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US bank lending: Munis look at alternatives to bonds

Loans grow in appeal for both banks and munis; State infrastructure banks offer viable alternative

As US municipalities look to raise money, they are increasingly considering options other than the bond market. In February, Riverside, California, had been intending to issue a bond to raise money for expansion of its performing arts centre, but scrapped the deal in favour of a $25 million loan. According to the Wall Street Journal, Elgin Academy, a school in Elgin, Illinois, dropped its bond offering, instead taking out a loan of $10 million.

Municipal bond issuance grew in 2009 and again in 2010, reaching about $475 billion, but that growth was driven by the Build America Bond programme. Tax-exempt municipal bond issuance fell, according to figures by Sifma, to about $330 billion in 2010 from about $410 billion in 2007. Now that the BAB programme has been closed, some municipal issuers are looking for alternative ways of raising funds since credit spreads have widened.


Bill Rhodes, partner at law firm Ballard Spahr in Philadelphia, says some of the smaller local government bond issuers sat on the sidelines during the financial crisis. Now, needing to raise capital, they have returned to find the tax-exempt market too expensive or arduous. "Don’t forget that the triple-A bond insurers have all but gone now," says Rhodes.

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