COMPANIES MISS OUT ON DEVELOPMENT BONDS.

Byline: John W. Cox Staff Writer

Tens of millions of dollars in low-interest financing are going untapped by the state's small and medium-size manufacturers, despite recent interest rate cuts that make the program more attractive than ever.

This year, $67 million was left unspent in the state's $115 million pool for industrial development bonds. That's a sharp turnaround from years past, when demand was higher and competition among borrowers was more intense.

State officials say that fewer companies are requesting the money because of a combination of two factors: a hesitancy to invest amid the recent economic downturn and a general lack of awareness of the bonds as a financing option.

A handful of manufacturers in Southern California have availed themselves of the bonds in order to expand their operations. These companies are now enjoying interest rates that are roughly half that of the nation's prime interest rate, which is the base rate for most business loans.

The paperwork required for such deals is substantial, and completing the entire application process typically requires the services of an entire team of professionals. That raises the cost of the financing, but it still ends up being much less expensive than a standard business loan.

``Is it worth it? Of course it's worth it. Was it easy? No,'' says Bitsu Welderufael, controller for Studio Moulding in Carson, a 115-employee manufacturer of picture frames. On Thursday, after three months of paperwork and preparation, the company closed a deal for about $4 million in variable interest-rate industrial development bonds. The bonds' current interest rate is 1.15 percent, though with various fees, that rate works out to about 3 percent to 4 percent. Studio Moulding plans to use the money to move from a 50,000-square-foot plant in Carson to one nearby that measures about 95,000 square feet.

Industrial development bonds are designed to promote expansion and increased employment among the state's small and medium-size manufacturers, such as furniture factories, metal finishing companies and food processing businesses. Bond guidelines dictate that the money be used to create jobs or use vacant buildings. One stipulation requires that one new job be created for every $50,000 in proceeds. No more than $10 million is available to any individual borrower.

To apply, companies contact a financial adviser who helps them put together the necessary paperwork and guides them through a roughly 90-day process that, if successful, leads toward what is known as conduit financing. The term refers to private financing through public means.

Since the bonds are not guaranteed by the government, one of the key steps in the process is getting a private bank to issue a letter of credit. This is the insurance that state regulators need to sell the tax-exempt bonds to private investors. Because of this step, this kind of financing is not usually available to small companies without an established line of credit.

When all the paperwork is complete, the application is reviewed by a set of two panels within the state Technology and Trade Agency. If these panels approve the request, the bonds can then be issued by any of a number of public sources, such as city governments. The bonds are then sold at a federally subsidized interest rate to private bond investors, whose income from the company's debt payments are tax exempt.

Daniel J. Bronfman, a Santa Monica financial adviser who handles an average of about a dozen industrial development bond deals yearly, says the bonds have been overlooked recently as a means of financing expansion.

Even a few years ago, he says, so many companies were applying for the financing that competition was fairly intense. But now, he says, virtually any company that qualifies can tap the fund.

``The biggest thing is, people don't know (the money) is available,'' says Bronfman, who helped Studio Moulding gets its financing. Bronfman is paid through a percentage-based commission on the bond revenues.

Cunico controller Gary Hubbard characterizes his company's bond financing as ``a hell of a deal.'' The company had been forced out of its former Wilmington plant because of an expansion project by the Port of Los Angeles. In their search for a new home, Cunico executives were referred by redevelopment officials to Bronfman. He helped the company secure about $2 million to build a much larger plant at 1910 W. 16th St. in Long Beach. Hubbard said his only regret is that the company didn't ask for more bond money.

Officials with the state Technology and Trade Agency say that although few applicants have filed for the bond financing in recent months, activity has recently picked up. They add that unspent money available for industrial development bonds is simply recycled into the pool of money available the following year.