Relates to alternative investment bonds

Summary of provisions

Section 1 sets forth the legislative findings.

Section 2 defines the Alternative Finance Investment Bond (AFIB) and directs the chair of the Urban Development Corporation (UDC) to create the AFIB. This section also requires the UDC, in consultation with the state Comptroller and Attorney General, to issue regulations for the Alternative Finance Investment Bond. Finally, the chair of the UDC must also submit a report within 90 days of passage, on the potential foreign and domestic market for this investment vehicle.

Section 3 establishes the effective date.

Existing legislation

None.

Justification

According to a 2008 report by the Partnership for New York (PNY) titled, Foreign Direct Investment: Bringing the Benefits of Globalization Back Home, one in twenty jobs in New York City alone is attributed to the $58 billion in foreign direct investment (FDI) received in New York City. By comparison, London eclipses New York City with over $104 billion in foreign direct investment.

New York ranks third among the United States' large states with regards to FDI, lagging considerably behind Texas and California. The U.S. Census Bureau reports that for the year 2007 Texas attracted $119 billion in foreign direct investment, California $110 billion, and New York a mere $62 billion. In order to create jobs and increase New York's competitiveness, more investment and financing options must be brought to the state.

The way to attract more FDI and new intra-state capital flows is to create new forms of investment opportunities throughout the state. In the past decade, nations from the Persian Gulf, South East Asia, and other emerging markets have experienced tremendous growth. Investors from these countries are seeking investment opportunities abroad that comport with their religious beliefs as Muslims, namely a prohibition

on interest, This precludes them from using conventional debt instruments such as bonds. These investors use sukuk, also referred to as Alternative Finance Investment Bonds. This financing vehicle permits assets to be held for the benefit of investors in certificates issued by an entity. These benefits may include payment of a return that is economically equivalent to interest and redemption of the certificates out of the process from the disposal of the asset.

In a traditional AFTB arrangement, the issuer uses the subscription proceeds of the bond to acquire the assets, which are then held for the benefit of the holder of the AFIB. The income earned from the assets is shared with the bond holder. Upon the maturity of the AFIB, the assets are sold under a pre-existing arrangement and the proceeds are returned to the holder of the certificates. The New York Times reported in late 2010 that the global demand for sukuk has grown into a $100 billion market in the past decade.

General Electric became the first U.S. company to utilize this vehicle in 2009 by issuing a $500 million sukuk to finance the leasing of aircraft and is in the process of issuing another. Nations such as England, France, South Africa, and Australia are all in the process of changing their laws to treat these investment vehicles equal to traditional bonds. In fact, France is expected to issue its first sukuk in 2011.

In addition to the potential for job growth and development, permitting the state and private entities to issue Alternative Finance Investment Bonds would permit communities that do not engage in interest based transactions, the opportunity to benefit from capital financing facilitated by the state for the construction of education and health care facilities as well as increase the market for those who wish to purchase the State's debt instruments. The use of AFIBs will permit all communities in New York to take advantage of state financing and potentially lower the cost of borrowing.

Legislative history

2011-12: S.2792/A.5836 - Referred to Banks

Fiscal implication

There will be no cost to the State of New York, but there will be a potential for large amounts of new investment capital to be made available to the State and citizens.

Effective date

Immediately.