Bond Financing Becoming More Popular with Banks

Article excerpt

Bond financing is gaining popularity as a way for banks to earn money, and the banking and investment banking industries could converge within the next two decades, says the state bond advisor.

Stan Provus came to Oklahoma from Maine, a state that is big on bonds. Local governments order their municipal bonds from the State Bond Bank, where they are pooled into one giant bond issue backed by the state's moral obligation.

A moral obligation is just that - not legally binding. Provus said bond rating services generally accept a moral obligation because a state will honor it.

Meanwhile, communities with no credit rating get access to AA-rated money.

"That's what the Oklahoma Development Finance Authority is capable of doing here, and that's what the State Bond Bank does," Provus said.

Oklahoma voters last fall granted the finance authority a $100 million insurance commitment so it can guarantee loans to new and expanding businesses. The authority will issue bonds to raise money to lend. The loans can be pooled to sell on the bond market.

"Even if you ignore the insurance, there's the advantage of pooling a loan because you diversify the risk to the bondholder," Provus said.

"I, as a lender, can make a $100,000 loan to one municipality, or I can buy a $100,000 bond that has loans under it to 20 municipalities. I've diversified my risk as a bondholder."

Even without insurance, lenders will offer you better rates and terms because there is less risk, he said. …