Bank of America (BoA) Tower in New York City should be completed by 2007 thanks in part to an innovative public-private financing mechanism that incorporates an unusual use of letters of credit (L/Cs).

While construction financings routinely involve the issue of bonds backed by L/Cs of a fixed value, this deal features accreting L/Cs where the principal amount grows over the life of the credit according to a pre-set schedule.

Liberty Bonds

Construction of Bank of America's new US$1.3 billion global headquarters is to be financed by US$650 million worth of Liberty Bonds issued by New York City's Industrial Development Agency.

This is first commercial loan to be financed using New York Liberty Bonds, which provide tax exemptions in areas of the city affected by the terrorist attacks of 11 September 2001.

Groundbreaking L/Cs

But this is not the only innovative feature of the financing according to Mark Edelstein, a partner at Morrison & Foerster who represented Bank of America on the financing.

"We cut a lot of ground in terms of the letters of credit," Edelstein told the New York Law Journal. While L/Cs are routinely posted in transactions such as this in the full amount of the bond on the day the deal closes, in this financing the L/Cs track the value progress of the bonds.

More L/Cs

On closure of this transaction, the combination of initial L/Cs backing the bond totalled just over US$130 million. A large proportion of the bond proceeds are put into guaranteed investment contracts to earn interest and provide credit support for the bonds.

Over the four-year construction period, the money in the contracts will be used, while the value of L/Cs issued will eventually finish up at around US$649 million.

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