During last week’s regular meeting of the Fulton Board of Aldermen, city officials voted unanimously to work with Memphis-based law firm Duncan-Williams, Inc. to refund — essentially refinance — several of the city’s long-standing U.S. Department of Agriculture Rural Development loans. Over the course of the loans’ lifetime, the refinance is expected to save more than $1 million in interest payments.
A bond is basically an IOU — a loan from some entity issued with the expectation that the money will be paid-in-full over a period of time, plus regular interest payments. In this case, the bonds were issued by the USDA to help the City of Fulton pay for various projects.
Refunding a bond is a lot like refinancing a loan: The bond is paid off with another loan at a lower interest rate. In the long run, this can save a municipality hundreds of thousands of dollars in interest payments.
For Fulton, a total of seven 35-year bonds are being refunded, the oldest of which originated in 1982. The average life of the new loans is about 13 years. In total, nine years will have been cut off the loans.
The new bond payments will carry an interest rate of approximately 3.04 percent. The old payments have varying rates in the range of five to six percent. Monthly payments on the new loans will be approximately the same as the old.
The total value of the original bonds was more than $3 million. If they had been paid in full, the old loans at their original interest rates would have cost the city approximately $5.22 million to repay. Under the refinanced loans, the city will pay $4.2 million — a savings of around 19 percent.
Closing on the refinance should take place in April.
According to attorney E.J. Gregory with Duncan-Williams, who attended the meeting, quite a few municipalities have been looking at or are currently in the process of refunding their USDA bonds. Interest rates are historically low right now, making it a financially attractive move.
“This is not uncommon right now,” Gregory told the board, He said that the interest is “purely based on current interest rates.”
The board seemed to support the idea of refunding the bonds almost immediately, although Alderman Kevin Nolan questioned if there were any out-of-pocket expense in doing so.
Gregory said there are none. After that, the board appeared eager to move forward.
“It’ll save us a lot of money,” said Alderman Barry Childers.
“We need to get this done,” Nolan agreed.