on a $5 million loan over 20 years through the Growth Bond Program, Braun said.

"That's a very significant number if you put it in terms of a small or medium company's budget," he said. "Basically, the biggest deterrent to companies doing this is the knowledge that it's an option."

Stern Bros., a Clayton-based investment banking firm, aids the process by:

• Structuring the transaction to meet the company's goals,
• Acting as quarterback in the transaction by overseeing the process, and
• Purchasing the bond and later selling it to institutional investors, such as mutual funds, money market funds, insurance companies and pension funds.

"This approach doesn't replace a company's relationship with existing banks, but it works in a slightly different way," Braun said.

Rick Palank, senior vice president of business finance for the St. Louis County Economic Council, called the program "a great product" that eventually could expand around the country.

He and Estell began working on the concept about six months ago after realizing that the interest rate on taxable bonds was so reasonable. Shortly afterward, two local projects came to their attention that could have benefited from such a program in St. Louis County.

"I can't understand why no one has done this before now, but we felt there was a real need for it," Palank said. "I'm on the national Council of Development Finance Agencies and no one even talks about it there."

Although several local companies have expressed interest in participating in the program, none of their projects have been completed since the program initially launched a few months ago. However, Palank estimated that 20 to 50 capital improvement projects in the $2 million to $10 million range in St. Louis County could have benefited from the program in 2004 alone.

"I think this will snowball once a few projects are done," Palank said. "If we can help companies in St. Louis County save money, that's great. Who's not for that?"

To initiate a loan through the Growth Bond Program, St. Louis County-based companies should contact the St. Louis County Economic Council. Additional information also is available on the council's Web site at www.slcec.com.

In addition to Clayton, Stern Bros., which employs 35 people, also has offices in Kansas City, Chicago and Sarasota, Fla.

Bonita L. Tillman is a St. Louis freelance writer.

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