1. SERIES 2011 | ISSUE 1
Non-Profit Finance:
Fresh Perspectives
JUNE 2011
A Bright Future For Non-Profit Financing?
The past three years have witnessed dramatic developments in the
Inside This Issue capital markets resulting in a fundamentally changed, still evolving, and,
2 The Rise and Fall of VRDBs in many respects, significantly improved financing climate. Both access
to capital and the breadth of financing alternatives have expanded
2 BQ Bonds… First to the
Rescue, Then off to the
while interest rates have remained low and relatively stable. The causes
Sunset of this more hospitable environment are several, and the benefits to
non-profit borrowers are many:
3 And Now… The “NBQ”
Bond!
 Structurally simpler and sounder “bank bought” transactions are
3 To What End a Public eclipsing the traditional variable rate demand bond (VRDB)
Offering? structure.
5 The Blessings of
Competition and Price  Long the province of large investment-grade-rated banks, the
Transparency non-profit market is witnessing the emergence of well
capitalized regional and community banks as competitive
sources of financing. The increasing number of banks active in
the non-profit sector is creating greater competition in the
lending community resulting in lower capital cost for non-profit
Wye River Group is an borrowers.
independent financial
advisory firm focused on  In response to the growing reluctance of borrowers to use
the financing and interest rate swaps, traditional “variable rate” lenders are now
investment needs of non-
offering “true fixed rate” options for periods up to 10 years and
profit organizations.
amortizations of up to 30 years.
How did all of this happen and what does it mean for non-profits
pursuing financings or refinancings?

2. Page 2 NON-PROFIT FINANCE | FRESH PERSPECTIVES
The Rise and Fall of VRDBs
VRDBs have long been the most popular tax-exempt financing vehicle
for non-profit organizations. Over the past 10 and 20 years, VRDB
borrowers have enjoyed average borrowing costs of 1.80% and 2.60%
respectively (excluding the cost of remarketing services and the letter of
“The vulnerabilities of
financing structures credit (LC)). Since the early 2000s, borrowers have been sold on the
involving VRDBs and idea of fixing “synthetically” their variable rate borrowing cost by
companion swaps were purchasing an interest rate swap. The vulnerabilities of financing
fully exposed during the structures involving VRDBs and companion swaps were fully exposed
credit crisis of 2008-09.”
during the credit crisis of 2008-09:
 LC bank credit rating downgrades resulted in increased VRDB
rates and in some instances, the collapse of the market for such
bonds.
 Borrowers discovered the meaning of “basis risk” as their interest
rate swaps failed to hedge increases in VRDB interest cost.
 Mark-to-market losses on swaps, often combined with significant
erosion in investment portfolio values and radically increased
debt service cost, triggered financial covenant violations with
an array of negative consequences.
BQ Bonds… First to the Rescue, Then off
to the Sunset
Many non-profit borrowers struggling with “broken” VRDB financings
found salvation in a refinancing with “Bank Qualified” (BQ) Bonds.
Under the stimulus-motivated American Recovery and Reinvestment Act
of 2009, the new, but temporary, BQ exemption for non-profits was not
only a timely solution for the restructuring of troubled bond issues, but a
radically new financing alternative that challenged banks to offer less
expensive and structurally simpler direct loans with features non-profit
Bank Qualified Bonds
borrowers wanted most:
 a variable rate option with an interest rate that is indexed rather
than market driven,
 no “basis risk” for those inclined to synthetically fix their variable
rate financings, and
 better yet, for borrowers desiring predictable borrowing cost
without a hedge, “true fixed rate” options.

3. NON-PROFIT FINANCE | FRESH PERSPECTIVES Page 3
Between 2009 and 2010, it is estimated that approximately $70 billion
of non-profit BQ financings were completed. During the same period, VRDB vs. BQ Issuance
($ in millions)
new issuance of VRDBs declined by nearly half, with a significant 120,000
100,000
amount of outstanding VRDBs redeemed or refunded with BQ Bonds.
80,000
Unfortunately, the tenure for the special BQ exemption was brief. It
60,000
expired on December 31, 2010. Legislation has been introduced to 40,000
reauthorize the exemption, but the prognosis for its passage is dim. But 20,000
0
even if the special BQ exemption never returns, it has had a profoundly
2006 2007 2008 2009 2010
beneficial impact on the non-profit community, with banks continuing VRDBs BQ Bonds
today to offer “BQ-like” financing alternatives. Source: The Bond Buyer
Figures are based on issues
maturing in 13 months or longer
And Now… The “NBQ” Bond!
“Non Bank Qualified” (NBQ) financing is rapidly achieving prominence
as the successor to BQ financing. Here is what we are seeing in the
most recent (2011) financing solicitations conducted for our non-profit
clients:
 Despite the loss of the BQ exemption, a significant number of
banks are still offering “bank purchased” alternatives to LC-
backed VRDBs.
 Banks are not only offering both variable and true fixed rate
“For most non-profit
options, but pricing is reasonably in line with last year’s BQ
borrowers, it is hard to
levels. Typical variable rate options are being priced at 67 to justify a public offering of
77% of LIBOR plus a “spread” and true fixed rates for good fixed rate bonds…”
credits have ranged from 2.50% for a 3-year term to up to
4.00% for a 10-year term.
 For variable rate financings, banks are offering swaps whose
pricing is calibrated to the related bond rate index to assure
effective hedging.
To What End a Public Offering?
In light of the expanded financing repertoire of banks, that is a good
question. For most non-profit borrowers, it is hard to justify a public
offering of fixed rate bonds unless the borrower is either:
 an “AA” or better rated credit with a relatively large borrowing
requirement ($30 million plus) and a strong desire to secure a
fixed rate for the full term of the debt, or

4. Page 4 NON-PROFIT FINANCE | FRESH PERSPECTIVES
 at the other end of the credit spectrum, a non-rated credit with
a financing requirement that cannot satisfy the lending criteria
of banks (for instance a high “loan to value” need or a
significant dependency on future growth in revenues to support
debt service).
In general, the disadvantages of a public offering relative to a bank-
based financing are significant:
 transaction costs that can be twice as high or more,
ABC Non-Profit  the interest rate is not fixed until all financing documents are
Fixed Rate Financing Options completed and the bonds are sold, which can take months
Year NBQ Public Offering from the start of the transaction, exposing the borrower to
1 --- 1.95% potentially higher than planned rates,
5 --- 3.80%
7 --- ---  there is usually a debt service reserve fund requirement equal to
10 4.25% 5.35%
10% of the borrowing amount, exacerbated by a significantly
15 --- 6.00%
20 --- 6.20% negative carrying cost under current market conditions,
30 --- 6.50%
All-In Cost 4.37% 6.55%  the initial and ongoing annual public disclosure requirements
Source: The Bond Buyer can be burdensome,
WRG Managed Transactions
Key Assumptions:  there is an early repayment limitation, usually in the form of a 10-
 BBB Credit Quality
 $10 Million Borrowing; 30 Year Term year redemption prohibition, and
 NBQ Callable in Year 10
 the interest cost will be 150 to 250 basis points higher than that
of a 10-year, bank-purchased alternative under current market
conditions.
Moreover, as a practical matter, relatively few long-term, fixed rate
bond issues ever even run full term. Interest cost saving opportunities,
new borrowing requirements and other changes in circumstances
inevitably prompt the refinancing or early repayment of a significant
number of such issues. Consequently, if a non-profit can borrow under
current market conditions at an all-in fixed cost of 4.00% for 10 years, it
may be hard-pressed to justify the public offering alternative at
appreciably higher interest rates.

5. NON-PROFIT FINANCE | FRESH PERSPECTIVES Page 5
The Blessings of Competition and
Price Transparency
Today, borrowers have the opportunity to reap the benefits of (1)
increasing competition among a growing number of capital sources
and (2) mechanisms that can harness competition to their maximum
advantage. In our experience, competitive solicitations directed to all
logical financing candidates consistently produce better pricing and
terms than one-on-one negotiation or “price shopping”. At our firm,
we have developed web-based solutions to streamline solicitation,
information dissemination and proposal analysis. The result is a highly
compressed and cost-effective process that enables a broad based
market solicitation of 25 or more financial institutions, the selection of a
preferred lender, negotiation of a commitment letter and transaction
documents within 90 to 120 days. This compares to the more
“In our experience,
cumbersome and expensive process for VRDBs or public offerings that competitive solicitations
can typically span 180 to 270 days. consistently produce
better pricing and terms
For non-profit borrowers, debt financings will almost always be “mission than one-on-one
negotiation or “price
critical” and great care should be taken to assure that the financing
shopping”.”
serves the mission. Non-profits owe it to themselves and their
stakeholders to secure financings on the most economical and cost-
efficient basis with reasonably contained transaction costs. Bank-
based financing offers non-profits those opportunities. The challenge
facing each non-profit borrower in these transactions will be
managing the planning, solicitation, evaluation and implementation
phases of the financing process to the best economic advantage.
The assistance of a knowledgeable and motivated independent
financial advisor can help assure that result.
For More Information:
Wye River Group
Independent Financial Advisors
522 Chesapeake Avenue | Annapolis, MD 21403 | www.wyeriver.net