Industrial Revenue Bonds — IRBs

What Are Industrial Revenue Bonds — IRBs?

Industrial revenue bonds (IRB) are municipal debt securities issued by a government agency on behalf of a private sector company and expected to build or acquire factories or other heavy equipment and devices.

IRBs were formerly called Industrial Development Bonds (IDB).

Understanding Industrial Revenue Bonds — IRBs

Municipal bonds (aka munis) are tax-exempt debt obligations issued by a state, city, or region to raise money for major capital projects, like infrastructure or new schools. Investors anticipate an opportune and periodic stream of interest income on these bonds and, upon maturity, repayment of their principal. The source of funds utilized for interest payments and principal relies upon whether the muni bond is a general obligation bond or a revenue bond.

• A general obligation bond makes its repayments from the general funds of the municipal issuer; they're backed by the full faith and credit of the issuer, which may increase taxes to meet its payment obligations.
• A revenue bond is a municipal bond that is backed by the revenues generated from a specific project or related revenue source (like the costs collected from another highway).

One type of revenue bond is the private activity bond (PAB), which is issued by the municipality on behalf of private organizations (either for-benefit or non-benefit) to finance particular projects. Although a private entity is accomplishing the work, the project is one that will benefit the community here and there: a hospital, airport, or sports stadium.

An industrial revenue bond (IRB) is a variety of PAB — one issued by the state or local government on behalf of a for-benefit company. The municipality's aim is to work on the economic and employment conditions of its region, and, via the IRB, will assist with funding a project and issue to tax breaks to the entity undertaking it.

How Industrial Revenue Bonds — IRBs Work

Municipalities issue IRBs to assist a company that could somehow be unable to obtain financing for its industrial venture or reluctant to undertake the project all alone. The proceeds from the bond are utilized to fund the acquisition, development/recreation, expansion, or improvement of property that qualifies as a manufacturing facility or equipment. As with PABs in general, the IRB's underlying borrower — the for-benefit company — agrees to repay the issuer, which pays the interest and principal on the securities exclusively from the revenue stream of the borrowers' projects.

A private company's project qualifies for an IRB in the event that it includes manufacturing, waste disposal/recuperation, or wastewater treatment. Also, to qualify, total capital expenditures at the project site for the three years prior and subsequent to the issuance of the bonds must be $20 million or less.

Other IRB provisions include:

• the maximum amount of bonds that may be issued or outstanding is $10 million
• at least 95% of the bond proceeds must be spent on qualifying costs
• not over 2% of the proceeds may be utilized for costs of issuance
• total IRBs outstanding at the company may not surpass $40 million
• the weighted average maturity of the bonds cannot surpass 120% of the average economic life of the facilities to be financed
• bond proceeds cannot be utilized to acquire utilized equipment, besides as part of the acquisition of a whole facility
• something like 25% of the proceeds can be utilized to acquire land

As these provisions propose, IRBs will generally be small-issue manufacturing bonds.

Many IDBs are sold as variable rate demand obligation bonds (VRDO) secured by a bank letter of credit with a long-term credit rating of at least A3 from Moody's Investors Service, or A-from Standard and Poor's or Fitch Ratings.

Tax Treatment of Industrial Revenue Bonds — IRBs

As with other munis, the interest IRBs pay is exempt from both federal and state income taxes. Therefore, these bonds carry lower nominal interest rates than comparable conventional debt obligations.

IRBs are subject to IRS statutes. Since the project is legally owned by a governmental entity, notwithstanding, the company fostering the project obtains the status of a state or local government (for this project). The property being developed subsequently becomes exempt from many taxes, especially property taxes, until the bonds mature. Assuming that the company defaults on the lease payments, the bond trustee dispossesses and offers the company's assets to repay bondholders.

Features

• IRBs raise capital to fund the development of a manufacturing facility or equipment that will benefit the community at large; bondholders are repaid by the revenue the project generates.
• As with other munis, IRBs generate tax-free interest income.
• Industrial revenue bonds (IRBs) are a type of municipal bond, issued by a state or local government on behalf of a private company for a specific project.
• An IRB is a variety of revenue bond, specifically a private activity bond.