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Board Meeting Agenda Item 14
August 20-21, 2002 Attachment 1
RECYCLING MARKET
DEVELOPMENT LOAN LEVERAGING
STUDY
PREPARED FOR: CALIFORNIA INTEGRATED WASTE
MANAGEMENT BOARD
PREPARED BY: MILKEN INSTITUTE
CAPITAL ACCESS GROUP
CONTRIBUTORS: PAUL PRYDE
BILL SCHMIDT
GLENN YAGO, PH.D.
BETSY ZEIDMAN
MILKEN INSTITUTE
1250 FOURTH STREET, 2/FL
SANTA MONICA, CA 90401
(310) 998-2600
AUGUST 9, 2002
TABLE OF CONTENTS
EXECUTIVE SUMMARY ........................................................................................................................ 1
INTRODUCTION..................................................................................................................................... 10
INDUSTRY ASSESSMENT .................................................................................................................... 11
California Recycling Industry ............................................................................................... 11
Recycling Market Development Revolving Loan Eligible Companies................................ 12
SUMMARY OF INTERVIEWS WITH BUSINESSES AND ZONE ADMINISTRATORS ............ 13
Businesses ............................................................................................................................. 13
Characteristics of Financing Needs ...................................................................................... 13
Attractiveness of the Program............................................................................................... 13
Zone Administrators ............................................................................................................. 14
FINANCING IN RECYCLING AND REUSE INDUSTRY ................................................................. 16
Available Financial Products ................................................................................................ 17
Recycling and Reuse Firms’ Financing Needs ..................................................................... 20
Annual Financing Needs ....................................................................................................... 21
OVERVIEW OF THE INITIAL LEVERAGING OPTIONS .............................................................. 22
Framework ............................................................................................................................ 22
Preliminary Recommentations .............................................................................................. 24
OVERVIEW OF MINI BUSINESS PLANS .......................................................................................... 29
Introduction ........................................................................................................................... 29
Borrowers.............................................................................................................................. 29
Products................................................................................................................................. 29
New Markets Tax Credit Strategy ........................................................................................ 31
Analysis................................................................................................................................. 32
Loan Guaranty Strategy ........................................................................................................ 34
Loan Sale Strategy ................................................................................................................ 38
Equity Equivalent/Program-Related Investment Strategy .................................................... 41
TABLES
TABLE A California's Share of Recycling Activity…..………………………………………...44
TABLE B Recycling Industry Definitions……….……………………………………………...45
TABLE C California's Recycling Industry Characteristics……………………………………...46
TABLE D RMDZ Loan Recipients……………………………………………………………...47
TABLE E Prime Rate and CIWMB's RMDZ Active Loan Portfolio….………………………...48
TABLE F Overview of Leverage Strategies...…………………………………………………...49
APPENDICES
NEW MARKETS TAX CREDIT STRATEGY ..................................................................................... 50
LOAN GUARANTY STRATEGY .......................................................................................................... 76
LOAN SALE STRATEGY....................................................................................................................... 92
EQUITY EQUIVALENT/PROGRAM-RELATED INVESTMENT STRATEGY ......................... 115
FINANCIAL TERMS GLOSSARY……………………………………………………………..…….137
Milken Institute/Capital Access Group CIWMB RMDZ Loan Leveraging Study – 6/30/2002
EXECUTIVE SUMMARY
This report examines the market, financial requirements, leveraging options and final plans to leverage
the California Integrated Waste Management Board’s (herein referred to as “CIWMB” or the “Board”)
Recycling Market Development Zone’s (RMDZ) revolving loan program. The plans outline the process
of increasing the Board’s available funds of $3.5 million to $10 million annually in a manner that is
consistent with the financing needs of recycling companies in California.
This study was commissioned because the amount of funds available during the next four years (state
fiscal years 2002/03 through 2005/06) declines significantly, from $10 million to $3.5 million. The
program has the advantage of relaxed credit underwriting standards and repayment terms longer than
industry average. Although the government approval process is protracted because of public open
meeting acts, the Board has the flexibility to structure loans to better match the recycling businesses
needs.
The goal of the leveraging strategies are to secure long term funding for recycling businesses, making the
loan program sustainable beyond the sunset date of July 1, 2006. The leveraging strategies identify other
sources of funds that perhaps can be made available through existing community financing organizations.
Recycling Industry Assessment
California produces more than 60 million tons of waste per year. The State’s recycling and reuse industry
generates over $14.2 billion in revenue and employs over 84,000 workers. Thirty-six percent of this
revenue is generated by establishments in industries eligible for the RMDZ loans if the project is located
in one of forty Recycling Market Development Zones, underscoring the importance of the program.
For the purposes of this report, the industry in California is the universe defined in the report
commissioned by the National Recycling Coalition, U.S. Recycling Economic Information Study. The
industry can be broadly divided into four categories: Recycling Collection, Recycling Processing,
Recycling Manufacturing, and Reuse and Remanufacturing with 27 sub-industry categories. Seventeen of
these industries contain companies that are eligible for RMDZ loans.
Current and Historic RMDZ Loan Pool
Throughout the history of the RMDZ program, $55,910,300 has been lent to recycling companies, with an
average loan granted of $511,697 and a 5.1 percent annual interest rate. The Board sets the interest rate
semiannually and it is currently 4.0 percent through July 15th, 2002 (presently, 75 basis points below the
current prime rate). Of the companies that have received loans, 14 percent were classified as in the “start-
up” phase, 38 percent were in the expansion phase, and 48 percent were in the established phase of their
growth cycle. The overriding use of the proceeds of the loans was for machinery and equipment (41
percent of companies) and working capital (35 percent). However, RMDZ financing was used for other
projects such as leasehold-improvements (10 percent), real estate purchases (8 percent), and refinancing
onerous debt (6 percent).
The current pool of active RMDZ loans has a weighted average interest rate of 5.37 percent. Because this
rate is above the prime rate, the Board may have the opportunity to sell loans at a premium (a strategy
discussed later in this paper).
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Milken Institute/Capital Access Group CIWMB RMDZ Loan Leveraging Study – 6/30/2002
Evaluation of Current Program
In order to gain a better understanding of the current recycling marketplace in California and businesses’
and governmental officials’ response to the RMDZ loan program, the Milken Institute and the Capital
Access Group (MI/CAG) interviewed a sample group of loan recipients and Zone Administrators. While
the information presented is anecdotal in nature, it offers a representative picture of the views of
administrators and participants of the program.
The two drivers providing the greatest incentive for a company to participate in the RMDZ program are
the relatively low interest rate and the access to financing that traditionally would have been unavailable.
Established businesses would not have participated in the program without the below-market interest rate,
while start-ups would have most likely considered a loan with a market interest rate because of their lack
of access to other capital sources.
While businesses were overwhelmingly supportive of the program, they voiced the following criticisms:
Timing of interest payments. The program requires that companies begin paying down interest on the
entire principal amount regardless of when the funds have been fully disbursed.
Collateral requirements too strict. Some businesses knew of companies that could not participate in
the program because the program restricts loan recipients from using their homes as collateral.
Zone Administrators have been crucial in marketing the program to potential businesses. To more
effectively aid this effort they suggested changes in the following areas:
Start-up companies are often worried about the confidentiality of their business plans when sending
them to State agencies.
The financial incentives are not great enough to merit some potential borrowers’ attention.
The universe of qualified companies in some zones is too small.
Improve stability of funding given the threat of losing credibility by aggressively marketing the
program whose funding history is unstable.
Furthermore, Zone Administrators described the following issues with the current structure:
The interest rate charged on loans is not adjusted with great enough frequency.
Disallowing single-family homes as collateral has restricted access to financing for many start-up
firms.
Smaller loans require the same review process and approval time as larger loans.
The target market is too small given the eligibility requirements.
The funds must be better replenished.
The Board provided input on how it has addressed these issues, specifically in the area of confidentiality,
project eligibility, adjusting the interest rate, improvements made to improve and expedite loan approval
process, and the Board’s stance on using residential properties as collateral. Please see the body of the
report for their specific comments.
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Financing in the Recycling and Reuse Industry
In order to create leveraging strategies to address the concerns addressed in the above interviews it is
important to understand the specific financing needs of the recycling and reuse industry. Recycling
companies face barriers to traditional capital sources because of lack of security or collateral, lack of an
established credit history, thin profit margins, tight credit conditions in the marketplace, lack of
information about new recycling products and processes, and restrictive covenants that some bank loans
place on businesses reducing their access to other forms of capital.
Nonetheless, in most respects recycling businesses are like any firm. Companies, regardless of industry
need two types of financing—equity and debt.
Equity is capital supplied by investors to a business in exchange for an ownership interest. Because it has
no fixed cost or repayment requirement, equity allows a company to finance activities and assets that are
important to growth and success but produce uncertain short-term returns. For example, equity capital is
often used to fund operating expenses for start-up companies until they are able to finance these costs
from operating cash flows. Examples of equity capital that recycling companies traditionally rely on are:
Personal savings and internal investments
Earnings
Angel Investors
Venture capital
Government and charitable grants
Debt is fixed-cost capital that is repaid from business revenues. Because lenders receive only a modest
return in the form of interest, debt capital is generally used to finance activities and assets that can
produce immediate cash flows. For example, debt capital is often used to finance assets (collateral) that
can easily be converted into cash within a short period such as receivables and inventory. It is also used to
finance equipment and facilities that can be sold to repay indebtedness in the event that business cash
flows are insufficient to do so. Examples of debt capital that recycling companies traditionally rely on are:
Banks
Leasing and financing companies
Community development loan funds
Local government loan funds
State loans and bonds
Because few recycling companies would qualify for external equity investment (and must use various
forms of debt to fund growth) the decisions of lenders, especially banks, would determine whether they
have adequate access to outside financing.
Assuming that the credit history and character of a borrower are acceptable, lenders have two concerns
when they consider financing a business.
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Milken Institute/Capital Access Group CIWMB RMDZ Loan Leveraging Study – 6/30/2002
1. Is there adequate cash flow? The operating cash flow of a business is a lender’s principal source of
loan repayment. If the cash flow is not large or predictable enough to repay the loan, most lenders
will refuse to extend credit.
2. Is there adequate collateral? Lenders recognize that historic cash flow may not materialize in the
future. Thus, they look to the market value of the borrower’s collateral as the secondary source of
repayment. If things go wrong, the lender will take possession of the borrower’s property and sell it to
recover any outstanding indebtedness.
Looked at in terms of these two factors, recycling firms often have two characteristics that increase their
credit risk in the eyes of lenders.
1. Unpredictable cash flows. As is the case with early stage companies in any industry, newer recycling
companies are too young to have established a history of positive cash flow. Because lenders tend to
look at past performance (rather than future promise) these companies are considered high credit
risks.
2. Special-purpose assets. Recycling companies often need real estate or equipment with few
alternative uses or buyers (special-purpose assets). Because this property cannot easily be resold
(without a substantial loss) lenders are reluctant to make loans secured by it.
The way to solve this problem is to identify strategies that can mitigate the associated risk—not with
recycling companies as such, but with companies that may have unpredictable cash flows and collateral
which is not easily sold. Put differently, any strategy that works for recycling companies would work for
any other company with similar characteristics—transportation companies, construction companies,
retailers, etc.
In fact, these two factors can be used to construct a credit matrix for such firms regardless of industry.
All of the firms in CIWMB’s market generally fall within these four cells.
CREDIT MATRIX FOR FIRMS SEEKING FINANCING
Collateral
Adequate Inadequate
Adequate Established company Established service or technology
representing low credit risk; can firm in the expansion stage with
secure conventional bank few hard assets; needs
financing; most attracted by low subordinate debt product that
capital cost. removes collateral risk from
lender
Cash flow
Inadequate Company’s in the expansion Start-up early-stage company
stage seeking to acquire real with little operating
property with good market value history; most concerned
but weak income stream; needs about financing availability;
equity or deferred payment. needs
equity or deferred payment
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Milken Institute/Capital Access Group CIWMB RMDZ Loan Leveraging Study – 6/30/2002
Criteria to Select Final Leveraging Strategies
Based on discussions with CIWMB and the research conducted above, MI/CAG developed the initial
leveraging options. The initial options were evaluating using the following criteria:
Financing capacity. The strategy should achieve the highest possible ratio between CIWMB capital
resources and private investment.
Financial stability. As noted above, uncertainty regarding the availability of loan funds has, in the
past, made Zone administrators reluctant to promote the program. The RMDZ loan program needs a
sustainable long-term source of funds to leverage with outside investors and allow time for marketing
efforts to come to fruition. Thus the strategy should provide a reliable source of continuing liquidity.
In addition, program revenues – interest income, fees and the like – should cover program costs.
Market responsiveness. The strategy should allow the RMDZ program to offer financial products that
meet the varied needs of a large number of recycling companies. For example, the program should be
able to help start-up companies having little collateral as well as established firms looking for low-
cost financing.
Customer friendliness. Some borrowers – and administrators – have complained that RMDZ loans
involve large amounts of paperwork and a protracted approval process. While loans cannot be
approved without public comment which can lengthen the process when compared to receiving funds
from a private lender, the strategy, where possible, should simplify and shorten the loan approval
process.
Affordability. Loans and investments made possible by the strategy should be structured to ease
repayment burdens on borrowers. Interest costs should be as low as possible.
Leveraging strategies addressed one, or all, of the following types of financing:
Equity. Early-stage companies without a proven business model or operating history and established
enterprises entering unproven lines of business often require infusions of risk-oriented permanent
capital that do not carry fixed repayment obligations.
Senior debt. Companies that need to finance assets and activities that produce reliable and predictable
cash flows often employ loans that are repaid according to a fixed schedule and secured by business
(and personal) collateral.
Subordinate debt. Established companies acquiring new assets or entering new lines of business often
employ subordinate debt both as a borrowing base for senior debt and to increase their return on
equity. Subordinate debt can also be employed as part of venture financing structures.
The ability of recycling companies to secure any of these forms of financing is often inhibited by the
following risks and costs:
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Milken Institute/Capital Access Group CIWMB RMDZ Loan Leveraging Study – 6/30/2002
A. Risk
Credit or portfolio risk. The possibility that loans will not be repaid according to their terms or that
investments will prove worthless can make lenders and investors reluctant to finance certain deals.
Rate risk. The danger that interest rates on short-term borrowings (especially deposits) will exceed the
interest coupon on fixed rate loans makes certain loan structures unattractive for private lenders.
Liquidity or exit risk. The need to sell existing loans and investments in order to fund new loans or
provide a return to investors can make lenders and investors unwilling to finance certain deals for
which there is no secondary or investor market.
B. Cost
Origination expenses. The high costs of identifying and pre-qualifying promising borrowers and
business plans can make certain loans and investments economically unattractive.
Underwriting and processing costs. Credit analysis, due diligence and transaction structuring
expenses can make the economics of small or marginal loans and investments unattractive.
Servicing and monitoring costs. Excessive oversight and management expenses can reduce the
returns on loans and investments.
Strategies for reducing these risks and costs generally involved one or more of the following:
New products. Loans and investments that are structured to assume risks that other lenders and
investors refuse to bear can increase the availability of scarce forms of financing. For example,
second mortgages make it easier for marginal borrowers to purchase property.
New organizations. Organizations that specialize in a particular type of product, borrower segment or
finance function can achieve the efficiencies and expertise needed to improve the economics
associated with serving certain markets. For example, the emergence of specialty finance companies
as competitors to banks has expanded the availability of commercial credit to mid-market companies.
New technologies. New uses of information and computer technology can reduce the uncertainty and
cost of loans and investments. For example, credit scoring allows the underwriting of certain
consumer and small-business loans under $100,000 to be automated.
New strategies for managing risk. New insurance and credit enhancement techniques allow lenders
and investors to reduce risks or remove unwanted risks from their balance sheets. This allows them to
make capital and credit available to a wider group of borrowers. For example, the California Capital
Access Program administered by the state Treasurer’s Office, a small business portfolio insurance
program, makes loans more available to small, marginal firms by reducing bank credit risk.
New sources and methods of funding. Access to new pools of private investment capital can broaden
the financing capacity of lenders and investors. For example, securitization allows almost any
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Milken Institute/Capital Access Group CIWMB RMDZ Loan Leveraging Study – 6/30/2002
financial asset to be sold in the capital markets allowing lenders to offer a wider array of products to
borrowers.
MI/CAG developed initial options with CIWMB staff. Some were dropped because of requirements that
would require new legislation or because they were determined suboptimal based on the above criteria.
The remaining options were combined into four mechanisms, and a mini-business plan created for each.
Each of these mechanisms uses innovative financial technologies to leverage up CIWMB’s annual
contribution of $3.5 million to provide at least $10 million in lending capacity per year. Each mechanism
utilizes three different financial products, catering to the particular needs of the three stages of borrowers:
early, expansion and established companies.
Mechanisms
Equity
New Markets Tax Credit Loan Guaranty Loan Sale
Equivalent Investments
Sources
Community Development
CDFIs CTTCA Securitization Investors
Entities
Products
Subordinate Loans Deferred Payment Loans Below-Market Loans
Leveraging Strategies
Assuming CIWMB has an available pool of capital of $3.5 million annually, the following plans assume
that the full amount is applied to each strategy to leverage this amount to satisfy the estimated demand of
$10 million per year be available to lend to eligible recycling companies. Nonetheless, the plans are
structured in such a matter that two or more strategies can be employed simultaneously with similar
results:
New Markets Tax Credit Strategy
Loan Guaranty Strategy
Loan Sale Strategy
Equity Equivalent/Program-Related Investment Strategy
Each of the plans is designed to meet the financing needs of three types of recycling companies that make
up the RMDZ market.
Established recycling firms.
Expansion-stage companies.
Early-stage companies.
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Milken Institute/Capital Access Group CIWMB RMDZ Loan Leveraging Study – 6/30/2002
The following three products are designed to meet the distinct needs of each these borrower segments:
Below-market loans. Established recycling companies seeking expansion financing would be eligible
for medium and long-term fixed-asset loans priced below the market rate for such financing.
Subordinate, companion loans. Expansion-stage companies that lack the collateral to secure senior
financing needed for fixed assets or working capital would be candidates for subordinate debt. These
loans would typically be structured as junior participations in senior, secured loans extended by banks
or other commercial lenders.
Deferred payment loans. The borrower makes no interest or principal payments during the life of the
loan, but at maturity, pays the original principal amount plus accrued interest.
The following table describes how these products are utilized in the four leveraging strategies.
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Milken Institute/Capital Access Group CIWMB RMDZ Loan Leveraging Study – 6/30/2002
New Markets Tax Credit Loan Guaranty Loan Sale EQ2/PRI
Description A new federal incentive A risk-sharing partnership Selling loans to secondary Forming a financing
program under which between CIWMB and one or market investors, such as the partnership with an
taxpayers are allowed to more existing small business Community Reinvestment established non-profit
reduce their federal income loan guarantors – preferably Fund, and using the cash to Certified Development
tax payments by 39 percent of with a California Financial make more loans. Interest Financial Institution (CDFI)
the amount invested in a Development Corporation rates on the loans would be that would agree to use funds
qualifying Community (FDC) that provide guaranties structured so that loans would obtained through PRIs, low-
Development Entity (CDE)– a of up to 90 percent on small be sold at a premium. interest loans that foundations
for-profit organization that business bank loans of up to provide, or EQ2s, long-term,
makes business loans and $350,000. low interest loans made by
investments in low-income commercial banks to
areas. community development
organizations.
Borrowers Established: 50% Established: 50% Established: 50% Established: 50%
Early-Stage: 30% Early-Stage: 30% Early-Stage: 30% Early-Stage: 30%
Start-Up: 20% Start-Up: 20% Start-Up: 20% Start-Up: 20%
Products Below-market loans Below-market loans Below-market loans Below-market loans
Subordinate loans Subordinate loans Subordinate loans Subordinate loans
Deferred payment loans Deferred payment loans Deferred payment loans Deferred payment loans
Sources of Funds for Loans Investors that expressed California FDCs such as: Possible purchasers of loans Organizations that have made
interest in purchasing NMTCs Nor-Cal FDC, such as: EQ2 or PRI investments such
such as: Pacific Coast Regional Community as:
Enterprise Social FDC Reinvestment Fund Ford Foundation
Investment Corporation California Southern FDC Bayview Financial Citibank
Bank of America CBA Receivables F.B. Heron Foundation
Bear Stearns
Lenders Community Development Ca. Technology, Trade and Companies that purchase Certified Development
Entity (for-profit) Commerce Agency’s 11 commercial loans to private Financial Institions
Financial Development businesses at market interest
Corporations that administer rates
the State Loan Guarantee
Program
Analysis Rating Rating Rating Rating
Rating: (-) worse than avg. Simplicity (-) Simplicity (+) Simplicity (+) Simplicity (0)
(0) average Practicality (-) Practicality (0) Practicality (+) Practicality (-)
(+) better than avg. Sustainability (+) Sustainability (+) Sustainability (+) Sustainability (0)
Affordability (+) Affordability (0) Affordability (+) Affordability (+)
Implementability (0) Implementability (-) Implementability (+) Implementability (0)
Leverage Base Case: 5 to 1 Base Case: 12 to 1 Base Case: 16 to 1 Base Case: 5 to 1
Best Case: 5 to 1 Best Case: 19 to 1 Best Case: 16 to 1 Best Case: 5 to 1
Return on Investment Base Case: 32.98% Base Case: 10.23% Base Case: 0.01% Base Case: 0.06%
Best Case: 33.30% Best Case: 14.37%
9 Best Case: 15.30% Best Case: 12.50%
Milken Institute/Capital Access Group CIWMB RMDZ Loan Leveraging Study – 6/30/2002
INTRODUCTION
The United States generates approximately 208 million tons of municipal solid waste per year, or
approximately 4.3 per pounds per person per day.1 California, alone, produces over 60 million tons of
waste per year. Currently, 56,000 recycling establishments operate in the nation with over $236 billion in
revenues. California’s 10 percent share of the total number of these businesses is approximately in line
with its 12 percent share of the country’s population. However, despite the State’s extraordinarily large
share of economic activity in the country, California generates only 6 percent of the U.S.’s total recycling
revenue and employs a similar share of workers (see Table A on page 44).
Overview
This report covers five areas that examine the market, financial requirements, leveraging options, and
final plans to improve and leverage the Recycling Market Development Zone (RMDZ) loan program. The
first section consists of an assessment of the recycling market in California and an analysis of the current
pool of RMDZ loans. This is followed by a summary of interviews conducted with past loan recipients
and current Zone Administrators. In the subsequent section, we examine financing the needs and products
available in the recycling and reuse industry. Next, we describe the process that was used by the Milken
Institute and Capital Access Group and the California Integrated Waste Management Board (“CIWMB”
or “the Board”) to determine the four chosen business plans to leverage RMDZ assets. In the last section,
the final mini business plans are summarized.
1
Environmental Systems of America, Inc. website.
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INDUSTRY ASSESSMENT
California Recycling Industry
Table B (page 45) summarizes the recycling, remanufacturing, and reuse industry in California. 5,342
establishments2 operate in the State, employing approximately 84,000 workers and generate $14.2 billion
in revenue. For the purposes of this report, the industry in California is the universe defined in the report
commissioned by the National Recycling Coalition, U.S. Recycling Economic Information Study. The
industry can be broadly divided into four categories: Recycling Collection, Recycling Processing,
Recycling Manufacturing, and Reuse and Remanufacturing. Of these industries the following sub-
categories (see Table B for definitions) exist:
RECYCLING INDUSTRY CATEGORIES
Recycling Collection Recycling Recycling Manufacturing Reuse and
Processing Remanufacturing
Government Staffed Compost and Glass Container Computer and
Collection Miscellaneous Manufacturing Plants (a) Electronic
Organic Producers Appliance
(a) Demanufacturers
(a)
Private Staffed Materials Recovery Glass Product Producers Motor Vehicle Parts
Collection Facilities (MRFs) (other recycled uses) (a) (used)
Recyclable Material Nonferrous Secondary Retail Merchandise
Wholesalers (a) Smelting and Refining Sales
Mills (a)
Textile Recycling Nonferrous Product Tire Retreaders
(a) Producers (a)
Nonferrous Foundries (a) Wood Reuse (a)
Paper, Paperboard, and Materials Exchange
Deinked Market Pulp Mills Services
Paper-based Product Other Reuse (a)
Manufacturers (a)
Pavement Mix Producers
(asphalt and aggregate) (a)
Plastics Reclaimers (a)
Plastics Converters (a)
Rubber Product
Manufacturers (a)
Steel Mills
Iron and Steel Foundries
Other Recycling
Processors/Manufacturers
(a)
2
An establishment is a single physical location where business is conducted or where services or industrial operations are
performed.
(a) RMDZ eligible industry group, which diverts non-hazardous solid waste materials from California’s landfills and adds-value
to the product.
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Recycling Market Development Revolving Loan Eligible Companies
Under the current rules of the program, only seventeen of the twenty-seven industry subcategories defined
above are eligible for RMDZ loans. This represents 12 percent of the State’s total establishments and 36
percent, or approximately $5.1 billion, of the $14.2 billion recycling market in California. Through the
history of the program, 108 loans have been made to 96 different companies located throughout
California. Table C (page 46) provides additional information about the relative size of each of the sub-
industries.
Table D (page 47) summarizes the geographic location, average loan size, average term, average rate, and
use of loan proceeds for each of the seventeen eligible sub-industries. Firms in all but one eligible sub-
industry, Tire Retreaders, have received RMDZ loans. The average loan granted was $511,697 at a 5.1
percent average annual interest rate and an average term of 9 years. The interest rate is set semiannually
and is currently 4.0 percent through July 15th, 2002 (presently, 75 basis points below the current prime
rate). Of the companies that have received loans, 14 percent were classified as in the “start-up,” 38
percent were in the expansion, and 48 percent were in the established phase of their growth cycle. The
overriding use of the proceeds of the loans was for machinery and equipment (41 percent of companies)
and working capital (35 percent). However, RMDZ financing was used for other projects such as
leasehold improvements (10 percent), real estate purchases (8 percent), and refinancing onerous debt (6
percent).
Throughout the history of the program, the majority of loans have been made to companies located in
Southern California (52 percent) with the remaining split between Northern California (24 percent) and
Central California (24 percent). Of the current, active loans, approximately 23.4 percent of the loans
representing 23.2 percent of the total principal amount have been financed by businesses located in zip
codes of economically distressed empowerment zones or enterprise communities. To determine whether
these businesses are located within the census tracks covered by the New Markets Tax Credit (one of the
leveraging strategies described later) as low-income communities, requires further analysis.
As shown in Table E (page 48), the prime rate, once at a relative high of 9.5 percent in 2001, is currently
4.75 percent following aggressive cuts in interest rates by the Federal Reserve to stimulate economic
growth. Because of the recent decline in interest rates, the average interest rate of the active portfolio of
RMDZ active loans is above the current prime rate of 4.75 percent. The portfolio of RMDZ loans
presently has a weighted average interest rate of 5.37 percent.3 This presents an opportunity to sell the
pool of loans at a premium.
3
The interest rate is weighted by the remaining principal owed for each loan.
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Milken Institute/Capital Access Group CIWMB RMDZ Loan Leveraging Study – 6/30/2002
SUMMARY OF INTERVIEWS WITH BUSINESSES AND ZONE ADMINISTRATORS
In order to gain a better understanding of the current recycling marketplace in California and businesses’
and governmental officials’ response to the RMDZ loan program, the Milken Institute interviewed a
sample group of loan recipients and Zone Administrators. While the information presented is anecdotal in
nature, it offers a representative picture of the views of administrators and participants of the program.
Businesses that received loans were generally enthusiastic about the program and the access it provided to
much needed financing. As one borrower in the plastics industry stated, “We have been major
beneficiaries of the program and have been able to recycle hundreds of tons of plastic milk bottles.”
Businesses
Characteristics of Financing Needs
Participating companies used a variety of financial instruments to fund the growth of their businesses.
Beyond the initial investments by the founder, friends and family, businesses used commercial loans,
lines of credit, real estate financing and off balance sheet operating leases to finance expansion. Financing
was applied to such purposes as ongoing equipment purchases, working capital, and building
improvements. The following section, “Financing in Recycling and Reuse Industry,” describes the
requirements of businesses in this industry in greater detail.
Attractiveness of the Program
The two drivers that provided the greatest incentive for a company to participate in the program were its
relatively low interest rate and access to financing that would have traditionally been unavailable.
Established businesses indicated that they would not have participated in the program without the below-
market interest rate, while start-ups indicated that they would have most likely considered a loan with a
market interest rate because they lacked access to other capital sources. Barriers to traditional capital
sources included lack of security or collateral, lack of an established credit history, thin profit margins,
tight credit conditions in the marketplace, lack of information about new recycling products and
processes, and restrictive covenants that some bank loans place on businesses reducing their access to
other forms of capital.
Criticisms of the Program
While businesses were overwhelmingly supportive of the program, they voiced the following criticisms:
Timing of interest payments. The program requires that companies begin paying down interest on the
entire principal amount regardless of when the funds were fully disbursed.
The program does not provide construction financing.
Smaller, bridge loans are not available. One company suggested that smaller loans of $5,000 to
$15,000 be offered to bridge the gap between initial equity investments and larger rounds of financing
for start-up companies.
Collateral requirements too strict. Some businesses knew of companies that could not participate in
the program because the program restricts loan recipients from using their homes as collateral.
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Zone Administrators
Marketing the Program
Zone Administrators use a variety of techniques to contact potential recipients. While some
Administrators receive inquiries from potential businesses, most proactively market the program. They
use techniques such as working with local economic coordinators and economic development agencies to
identify potential recipients, offering workshops, and sending information sheets. Furthermore, some
Administrators pre-screen potential applicants before sending their applications to the State.
While the Administrators’ marketing efforts are substantial, there are still considerable impediments to
reaching potential recipients. Administrators voiced the following concerns:
Start-up companies are often worried about the confidentiality of their business plans when sending
them to State agencies.
The financial incentives are not great enough to merit some potential borrowers’ attention.
The universe of qualified companies in some zones is too small.
Given its lack of stable funding, aggressively marketing the program threatens its credibility.
Problems Identified with Current Structure
Zone Administrators voiced the following issues regarding the current loan program and process:
The interest rate charged on loans is not adjusted often enough. While the Federal Reserve has been
cutting interest rates almost monthly, CIWMB sets its rate semi-annually. As market interest rates
decline, the incentive to borrow from the loan program erodes. The loan program’s rate should be
adjusted more frequently to follow market conditions.
Disallowing single-family homes as collateral has restricted access to financing for many start-up
firms. For many entrepreneurs, the most significant collateral they own is their home. Many do not
have other significant tangible assets. It is these same firms that have the most difficulty obtaining
traditional bank loans. Entrepreneurs who use their residences as collateral have a greater incentive to
ensure that their businesses succeed, however, CIWMB, a state agency, decided not to use homes as
collateral so as not to be in the position of foreclosing on personal residences.
Smaller loans require the same review process and approval time as larger loans. The excessive
administrative cost to firms to obtain a small loan as a large one acts as a disincentive to use the
RMDZ program to fund smaller projects.
The target market is too small given the eligibility requirements. Some Administrators feel the
eligibility requirements should be broadened to provide funding to more potentially waste-reducing
businesses.
Better replenishing of funds. Because of a potential lack of funds, many Administrators are reluctant
to market the program to its full potential. This study is the first step toward alleviating that problem.
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Board Response
The preceding concerns were presented to the Board to receive more comprehensive information in
designing the leveraging plans. The Board had the following response to Zone Administrator and loan
recipient concerns:
Confidentiality. Current code and regulatory provisions provide protections for the confidential and
sensitive business information submitted with loan applications. Precautions are taken by staff to
ensure that the information is not released to others. Loan application packages are confidential. The
information is only reviewed by the RMDZ loan officer and 9 loan committee members. The only
information made public is contained in a Board Agenda Item. Agenda items include the business
name, address, loan amount, use of RMDZ loan proceeds, and what the company does. Agenda items
do not include any financial information or lists of suppliers and customers.
Project Eligibility: Each year staff reviews the Loan Eligibility Criteria to ensure that projects
requiring funding are included. Prior to making revisions to the eligibility criteria, the Board solicits
input from Zone Administrators and other interested parties. The Board last considered project
eligibility in Sept. 2001.
Loan Interest Rate: The interest rate is tied with the State Surplus Money Investment Fund. That
interest rate is set semiannually. Shortly after that rate is set in January and July of each year,
adjustment of the RMDZ Loan interest rate is made.
Loan Processing and Approval Timeline: Since the Board is a public body, additional loan
processing time is required to have application reviewed by a loan committee, a board committee, and
the full board. On average, an RMDZ loan officer only has two weeks to review, analyze, and
underwrite a loan application. The most time consuming elements are the placement of a loan item
on the Board Agendas, the 10-day public meeting notices, and the fact that the Board only meets
once a month. Loan Committee is scheduled once a month, on a date when the loan is ready to be
presented.
Improvements made to improve and expedite process: If a borrower has all the information included
at the time his application is submitted to the Board, a loan can be processed in 45 - 90 days. Over
the last few years, the Board and its staff have tried to make the program responsive to its clients
through the lessening of loan guarantee requirements from those having 10% ownership the business
to 20%, changing from quarterly to continuous application filings, hiring more staff with direct
lending experience, streamlining loan documents to mirror those of private sector, outsourcing loan
servicing, increasing collateral advance rates, reducing the loan application fee from $500 to $300,
and reducing loan points from 3% to 1/2%. In addition, RMDZ loan officers make many attempts to
work with recycling businesses before they apply, to confirm they are located in an RMDZ, the
project meets the Boards Eligibility Guidelines, to understand how the loan will be structured, the
repayment schedule, collateral requirements, and that the borrower has sufficient funds for the entire
project. All these improvements have made the Loan program more responsive to the clients needs
and significantly shortened time to process loans.
Residential properties as collateral: The decision was made not to take residential property as
collateral based on a loan where the Board was in the position to foreclose on a single family
residence occupied by a retired disabled couple, who owned 100% of the recycling business. Loan
staff is only aware of only one recycling business that did not apply for an RMDZ loan because their
only collateral was a home.
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Creating leveraging strategies that address the concerns raised in the above interviews calls for an
understanding of the specific financing needs of the recycling and reuse industry. The following section
examines the requirements of this industry in greater detail.
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Milken Institute/Capital Access Group CIWMB RMDZ Loan Leveraging Study – 6/30/2002
FINANCING IN RECYCLING AND REUSE INDUSTRY
Available Financial Products
Businesses, regardless of industry, need two types of financing—equity and debt.
Equity is capital supplied by investors to a business in exchange for an ownership interest. Because it has
no fixed cost or repayment requirement, equity enables a company to finance activities and assets that are
important to growth and success despite uncertain short-term returns. For example, equity capital is often
used to fund operating expenses for start-up companies until they are able to finance these costs from
operating cash flows.
Debt is fixed-cost capital that is repaid from business revenues. Because lenders receive only a modest
return in the form of interest, debt capital is generally used to finance activities and assets that can
produce immediate cash flow. For example, debt capital is often used to finance assets (collateral) that
can easily be converted into cash within a short period such as receivables and inventory. It is also used to
finance equipment and facilities that can be sold to repay indebtedness in the event that business cash
flow is insufficient to do so.
Companies often employ two types of debt to finance their operations: senior loans and subordinate loans.
Senior loans are well-collateralized and therefore relatively safe for the lender, thus, they bear relatively
low interest rates. By contrast, subordinate loans are less well-collateralized and typically carry a higher
interest rate.
The particular mix of equity, and senior and subordinated debt that a company employs depends upon its
operating characteristics and stage of development. For example, firms with large amounts of fixed assets
and stable cash flows would use relatively more debt than companies that have less predictable cash flow
and fewer hard assets
Our research and interviews with recycling companies revealed that recycling companies typically rely on
the following sources of financing:
Equity capital
Personal savings and internal investments. Like most entrepreneurs, owners of recycling
companies drew upon personal savings and credit lines (including home equity loans and credit
cards) to finance their businesses, especially during the early stages of development. However,
few entrepreneurs have the wealth to finance the continued growth of their companies from
personal assets. Thus, except for early-stage companies, owner capital would generally represent
a small part of a recycling company’s capital structure.
Earnings. While recycling companies distribute some cash to owners and employees (e.g., for
bonuses), they tend to retain much of their internally-generated cash flow to fund future growth.
This is a company’s most inexpensive source of private financing. However, its availability
would vary depending on the company’s profitability and stage of development.
Venture capital. A small number of companies with significant growth and profit potential were
able to secure financing from venture capital firms. Venture firms tend to demand a significant
share of equity in the companies that they fund (thus making it expensive) and invest in less than
two percent of all companies that apply for financing (thus limiting its availability). As a result,
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venture financing cannot be considered a prominent source of equity capital for most recycling
companies.
Angel Investors. Several RMDZ loan borrowers have obtained funds from Angel Investors, who
are high net worth individuals that invest in small businesses but do not take an active role in the
company.
Government and charitable grants. While grants are not technically equity capital they serve the
same financial function. Companies do not have to pay them back. Several recycling firms in the
industry have able to secure this form of funding to finance development work on recycling
products, processes and technologies. However, like venture capital, grants are a form of
funding that is available to only a small percentage of the total applicant pool.
Debt capital
Banks. As is true with small companies in general, banks are a principal provider of funds to
recycling companies. Until recently, banks were fairly aggressive commercial lenders and made a
number of loans to recycling firms. However, the recession-induced tightening of credit standards
is likely to make bank loans harder for many recycling companies to secure. As the economy
contracts, the probability of firms defaulting on loans increases, making banks more reluctant to
offer credit. In addition, proposed cutbacks by the Bush Administration in the Small Business
Association’s (SBA) 7(a) program and the reluctance of many small banks to use SBA guaranties
may limit the future availability of SBA loans to recycling companies. A 7(a) loan is intended to
provide capital for businesses that may not have enough collateral for a regular bank loan.
Participating banks make the loans, but repayment is guaranteed up to 80 percent by the
government.
Real estate lenders. Commercial property is typically financed by banks, which generally obtain
a Federal Small Business Loan Guarantee. Residential real estate loans are readily available from
residential property lenders and brokers, in many cases subordinate loans can be up to 125
percent of the property’s market value.
Leasing and finance companies. Several companies employed lease financing through non-bank
lenders to obtain business assets. Leasing is a form of secured financing in which the
lender/lessor retains title to the property. Other recycling firms used non-bank lenders, including
factoring companies, to finance receivables. Factors buy receivables for cash at a discount.
Leasing and finance companies are an alternative source of financing for companies that have
difficulty securing bank credit. However, because of the added risk they assume, non-bank
lending and leasing companies generally charge higher interest rates than banks. Despite its high
cost, funding from leasing and finance companies remains a major source of credit for recycling
companies that cannot secure bank debt.
Community development loan funds. Some recycling companies were able to secure below-
market financing from non-profit loan funds that extend credit to companies that carry out
activities consistent with the fund’s mission. Because they tend to rely on the limited funds of
government agencies and foundations for capital, community development loan funds cannot be
considered a sizeable funding source for recycling companies. In addition, many community
development loan funds restrict their financing to companies that meet strictly defined mission-
related investment criteria.
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Local government loan funds. Selected recycling companies were also able to secure loans
through programs operated by local governments. Although government loans tend to have low
interest costs, they are typically limited to firms that meet strict location, job creation or other
criteria and are often subject to the particulars of local budget and political processes.
State loans and bonds. Recycling companies were able to secure taxable and tax-exempt
financing through state programs. Because of federally-imposed volume caps, tax-exempt
financing is not always available to companies who otherwise meet the qualifications for the
issuance of such debt. In addition, issuance costs, including credit enhancement expenses, can
make tax-exempt transactions prohibitively expensive for smaller businesses.
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Recycling and Reuse Firms’ Financing Needs
Because few recycling companies would qualify for external equity investment (and must use various
forms of debt to fund growth) the decisions of lenders, especially banks, determines whether they obtain
adequate access to outside financing.
Unlike venture capital investors who often concentrate their investments in certain industries or
technologies, banks and finance companies lend across industries to any business that meets their tests of
“creditworthiness.” Thus, whether loans are more or less available to recycling companies depends more
on their financial characteristics than their industry sector. To put it differently, if recycling companies
tend to have characteristics that increase lenders’ credit risk, recycling companies would, as a group, find
financing difficult to secure. If, however, these elements are removed or mitigated, financing availability
would improve.
The restaurant industry illustrates this phenomenon. Many lenders refuse to finance independent
restaurants, not because they serve food, because they have a relatively high failure rate. On the other
hand, franchise restaurants have a much lower failure rate, due to the management, financial and technical
support provided franchisees by franchisors. The lender’s credit risk has effectively been mitigated by the
franchisor, enabling the franchisee to secure financing more easily than the independent restaurant owner.
Assuming that the credit history and character of a borrower are acceptable, lenders have two concerns
when they consider financing a business.
3. Is there adequate cash flow? The operating cash flow of a business is a lender’s principal source of
loan repayment. If the cash flow is not large or predictable enough to repay the loan, most lenders
will refuse to extend credit.
4. Is there adequate collateral? Lenders recognize that historic cash flow may not materialize in the
future. Thus, they look to the liquidation value of the borrower’s collateral as the secondary source of
repayment. If things go wrong, the lender will take possession of the borrower’s property and sell it to
recover any outstanding indebtedness. Banks generally finance equipment for no more than three to
five years and only lend up to 65 percent of the cost, to ensure the loan balance reduces with the
useful life of the equipment.
Looked at in terms of these two factors, recycling firms often have two characteristics that increase their
credit risk in the eyes of lenders.
3. Unpredictable cash flows. As is the case with early stage companies in any industry, newer recycling
companies are too young to have established a history of positive cash flow. Because lenders tend to
look at past performance (rather than future promise) these companies are considered high credit
risks.
4. Special-purpose assets. Recycling companies often need real estate or equipment with few
alternative uses or buyers (special-purpose assets). Because this property cannot easily be resold
(without a substantial loss) lenders are reluctant to make loans secured by it.
As said earlier, the way to solve this problem is to identify strategies that can mitigate the associated
risk—not with recycling companies as such, but with companies that may have unpredictable cash flow
and collateral that is not easily sold. Put differently, any strategy that works for recycling companies
would work for any other company with similar characteristics—transportation companies, construction
companies, retailers, etc.
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Milken Institute/Capital Access Group CIWMB RMDZ Loan Leveraging Study – 6/30/2002
In fact, these two factors can be used to construct a credit matrix for firms regardless of industry. All of
the firms in CIWMB’s market generally fall within these four cells.
CREDIT MATRIX FOR FIRMS SEEKING FINANCING
Collateral
Adequate Inadequate
Adequate Established company Established service or technology
representing low credit risk; can firm with few hard assets;
Cash flow secure needs subordinate debt product
conventional bank financing; most that
attracted by low capital cost removes collateral risk from lender
Inadequate Company seeking to acquire Start-up company with little
real property with good market value operating
but history; most concerned
weak income stream; needs equity or about financing availability; needs
deferred payment. equity or deferred payment
Annual Financing Needs
Through discussions with the Board’s staff, MI/CAG determined that the approximate demand for
investment of RMDZ eligible companies is at least $10 million annually. The following proposed initial
leveraging options were designed to leverage the current $3.5 million loan pool that the RMDZ loan
program has, to meet this $10 million need.
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OVERVIEW OF THE INITIAL LEVERAGING OPTIONS
Based on discussions with CIWMB and the research conducted above, MI/CAG developed the following
initial leveraging options. This section provides a basis for CIWMB’s evaluation of the leveraging
strategies for the RMDZ loan program. By leveraging, we mean the using funds from the RMDZ loan
program sub-account of CIWMB to generate more private investment, through loans or stock to
leveraging partners.
Framework
The strategies were evaluated using the following criteria:
Financing capacity. Achieve the highest possible ratio between CIWMB capital resources and private
investment.
Financial stability. Provide a reliable source of funding sustainability for recycling businesses,
considering the future decline of RMDZ loan program sub-account.. Program revenues—interest
income, fees and the like—should cover program costs.
Market responsiveness. Allow the RMDZ program to offer financial products that meet the diverse
needs among recycling companies. The program ought to be able to help start-up companies with
little collateral, as well as established firms seeking low-cost financing.
Customer friendliness. Simplify and shorten the loan approval process. Some borrowers as well as
administrators have complained that RMDZ loans involve large amounts of paperwork and a
protracted approval process.
Affordability. Structure loans and investments to ease repayment burdens on borrowers with interest
costs as low as possible.
Leveraging strategies may address one, or all, of the following types of financing:
Equity. Early-stage companies without a proven business model or operating history and established
enterprises entering unproven lines of business often require infusions of risk-oriented permanent
capital that do not carry fixed repayment obligations.
Senior debt. Companies that need to finance assets and activities that produce reliable and predictable
cash flows often employ loans that are repaid according to a fixed schedule and secured by business
(and personal) collateral.
Subordinate debt. Established companies acquiring new assets or entering new lines of business often
employ subordinate debt both as a borrowing base for senior debt and to increase their return on
equity. Subordinate debt can also be employed as part of venture financing structures.
The ability of recycling companies to secure any of these forms of financing is often inhibited by the
following risks and costs:
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C. Risk
Credit or portfolio risk. The possibility that loans will not be repaid according to their terms or that
investments will prove worthless can make lenders and investors reluctant to finance certain deals.
Rate risk. The danger that interest rates on short-term borrowings (especially deposits) will exceed the
interest coupon on fixed rate loans makes certain loan structures unattractive for lenders.
Liquidity or exit risk. The need to sell existing loans and investments in order to fund new loans or
provide a return to investors can make lenders and investors unwilling to finance certain deals for
which there is no secondary or investor market.
D. Cost
Origination expenses. The high costs of identifying and pre-qualifying promising borrowers and
business plans can make certain loans and investments economically unattractive.
Underwriting and processing costs. Credit analysis, due diligence and transaction structuring
expenses can make the economics of small or marginal loans and investments unattractive.
Servicing and monitoring costs. Excessive oversight and management expenses can reduce the
returns on loans and investments.
Strategies for reducing these risks and costs generally involved one or more of the following:
New products. Loans and investments that are structured to assume risks that other lenders and
investors refuse to bear can increase the availability of scarce forms of financing. For example,
second mortgages make it easier for marginal borrowers to purchase property.
New organizations. Organizations that specialize in a particular type of product, borrower segment or
finance function can achieve the efficiencies and expertise needed to improve the economics
associated with serving certain markets. For example, the emergence of specialty finance companies
as competitors to banks has expanded the availability of commercial credit to mid-market companies.
New technologies. New uses of information and computer technology can reduce the uncertainty and
cost of loans and investments. For example, credit scoring allows the underwriting of certain loans to
be automated.
New strategies for managing risk. New insurance and credit enhancement techniques allow lenders
and investors to reduce risks or remove unwanted risks from their balance sheets. This allows them to
make capital and credit available to a wider group of borrowers. For example, CalCAP, a small
business portfolio insurance program, makes loans more available to small, marginal firms by
reducing bank credit risk.
New sources and methods of funding. Access to new pools of private investment capital can broaden
the financing capacity of lenders and investors. For example, securitization allows almost any
financial asset to be sold in the capital markets allowing lenders to offer a wider array of products to
borrowers.
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Preliminary Recommendations
The chosen leveraging option may employ a combination of strategies. (For example, one option would
be to create a free-standing organization that uses an innovative funding method to make a unique type of
loan offering terms not generally available in the market). Based on initial discussions with CIWMB
staff, the market research reviewed above and consideration of the stated criteria, MI/CAG identified ten
potential leveraging options. Grouped according to their primary category of strategy, these options are:
New products
Subordinate companion loans
Deferred payment debt
New organizations
Small business lending company specializing in the recycling industry
Private equity company specializing in the recycling industry
New ways of managing risk
Portfolio insurance
Loan guarantees
New funding methods and sources
Loan sale
Tax-exempt financing
Tax credit financing
Equity equivalent investments
Following is a brief outline of each alternative:
1. COMPANION SUBORDINATE DEBT
Similar to a second mortgage, a companion subordinate loan has rights to collateral that are
inferior to the rights of more senior secured creditors.
Many small businesses are undercapitalized, requiring 100 percent financing to purchase
equipment and other business assets. “Senior” lenders will rarely make a loan equaling the full
amount of the assets’ value. Companion subordinate loans fill the gap between the amount
required by the business and the amount of the loan provided by a senior lender. Because
companion subordinate loans comprise a small percentage of the overall transaction, they can
bear the interest rate needed to offer market-rate capital a competitive return without appreciably
increasing the cost of borrowing.
Companion subordinate loans can be used to finance expanding recycling companies that have
difficulty securing bank loans due to inadequate capital or applicable collateral, e.g., those whose
available collateral is a home.
2. DEFERRED PAYMENT NOTE
Deferred payment loans are zero-coupon debt (like savings bonds). The borrower makes no
interest or principal payments during the life of the loan, but at maturity, pays the original
principal amount plus accrued interest.
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The notes are ideal for relatively new companies that have not achieved positive cash flow and do
not have the capacity to make immediate payments of principal and interest. While some
companies are able to secure equity financing from venture capital firms and “angel” investors,
many are unable or unwilling to use equity from external sources to finance business growth. A
loan on which no payment is due during the term may be a reasonable alternative, assuming the
borrower has contracts and/or purchase orders to document the future ability to repay.
Deferred payment loans can be used to finance early-stage recycling companies that need equity-
type financing but do not have access to venture capital or other private equity.
The loans address the concern of businesses that want access to full financing before interest
payments are due.
3. SMALL BUSINESS LENDING COMPANY
The company is structured as a for-profit or non-profit non-depository lender.
A commercial finance company employs borrowed funds secured from banks or the bond market
to make loans to businesses.
State and federal loan guarantees reduce cost of finance companies to raise funds.
Examples:
o Business and Industrial Development Companies (BIDCOs)
o Companies authorized to make SBA-guaranteed loans (Banks)
o Small Business Financial Development Companies (SBFDCs)
CIWMB’s expertise would reduce transaction costs of double-bottom line and return-driven
investors.
A partnership with a finance company increases the pool of eligible recycling companies and loan
pool simultaneously.
Zone Administrators expressed interest in findings ways of increasing pool of RMDZ eligible
companies.
4. PRIVATE EQUITY COMPANY
For-profit companies that provide risk capital to companies with the expectation of returns from
capital appreciation.
Three types of private equity firms:
o Yield-Driven (e.g. Venture Capital): These firms generally operate as managers of profit-
driven institutional money. They invest the funds in growth companies and “exit” or sell
their investment through an IPO, sale to another firm, or recapitalization.
o Double-Bottom-Line: Investors in this type of private equity look for both a positive
social and financial return. Most are willing to accept slightly lower than market financial
returns.
o Small Business Investment Company: Special type of double-bottom-line private equity
firm that leverages its capital with loans from the Small Business Administration.
Meets need of young and growing recycling companies of equity in addition to – or instead of –
debt for rapid growth.
Eliminates burdensome collateral requirements of traditional debt instruments.
5. PORTFOLIO INSURANCE
Similar to the CalCAP program, portfolio insurance provides loss protection for an entire pool of
loans rather than on a loan-by-loan basis.
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Milken Institute/Capital Access Group CIWMB RMDZ Loan Leveraging Study – 6/30/2002
The lender and borrower contribute a specified percentage of each loan to a cash reserve fund.
This amount may be matched by the program sponsor (often a public entity). A lender’s cash
reserve account would cover any defaults in its portfolio of loans.
Portfolio insurance works best for lenders who make a relatively large volume of loans.
Pooling a large number of loans spreads risk across all loans, and reduces risk of any individual
loan.
The reduced risk to lenders enables private and public lenders to increase loan volume.
The increased loan pool gives reassurance to Zone Administrators of the continuity of the
program
6. LOAN GUARANTY PROGRAM
A loan guaranty allows a lender to recover a specified percentage of the outstanding interest and
principal on individual loans covered by the guaranty.
Like an insurance program, loan guarantors limit lenders’ risk to a certain percentage of loan
value in the case of a borrower’s default. Typically, guarantors set aside funds equaling a
specified percentage of each guaranty. Funds set aside in this fashion are then used to pay
guaranty obligations on defaulted loans.
Loan guarantees could be used to induce reluctant banks and other private lenders to make loans
to recycling companies.
The increased loan pool gives reassurance to Zone Administrators of the continuity of the
program
A sound reserve policy may foster secondary market interest in guarantee portion of loans.
7. TAX-EXEMPT FINANCING
Tax-exempt financing generally consists of notes or bonds on which interest payments are free
from federal and (usually) state income tax.
A local or state authority issues the debt instruments on behalf of qualifying businesses that use
the proceeds for eligible purposes, typically the purchase of hard assets. Owing to favorable tax
treatment, businesses that use tax-exempt debt can realize substantial interest savings.
Tax-exempt financing can reduce the cost of borrowing for recycling companies that need low-
cost financing in order to acquire equipment and fixed assets.
The companies surveyed expressed need for low-cost financing of equipment and fixed assets.
8. NEW MARKETS TAX CREDIT
The New Markets Tax Credit is a federal incentive program under which taxpayers are allowed to
reduce their tax payments by 39 percent of the amount invested in companies that make business
loans and investments in low-income areas.
For each dollar invested in a qualifying “community development entity” (CDE), investors are
entitled to reduce their federal tax payments by an average of 5.57 percent annually for seven
years. A CDE is a for-profit organization that is in the business of making business loans and
investments in low-income areas. Because the NMTC allows taxpayers to use money they would
otherwise pay in taxes to finance an investment in a CDE, capital for low-income area businesses
should become cheaper and more available.
A company formed by CIWMB to provide loans and investments to recycling companies would
qualify for the NMTC if 85 percent of the companies financed were located in low-income
distressed urban and rural areas. A CDE could make both loans and equity investments in such
companies.
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Milken Institute/Capital Access Group CIWMB RMDZ Loan Leveraging Study – 6/30/2002
Eligible recycling companies in low-moderate income areas would be candidates for this loan
program, increasing the size of the pool of available funds.
9. EQUITY EQUIVALENT INVESTMENTS (EQ2)
Debt with an interest rate significantly below-market supported by charitable organizations
through “program related investments.”
Typically structured as unsecured debt with fairly long maturities (in order to minimize the size
of periodic principal payments). May require repayment only from the net cash flows of the
borrower.
The availability of long-term, inexpensive debt would increase the capacity of CIWMB to offer
low-interest-rate financing to rate-sensitive borrowers. CIWMB (or an affiliated financial
company) could also use this source of capital to provide risk financing to early-stage recycling
companies.
10. LOAN SALE
Sale of whole loans or securities backed by loans (securitization) to investors.
Lender sells single loans or a group of loans in exchange for cash, or notes or bonds that are sold
for cash and uses the cash to make new loans. Depending upon the interest rate and credit quality
of the loans sold, such transactions may or may not involve a discount.
High level of flexibility, with record of success in other non-traditional industries.
Useful for recycling industry that includes businesses with unproven technologies.
Provides potential for increased level of both equity financing for early stage companies, and
below-market interest rate financing for mature companies.
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The following grid provides a relative (1) to (5) score of each of the ten alternatives against five criteria:
EVALUTATION OF INITIAL LEVERAGING STRATEGIES
Financing Financial Market Customer Affordability TOTAL
Capacity Stability Responsiveness Friendliness
Subordinate 3 4 4 4 3 18.0
Loans
Deferred 3.5 3 4 3 5 18.5
Payment Loans
Small Business 4 4 3.5 4 3.5 19.0
Lending Co.
Private Equity 3 4 3 4 5 19.0
Co.
Portfolio 5 4 1 4 3 17.0
Insurance
Loan Guaranty 4 3 3 4 3 Formatted
17.0
Tax-exempt 4 3 2.5 2.5
Financing
New Markets 5 5 2.5 3 4 19.5
Tax Credit
EQ2/PRI 3 2 4 5 4 Formatted
18.0
Loan Sale 5 4.5 3 3.5 3.5 19.5
Formatted
Key: 5=Exceptional, 4=Very Good, 3= Good, 2= Fair, 1= Poor
MI/CAG reviewed these options with CIWMB staff. Some were dropped because of requirements that
would require new legislation or because they were determined to be suboptimal based upon the above
criteria. The remaining options were combined into four mechanisms, and a mini-business plan created
for each. Each of these mechanisms uses innovative financial technologies to leverage up CIWMB’s
annual contribution of $3.5 million to provide at least $10 million in lending capacity per year. Each
mechanism utilizes three different financial products, catering to the particular needs of the three stages of
borrowers: early, expansion and established companies.
Mechanisms
Equity
New Markets Tax Credit Loan Guaranty Loan Sale
Equivalent Investments
Sources
Community Development
CDFIs CTTCA Securitization Investors
Entities
Products
Subordinate Loans Deferred Payment Loans Below-Market Loans
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Milken Institute/Capital Access Group CIWMB RMDZ Loan Leveraging Study – 6/30/2002
OVERVIEW OF MINI BUSINESS PLANS
Introduction
Assuming CIWMB has an available pool of capital of $3.5 million annually, the following plans assume
that the full amount is applied to each strategy to leverage this amount to satisfy the estimated demand of
$10 million. Nonetheless, the plans are structured in such a matter that two or more strategies can be
employed simultaneously with similar results. The full mini business plans are presented in Appendices
One, Two, Three, and Four. The following section provides information on the borrowers and loan
products that are common to the four plans, followed by summaries of each strategy (see Table F, page 49
for a comparison matrix):
New Markets Tax Credit Strategy
Loan Guaranty Strategy
Loan Sale Strategy
Equity Equivalent/Program-Related Investment Strategy
Borrowers
Each of the plans is designed to meet the financing needs of three types of recycling companies that make
up the RMDZ market.
Established recycling firms. Approximately 50 percent of borrowers are companies that have
sufficient operating and earnings history to secure credit from conventional sources. These low-risk
companies would be more concerned with the cost of capital than with access to capital.
Expansion-stage companies. Approximately 30 percent of borrowers are companies that have
survived their formative years and are now seeking to grow. However, these companies lack the
earnings history, capital or collateral needed to support the full amount of funding needed to finance
expansion.
Early-stage companies. The remaining 20 percent of borrowers are companies that are essentially
start-up businesses. Because they are not yet producing positive cash flows, these high-risk
companies require some form of “equity-like” financing to fund continued growth.
Products
The following three products are designed to meet the distinct needs of each these borrower segments:
Below-market loans. Established recycling companies seeking expansion financing would be eligible
for medium and long-term fixed-asset loans priced, on average, 200 basis points below the market
rate for such financing. Underwriting standards for these loans including loan-to-value and debt
service coverage ratios would be only slightly more liberal than those employed by commercial
lenders.
Subordinate, companion loans. Expansion-stage companies that lack the collateral to secure senior
financing needed for fixed assets or working capital would be candidates for subordinate debt. These
loans would typically be structured as 25-40 percent junior participations in senior, secured loans
extended by banks or other commercial lenders. Because of the risk associated with junior-lien
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Milken Institute/Capital Access Group CIWMB RMDZ Loan Leveraging Study – 6/30/2002
lending, the junior interest in each transaction would be priced at 300 to 500 basis points above prime.
In addition, as part of each transaction, a loan loss reserve contribution, equaling four-to-eight percent
of the total financing, would be funded from loan proceeds.
Deferred payment loans. Early-stage companies, including start-up firms that possess neither the cash
flow nor collateral to qualify for debt financing, nor the “upside” potential to qualify for venture or
angel financing, would be candidates for deferred payment loans. The deferred payment loan would
be modeled on the structure employed by SBA for investments in New Markets Venture Capital
Companies. That is, each loan would involve a “discount period” – two to three years during which
no principal or interest payments would be required – followed by an amortization period. Upon
closing, the borrower would receive the full amount of the loan less the present value of interest for
the discount period. At the end of the discount period, the borrower would repay the loan in regular
installments of principal and interest over a period of up to seven years. Because of the risk that
borrowers would be unable to repay loans during the amortization period, deferred payment loans
would priced at 600 basis points above prime. In addition, as with subordinate loans, a cash reserve
account would be funded as part of each transaction.
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Milken Institute/Capital Access Group CIWMB RMDZ Loan Leveraging Study – 6/30/2002
New Markets Tax Credit Strategy
The New Markets Tax Credit (NMTC) is a new federal incentive program under which taxpayers are
allowed to reduce their federal income tax payments by 39 percent of the amount invested in a qualifying
“community development entity” (CDE) – a for-profit organization that makes business loans and
investments in low-income areas. For each dollar invested in the CDE, investors are entitled to reduce
their federal tax payments by an average of 5.57 percent annually for seven years.
To meet a minimum demand of $10 million in recycling loans annually for five years, the Board would
employ an existing CDE as the vehicle for raising $50 million in NMTC financing. The financing plan
follows:
The California Integrated Waste Management Board (“CIWMB” or the “Board) and a selected
number of banks or other financial companies would agree to invest a total of $40 million in the CDE
for the purpose of financing businesses located in targeted Recycling Market Development Zones or
other low-income areas.
1. CIWMB would invest $10 million over three years in the CDE in the form of a long-term, low-
interest subordinate loan. The loan would bear an interest rate of 2.75 percent (200 basis points
below prime) and would be repaid solely from the earnings of the CDE.
2. Banks and other taxable investors would invest $30 million in the form of equity in exchange for
New Markets Tax Credit allocations totaling $11.7 million over seven years. The banks would
also be entitled to all profits after interest and principal payments on the CIWMB loan.
With $40 million in equity capital and subordinate debt financing, the CDE could obtain a $10
million credit facility secured by the CDE’s $50 million loan portfolio and associated reserves. The
credit facility would be priced at no higher than prime.
Financing Sources:
The following investors have either announced their intention to purchase NMTCs or have experience in
purchasing the residential equivalent of the NMTC, the Low-Income Housing Tax Credit. While they do
not specifically focus on recycling companies, the entities they lend to share similar risk profiles to
CIWMB’s target borrowers.
Enterprise Social Investment Corporation
Bank of America
Bear Stearns
Leverage
Leverage is calculated as the ratio between CIWMB’s total capital contribution and loan originations.
Under both base-case and best case scenarios, total leverage is approximately 5:1. That is, CIWMB’s $10
million capital contribution would produce $50 million in total recycling loans over a 5-year period.
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Milken Institute/Capital Access Group CIWMB RMDZ Loan Leveraging Study – 6/30/2002
Return on Investment
Return on investment is defined as the increase in the CDE’s net worth in relationship to CIWMB’s
original investment. Under the base-case scenario, return on investment is 32.98 percent. Under the best-
case scenario, it is 33.30 percent
Board’s Return of Investment
Because of the high return on investment achieved under this model, the Board would receive the return
of its $10 million investment through the retirement of its loan to the CDE. The Board could recover its
entire investment as early as Year 4 through an early retirement of its loan to the CDE.
Analysis
As a source of financing for the CDE, the New Markets Tax Credit has both advantages and
disadvantages. The analysis below considers the proposed leveraging strategy in light of five criteria
discussed as important in a successful CIWMB loan leveraging program:
Simplicity. Because of the inherent complexities associated with using a new tax incentive to raise
capital, New Markets Tax Credit transactions are likely to be more complicated than other
alternatives. For example, because of its previous experience, CIWMB may well find loan sales
simpler and easier to execute.
Practicality. Because the NMTC is new, investor response to NMTC-based financing transactions
cannot be known. For this reason, NMTC-based financing must also be considered more speculative
than other alternatives.
Sustainability. NMTC financing would provide substantial sums of equity for the CDE, thereby
reducing the size of necessary leverage and decreasing the risk that interest income would be
insufficient to cover fixed interest costs and other operating expenses. For example if CIWMB
financed its program with greater amounts of debt, in lieu of equity generating NMTCs for the
investors, the interest costs would be much higher and the income required to cover them higher. For
this reason, a lending program organized around the NMTC has a higher probability of achieving
long-term financial viability than other leveraging options discussed.
Affordability. As noted, the substantial amounts of equity that can be raised with the NMTC should
reduce need for interest income to pay interest expense. This would allow borrowers to pay lower
interest rates than if debt (especially market-rate debt) were the principal source of loan financing.
Implementability. Assuming success in securing an NMTC allocation, there is at least a reasonable
likelihood that successful transactions involving the exchange of the NMTC for equity can be
structured. The need of both small and large banks for CRA “investment credit,” as well as the
financial success of Low Income Housing Tax Credit syndications, should produce a high degree of
interest in NMTC financings.
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Milken Institute/Capital Access Group CIWMB RMDZ Loan Leveraging Study – 6/30/2002
Investors
Invests $30 million in
exchange for $11.7 million
(39%) NMTC
Makes $10 million market- Makes $10 million loan
rate loan term loan (funded over 3
years).
Lender CDE Board
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Milken Institute/Capital Access Group CIWMB RMDZ Loan Leveraging Study – 6/30/2002
Loan Guaranty Strategy
The Loan Guaranty Program (LGP) would be a partnership between the Board and one or more of
California’s eleven California’s Regional Financial Development Corporations (FDCs). FDCs are
nonprofit companies that employ a dedicated reserve fund of the California Technology, Trade and
Commerce Agency to provide loan guaranties of up to 90 percent on small business bank loans of up to
$350,000. Under LGP:
The state Small Business Loan Guarantee Program (LGP) promotes local economic development by
providing guarantees of principal and interest on small business loans made by participating private
financial institutions. FDC’s market the program, coordinate the packaging of the loan and loan
guarantee applications and issue loan guarantees. Appropriations to a Small Business Expansion Fund
(SBEF) serve as loan-loss reserves and “back” FDC guaranties. An FDC can issue guaranties equaling
four times its allocable share of these reserves. The five-year default rate on loan guarantees is 1.55%.
As of June 2001, the SBEF possessed $31.7 million in reserves, giving it the capacity to support up to
$127 million of bank loans. Of this total $8.3 million was available to support up to $33.3 million in new
loan guarantees
CIWMB would enter into a master contract with the California Technology, Trade and
Commerce Agency to provide funds to the Loan Guarantee Trust Fund in exchange for an
agreement by participating Financial Development Corporations to issue loan guarantees to
recycling businesses.
Under the risk-sharing agreement, CIWMB would pay 80 percent of losses exceeding $350,000.
At present, FDCs are limited to guaranties on loans of no greater than $350,000. Thus, LGP
would be structured so that the FDCs would pay losses incurred on the first $350,000 of each
guaranteed loan with CIWMB paying losses on amounts over $350,000. The following table
compares how much CIWMB and the FDC would pay for losses incurred on three different loan
guaranty agreements, each involving an 80 percent guaranty.
Loan Amount $350,000 $700,000 $1,000,000
Total guaranty (80%) $280,000 $560,000 $ 800,000
FDC share $280,000 $280,000 $ 280,000
CIWMB share -0- $280,000 $ 520,000
Total exposure $280,000 $560,000 $ 800,000
For the following reasons, LGP would enable both CIWMB and participating FDCs to achieve greater
leverage with their limited guaranty reserve funds without increasing the guaranteed lender’s exposure to
loss.
CIWMB would share risk on guaranteed loans with FDCs. Thus, it would be able to achieve higher
leverage than would be the case were it responsible for paying 100 percent of loan losses. For
example, assuming that CIWMB were to set aside 25 percent of its exposure for each loan guaranty
(the amount that FDCs are required to hold in reserve), and that the average guaranty contract covers
80 percent of the loan balance, each $1 in reserves could achieve leverage ranging from about 8:1 to
40:1 (or more) depending on the average size of loans guaranteed
CALCULATION OF LEVERAGE RATIO
Average loan size $400,000 $1,000,000
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Milken Institute/Capital Access Group CIWMB RMDZ Loan Leveraging Study – 6/30/2002
Guaranty exposure $320,000 $ 800,000
FDC exposure $280,000 $ 280,000
CIWMB exposure $ 40,000 $ 520,000
CIWMB reserves (25%) $ 10,000 $ 130,000
Leverage 40:1 7.69:1
By paying losses on recycling loans above $350,000, CIWMB would help FDCs to achieve higher
leverage. Banks would be able to secure guaranties for loans above $350,000 (at least to recycling
companies), thus minimizing their credit risk on larger loans.
Subsidies
Approximately half of the recycling loans made under the guaranty program would be below-market
loans to established companies. Because lenders would be reluctant to subsidize borrowers, CIWMB
would create a subsidy fund to pay lenders an amount that would produce market-rate yields on
guaranteed loans. Based on expected loan volume, average loan size and the probable spread between the
below-market rate and the bank’s normal commercial rate, an annual subsidy contribution of
approximately $650,000 (13 percent of $5 million) should be sufficient to provide lenders the yields they
require.
Financing Sources
Currently there are 11 non-profit Financial Development Corporations that administer and issue state loan
guarantees. Following is a list of three FDCs that are possible candidates for the proposed co-guaranty
program. Under the current state-sponsored small business loan guaranty program, FDCs provide risk
protection for bank loans to companies that do not meet normal standards of creditworthiness. The
maximum guaranty is 80 percent on loans of up to $350,000. The typical FDC has guaranty authority of
about $15-$20 million backed by approximately $4 million in reserves.
Nor-Cal Financial Development Corporation, Pleasanton, CA
Pacific Coast Regional Financial Development Corporation, Los Angeles, CA,
California Southern Financial Development Corporation, San Diego, CA
Following is a list of additional FDCs.
SAFE-BIDCO, Santa Rosa, Ca.
California Capital Financial Development Corporation, Sacramento, Ca.
California Coastal Rural Development Corporation, Salinas, Ca. (with branch offices in Monterey,
Santa Barbara, and Santa Maria)
Valley Small Business Development Corporation, Fresno, Ca.
Hancock Urban Development Corporation, Los Angeles, Ca.
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Milken Institute/Capital Access Group CIWMB RMDZ Loan Leveraging Study – 6/30/2002
Leverage
Leverage is calculated as the ratio between total loan originations and loan guaranty payments. Under the
base-case scenario, LGP achieves leverage of 11.96:1. Under the best case scenario, leverage is 18.68:1.
Return on Investment
Return on Investment is calculated as the growth rate in reserves over the five-year period of LGP. Under
the base-case scenario, the rate of return is 10.23 percent; under the best case, it is 14.37 percent.
Board Return of Investment
Board funds would be deposited in the Loan Guarantee Trust Fund. Cash or insurance reserves funded as
part of each transaction would enable the Board to recover all or part of its initial contribution to LGP
over time. Funds encumbered to support issued to support loan guarantees would become available upon
repayment on the underlying loans.
Analysis
As a source of financing for the LGP has both advantages and disadvantages.
Simplicity. Because the loan-guaranty plan requires CIWMB to raise no outside capital, it would be
relatively simple to implement. The fact that participating FDCs and commercial banks would carry
out loan origination, underwriting and loan servicing functions would further reduce the plan’s
complexity.
Practicality. The CEOs of two regional corporations have expressed great interest in serving as
partners in the loan-guaranty program attesting to the practicality of the plan. Furthermore, the $8.2
million in financing required by the plan is well within CIWMB’s three-year $10.5 million budget.
However, because credit decisions would be reserved for commercial banks and other participating
lenders the extent to which the guaranty program would produce increased lending to recycling loans
is uncertain.
Sustainability. For five years, program reserves would be adequate to sustain cumulative losses
exceeding 16 percent on $50 million in loans. This loss rate is almost three times the loss rate for
SBA and CalCAP loans and 10 times the historic default rate on FDC loans. In addition, the bank
may obtain loan default “insurance” on each loan through the Treasurer’s California Capital Access
Program, a program in which the RMDZ loan program participates. In addition, reserve
“insurance” or loan-loss contributions made in connection with each loan and approximately
$2.3 million in additional CIWMB reserves – the difference between its available 3-year
budget of $10.5 million and the $8.2 called for in the mini-business plan—should make the
program viable beyond the five-year horizon.
Affordability. Annual subsidy contributions would ensure the affordability of below-market loans to
established borrowers. Deferred payment and subordinate loan borrowers would generally be rate-
insensitive firms and would generally consider the financing affordable as long as debt payments can
be serviced with relative ease from available cash flows.
Implementability. The existence of willing guaranty partners (the regional FDCs) to share risks and
manage the LGP Program should make it relatively simple to institute and operate. However, two
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Milken Institute/Capital Access Group CIWMB RMDZ Loan Leveraging Study – 6/30/2002
possible problems could create implementation difficulties. First, recruiting banks to make loans that
employ relatively novel structures could prove more time-consuming than expected. Second, if
regulatory approval is required for FDCs to participate in guaranties above $350,000, the completion
of risk-sharing agreements could prove a relatively protracted process.
3. Provides up to $12
million in loans
Lenders Borrowers
2. Provides up to $12
million in guaranties
1. Contributes $3 million
Small Business
Board
Expansion Fund
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Milken Institute/Capital Access Group CIWMB RMDZ Loan Leveraging Study – 6/30/2002
LOAN SALE STRATEGY
Under the Recycling Assets Sales Program (RASP), $3 million in Board funds would be employed to
make $10 million annually in recycling loans that would be sold to investors. The proceeds from the
sales, which would be made on a quarterly basis under a “forward purchase commitment,” would then be
used to make new loans. The proposed $2.5 million in capital could come from either an individual or
bulk sale of the Board’s existing loan portfolio or from appropriated funds. In an individual sale
transaction, an investor would purchase, for cash or a combination of cash and notes, selected loans from
an existing portfolio of loans. In a bulk sale transaction, the investor would purchase the entire portfolio
of existing loans, once again for cash or a combination of cash and notes. The price paid by the investor
would depend mainly on the default and delinquency history and interest rate of the loans being
purchased.
By contrast, under a “forward purchase” program, loans would be made by the lender and, under a pre-
existing agreement with the investor, immediately sold. The forward purchase or “flow” program would
be structured in the following manner:
The Board, in cooperation with the investor, would establish underwriting policies for each type of
recycling loan that would potentially be sold. These policies would be employed by CIWMB’s staff,
and “participating lenders” to originate loans to eligible recycling companies.
Loans would be funded either by the Board or by participating lenders. “Participating lenders” would
immediately be able to sell their loans to the Board under RASP.
The Board would then sell the loans to secondary market investors, such as the Community
Reinvestment Fund, and would use the cash to make more loans. Interest rates on loans made under
RASP would be established so that discounts on the sale of below-market loans would be offset by
premiums earned on the sale of market-rate loans. For example, a 5% premium on a market-rate loan
would compensate for a 5% discount on a below-market loan.
Financing Sources
Following is a list of three organizations that are possible purchasers of loans under RASP:
Community Reinvestment Fund (CRF). CRF is a non-profit secondary market for economic
development loans that has provided $200 million to lenders in 22 states since 1989.
Bayview Financial. Bayview is a private investment banking firm owned by Allstate Insurance that
purchases and securitizes both mortgage and commercial loans from a wide variety of lenders. The
company specializes in loans to borrowers with imperfect credit.
CBA Receivables. CBA buys and securitizes loans from smaller financial companies that originate
loans on a scale that fails to attract larger investment banking firms
Leverage
Leverage is calculated as the ratio of loan originations to original CIWMB capital. Under both scenarios
leverage is 15.76:1.
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Milken Institute/Capital Access Group CIWMB RMDZ Loan Leveraging Study – 6/30/2002
Return on Investment
Return on Investment is calculated as cumulative RASP earnings as a percentage of CIWMB’s original
investment. Under the base-case scenario, return on investment is 0.009 percent. Under the best case
scenario, return on investment is 15.3 percent.
Return of Investment
Given the relatively high return on investment, the Board would be able to recover its $3 million
investment from annual cash distributions.
Analysis
Loan sale strategies have both advantages and disadvantages.
Simplicity. Because RASP requires neither outside capital nor a new entity, it should be the simplest
of the four leveraging strategies to implement. The fact that participating banks can carry out a
substantial amount of out loan origination and loan servicing would further reduce the plan’s
complexity.
Practicality. The Board has already completed one successful bulk loan sale, thus proving the
feasibility of loan sales as a technique for leveraging capital. Increased investor interest in buying
economic development loans increases the likelihood of securing forward purchase commitments on
attractive terms.
Sustainability. RASP can be structured so that discounts from the sale of below-market loans are
offset by premiums received from the sale of market-rate loans. As the attached financial analysis
shows, this approach allows the Program to operate on a self-sustaining basis.
Affordability. Subordinate and deferred payment loans would be structured so that their higher
interest rates are more than offset by extended and deferred amortization features. The subsidy
implicit in the interest rate for below-market loans would ensure their affordability to established
borrowers.
Implementability. The increased willingness of investors to purchase economic development loans
should make both bulk and flow sales relatively simple to execute.
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Milken Institute/Capital Access Group CIWMB RMDZ Loan Leveraging Study – 6/30/2002
2. Gives Board up to $3
million in notes
RASP Borrowers
1. Makes up to $3 million
in loans per quarter
4. Gives up $3 million 3. Sells up to $3 million
in cash for relending in loans per quarter
Investor
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Milken Institute/Capital Access Group CIWMB RMDZ Loan Leveraging Study – 6/30/2002
Equity Equivalent/Program-Related Investment Strategy
In order to increase investment in poor communities, foundations, banks and insurance companies
provide below-market capital – in the form of Equity Equivalent Investments (EQ2) or Program-Related
Investments (PRIs) – to community development financial institutions (CDFIs). CDFIs are financial
services organizations that make loans and investments primarily in targeted geographic areas.
An EQ2 is a long-term, low-interest loan made by commercial banks that is typically structured with a
rolling “maturity” entailing automatic annual extensions of the loan as long as the borrower carries out its
community development purposes. Because interest payments are made solely from the net cash flows of
the borrower, EQ2 financing serves as a form of quasi-equity for CDFIs. PRIs are low-interest loans that
foundations use as an alternative to grants to finance charitable activities. As with EQ2s, they are
typically repayable only from the net cash flows of the borrower.
To take advantage of these unique sources of capital, the Board would form a financing partnership with
an established non-profit “CDFI” that would agree to use funds obtained through the plan described
below for the purpose of lending $10 million annually to eligible recycling companies. The financing plan
would be as follows:
CIWMB would agree to contribute $10 million to the CDFI over a three-year period in the form of a
recoverable grant or long-term subordinate loan. In either event, CIWMB would be entitled to recover
its capital contribution only after EQ2 and PRIs had been repaid.
Commercial banks, financial services companies and foundations would provide the CDFI $10
million in EQ2 investments and PRIs structured as long-term, low-interest subordinate loans. The
loans would bear an interest rate of 2.75 percent (200 basis points below prime) and would be repaid
solely from the earnings of the RFP.
Finally, a consortium of commercial banks would provide $30 million in credit secured by the assets
of the RFP. The credit line would be priced at prime plus a small spread of 100 basis points.
Financing Sources
Following are the names of three organizations that have made EQ2 or PRI investments in the past and
may find the idea of helping a CDFI expand its lending program to recycling companies intriguing.
Ford Foundation. With $14.5 billion in assets, the Ford Foundation is the largest private foundation
in America and has allocated $180 million for program-related investment activity.
Citibank. The nation’s largest bank with over $1 trillion assets, Citibank has a commitment to lend
and invest $115 billion in low and moderate income communities over a 10-year period. It is one of
the pioneers in the use of EQ2 investments to finance community development finance institutions
F.B. Heron Foundation. The F.B. Heron Foundation is a $300 million charitable organization with an
exclusive focus on community development. It has the stated aim of investing its entire corpus in
community development assets.
Leverage
Leverage, defined as the ratio between CIWMB’s capital contribution and total financing generated,
would be 5:1 under both best-case and base-case scenarios.
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Milken Institute/Capital Access Group CIWMB RMDZ Loan Leveraging Study – 6/30/2002
Return on Investment
Return on investment is defined as the 5-year rate of appreciation in the net worth or fund balance of the
RMDZ Loan program over the present value of CIWMB’s capital contributions. For the base-case
scenario, the rate of return is 0.57 percent. Under the best-case scenario, the rate of return is 12.5 percent.
Return of Investment
At maturity, the Board’s loan or recoverable grant would be repaid from the capital and earnings of the
CDFI.
Analysis
As a source of financing for the RFP, EQ2 and PRI financing have both advantages and disadvantages.
The analysis below considers the proposed leveraging strategy in light of five criteria.
Simplicity. PRIs and EQ2 financing have been employed to fund a number of CDFI lending
programs. As a result, reasonably standard structures and documents exist and can be employed to
finance the RFP.
Practicality. The total pool of available PRI and EQ2 financing is relatively small and competition for
it correspondingly stiff. Thus, CIWMB may find it difficult to raise as much as $10 million in such
financing for the RFP. However, the fact that the RFP should increase the participating CDFI’s
viability (by increasing its income and enabling it to spread costs over a larger loan portfolio) as well
as aid the growth of recycling companies should increase its attractiveness to investors.
Sustainability. Low-cost EQ2 and PRI financing, combined with CIWMB’s capital contribution,
should yield a blended cost of financing that is substantially less than the average interest rate on the
RFP’s recycling loans. In addition, the insurance features built into the RFP’s loans should minimize
the need to use interest spread to finance loan losses. As a result, the Program should be able to
finance its operating costs entirely from revenues without the need for additional infusions from
CIWMB.
Affordability. Once again, the Program’s low cost of funds should reduce the amount of interest
income needed to pay interest expense. This would allow borrowers to pay lower interest rates than if
market-rate debt were the principal source of loan financing.
Implementability. Because institutions tend to limit “social investments” to certified CDFIs,
CIWMB’s success in raising below-market capital for the RFP would depend, to a large degree, on its
partner. Recruiting, as program manager – and borrower – a well-regarded and well-known CDFI
would substantially increase the likelihood of success in raising funds for the program.
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Milken Institute/Capital Access Group CIWMB RMDZ Loan Leveraging Study – 6/30/2002
Borrower
Makes up to $50 million in
recycling loans
PRI/EQ2
Board CDFI
Investor
Provides $10 million loan
Invests $10 million
or recoverable grant
Provides $30 million credit
line
Bank
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Milken Institute/Capital Access Group CIWMB RMDZ Loan Leveraging Study – 6/30/2002
TABLE A
CALIFORNIA'S SHARE OF RECYCLING ECONOMIC ACTIVITY
US SUMMARY OF ESTIMATES OF DIRECT ECONOMIC ACTIVITY
Industry Sector
Recycling Recycling Recycling Reuse and
Collection Processing Manufacturing Remanufacturing Industry Total
Establishments 9,247 12,051 8,047 26,716 56,061
Employment 32,010 160,865 759,746 169,183 1,121,804
Annual Payroll ($000s) 956,875 3,826,360 29,181,749 2,747,498 36,712,482
Revenue ($000s) 1,974,516 41,753,902 178,390,423 14,182,531 236,301,372
CALIFORNIA SUMMARY OF ESTIMATES OF DIRECT ECONOMIC ACTIVITY
Industry Sector
Recycling Recycling Recycling Reuse and
Collection Processing Manufacturing Remanufacturing Industry Total
Establishments 521 1,209 795 2,817 5,342
Employment 5,000 18,208 39,448 21,588 84,244
Annual Payroll ($000s) 173,000 440,999 1,278,568 357,352 2,249,919
Revenue ($000s) 344,005 5,060,323 6,889,668 1,888,178 14,182,174
CALIFORNIA PERCENTAGES OF TOTAL US ECONOMIC ACTIVITY
Industry Sector
Recycling Recycling Recycling Reuse and
Collection Processing Manufacturing Remanufacturing Industry Total
Establishments 6% 10% 10% 11% 10%
Employment 16% 11% 5% 13% 8%
Annual Payroll 18% 12% 4% 13% 6%
Revenue 17% 12% 4% 13% 6%
SOURCE: "U.S RECYCLING ECONOMIC INFORMATION STUDY," R.W. BECK.
44
Milken Institute/Capital Access Group CIWMB RMDZ Loan Leveraging Study – 6/30/2002
TABLE B
RECYCLING INDUSTRY DEFINITIONS
INDUSTRY SUB-INDUSTRY DEFINITION
Recycling Collection Government Staffed Collection Recyclables collection using government employees.
Recycling Collection Private Staffed Collection Private sector collection of recyclables, including contract
collection on behalf of municipalities.
Recycling Processing Compost and Miscellaneous Organic Producers Produce compost, mulch, bark, or bedding from yard and
wood waste, biosolids, or other organic, also includes
vermiculture.
Recycling Processing Materials Recovery Facilities (MRFs) Process commingled or recovered materials, usually from
curbside/drop-off collection or recyclables separated from
solid waste.
Recycling Processing Recyclable Material Wholesalers Paper stock dealers, scrap metal processors, and other
establishments that sort, remove contaminants, and densify
recovered materials and brokers of recovered materials.
This category excludes textiles.
Recycling Processing Textile Recycling Textile recycling businesses.
Recycling Manufacturing Glass Container Manufacturing Plants Produce finished glass containers.
Recycling Manufacturing Glass Product Producers (other recycled uses) Produce glass products other than containers.
Recycling Manufacturing Nonferrous Secondary Smelting and Refining Mills Recycling and alloying of nonferrous metals, primary
products include billets, ingots, and other basic shapes.
Recycling Manufacturing Nonferrous Product Producers Produce nonferrous products through extrusion, rolling, or
drawing processes.
Recycling Manufacturing Nonferrous Foundries Produce castings from nonferrous metals.
Recycling Manufacturing Paper, Paperboard, and Deinked Market Pulp Mills Produce paper and paperboard products from recovered
paper or market pulp and/or deink recovered paper and sell
pulp.
Recycling Manufacturing Paper-based Product Manufacturers Produce cellulose-based products from recovered paper or
paperboard (e.g. cellulose insulation, hydro-seeding,
bedding)
Recycling Manufacturing Pavement Mix Producers (asphalt and aggregate) Produce asphalt paving mix from recycled materials such as
crumb rubber, aggregates, or glass.
Recycling Manufacturing Plastics Reclaimers Transform recovered plastics directly into products (e.g.
plastic lumber) or raw materials ready for remanufacture.
Recycling Manufacturing Plastics Converters Convert a recycled plastic clean flake or pellet into an
intermediate or end product.
Recycling Manufacturing Rubber Product Manufacturers Manufacture products using crumb rubber or cut rubber
shapes and stampings such as feedstock.
Recycling Manufacturing Steel Mills Produce iron and steel slabs, billets, bar, plate, and sheet
from scrap and/or raw materials.
Recycling Manufacturing Iron and Steel Foundries Produce cast iron or steel products.
Recycling Manufacturing Other Recycling Processors/Manufacturers Other processors and manufacturers not elsewhere
classified, using ash, sludge, engineering application of tires
or other recovered materials.
Reuse and Remanufacturing Computer and Electronic Appliance Sort, grade, dismantle and/or rebuild used electronic
Demanufacturers appliances.
Reuse and Remanufacturing Motor Vehicle Parts (used) Clean, sort, inspect, and remanufacture used automobile
parts.
Reuse and Remanufacturing Retail Merchandise Sales Retail thrift stores, antique shops, reuse centers, and other
shops dedicated to selling used merchandise.
Reuse and Remanufacturing Tire Retreaders Remove old tread from worn tires and add new thread.
Reuse and Remanufacturing Wood Reuse Process used wood for reuse (e.g. pallet rebuilders,
construction materials)
Reuse and Remanufacturing Materials Exchange Services Facilitate the reuse of products and materials by commercial
and industrial establishments.
Reuse and Remanufacturing Other Reuse Other reuse or remanufacturing, not elsewhere classified.
SOURCE: "U.S RECYCLING ECONOMIC INFORMATION STUDY," R.W. BECK.
45
Milken Institute/Capital Access Group CIWMB RMDZ Loan Leveraging Study – 6/30/2002
TABLE C
CALIFORNIA'S RECYCLING INDUSTRY CHARACTERISTICS
INDUSTRY SUB-INDUSTRY SUB-INDUSTRY CHARACTERISTICS
Eligible for Number of Employment Annual Payroll Revenue Rev./Establish.
RMDZ Loans* Establishments** (Thousands of $) (Thousands of $) (Thousands of $)
Recycling Collection Government Staffed Collection N 198 1,900 65,740 130,722 660
Recycling Collection Private Staffed Collection N 323 3,100 107,260 213,283 660
Recycling Processing Compost and Miscellaneous Organic Producers Y 162 1,892 46,119 304,722 1,881
Recycling Processing Materials Recovery Facilities (MRFs) N 47 2,606 49,986 206,424 4,392
Recycling Processing Recyclable Material Wholesalers N 955 11,131 344,894 4,437,163 4,648
Recycling Processing Textile Recycling*** Y 45 2,579 N/A 112,014 2,465
Recycling Manufacturing Glass Container Manufacturing Plants Y 8 3,013 122,890 651,773 81,472
Recycling Manufacturing Glass Product Producers (other recycled uses) Y 9 697 8,233 52,749 5,861
Recycling Manufacturing Nonferrous Secondary Smelting and Refining Mills N 43 1,597 62,504 707,670 16,457
Recycling Manufacturing Nonferrous Product Producers N 18 1,467 46,998 329,511 18,306
Recycling Manufacturing Nonferrous Foundries N 166 4,550 133,746 434,161 2,615
Recycling Manufacturing Paper, Paperboard, and Deinked Market Pulp Mills Y 24 2,940 149,712 1,112,318 46,347
Recycling Manufacturing Paper-based Product Manufacturers Y 16 520 15,713 104,528 6,533
Recycling Manufacturing Pavement Mix Producers (asphalt and aggregate) Y 15 228 2,990 41,370 2,758
Recycling Manufacturing Plastics Reclaimers Y 63 1,499 43,090 126,276 2,004
Recycling Manufacturing Plastics Converters Y 309 16,546 503,281 2,476,497 8,015
Recycling Manufacturing Rubber Product Manufacturers Y 15 271 9,363 56,880 3,792
Recycling Manufacturing Steel Mills N 1 333 17,316 129,036 129,036
Recycling Manufacturing Iron and Steel Foundries N 77 4,916 141,878 582,238 7,562
Recycling Manufacturing Other Recycling Processors/Manufacturers Y 31 871 20,854 84,661 2,731
Reuse and Remanufacturing Computer and Electronic Appliance Demanufacturers Y 34 956 24,696 125,120 3,680
Reuse and Remanufacturing Motor Vehicle Parts (used) N 773 5,288 108,208 653,927 846
Reuse and Remanufacturing Retail Merchandise Sales N 1,895 13,845 185,931 877,939 463
Reuse and Remanufacturing Tire Retreaders Y 68 893 20,971 111,147 1,635
Reuse and Remanufacturing Wood Reuse Y 32 375 4,503 29,088 909
Reuse and Remanufacturing Materials Exchange Services N 4 19 728 7,456 1,864
Reuse and Remanufacturing Other Reuse Y 11 212 12,315 83,501 7,591
TOTAL OF ELIGIBLE RMDZ LOAN COMPANIES 635 29,021 938,611 5,055,908
GRAND TOTAL 5,342 84,244 2,249,919 14,182,174
* UNDER CURRENT REGULATIONS
** A SINGLE LOCATION OF AN ORGANIZATION OR GOVERNMENT, THE ORGANIZATION OR GOVERNMENT MAY HAVE MULITPLE ESTABLISHMENTS (PHYSICAL LOCATIONS)
*** ESTIMATED FROM NATIONAL AND STATE CENSUS AND COUNCIL FOR TEXTILE RECYCLING DATA
SOURCES: "U.S RECYCLING ECONOMIC INFORMATION STUDY," R.W. BECK, STATE CENSUS, AND COUNCIL FOR TEXTILE RECYCLING
46
Milken Institute/Capital Access Group CIWMB RMDZ Loan Leveraging Study – 6/30/2002
TABLE D
RMDZ LOAN RECIPIENTS
INDUSTRY SUB-INDUSTRY RMDZ LOAN RECIPIENT CHARACTERISTICS CURRENT FINANCING
Receives Number Number Geographic Location (% of Total) Avg. Loan Average Use of Loan Average
Loans* Companies Loans Northern Central Southern Size ($) Term (Yrs.) Proceeds** Rate***
Recycling Processing Compost and Miscellaneous Organic Producers Y 16 18 28% 33% 39% 349,698 8 ME,WC,LI,RP 5.1%
Recycling Processing Materials Recovery Facilities (MRFs) Y 1 1 0% 0% 100% 68,685 5 RP,ME 4.5%
Recycling Processing Textile Recycling**** Y 2 4 0% 0% 100% 650,000 9 ME,WC,RP 5.4%
Recycling Manufacturing Glass Container Manufacturing Plants Y 1 1 0% 100% 0% 150,000 6 WC 5.0%
Recycling Manufacturing Glass Product Producers (other recycled uses) Y 2 3 33% 0% 67% 775,333 11 WC 5.5%
Recycling Manufacturing Paper, Paperboard, and Deinked Market Pulp Mills Y 14 17 18% 18% 65% 503,506 8 ME,WC,LI,DR 5.4%
Recycling Manufacturing Paper-based Product Manufacturers Y 3 3 33% 0% 67% 453,500 6 WC,DR 4.8%
Recycling Manufacturing Pavement Mix Producers (asphalt and aggregate) Y 11 12 17% 25% 58% 574,458 7 ME,WC,DR 4.9%
Recycling Manufacturing Plastics Reclaimers Y 13 14 7% 29% 64% 519,293 10 ME,WC,DR, RP,LI 5.2%
Recycling Manufacturing Plastics Converters Y 10 12 17% 25% 58% 702,356 7 WC,ME,RP,LI 4.9%
Recycling Manufacturing Rubber Product Manufacturers Y 1 1 0% 100% 0% 700,000 10 ME, WC, RP, LI 4.0%
Recycling Manufacturing Iron and Steel Foundries Y 2 2 100% 0% 0% 717,475 7 ME 5.3%
Recycling Manufacturing Other Recycling Processors/Manufacturers Y 3 3 33% 33% 33% 491,667 7 WC 4.5%
Reuse and Remanufacturing Computer and Electronic Appliance Demanufacturers Y 4 4 50% 0% 50% 681,250 10 ME,WC,RP 5.0%
Reuse and Remanufacturing Tire Retreaders N N/A N/A N/A N/A N/A N/A N/A N/A N/A
Reuse and Remanufacturing Wood Reuse Y 7 7 29% 29% 43% 361,429 10 ME,WC,RP,DR 5.3%
Reuse and Remanufacturing Other Reuse Y 6 6 22% 33% 44% 505,234 9 ME,WC 5.3%
ACTIVE LOANS 54 64 649,827 9.2 5.3%
TOTAL LOANS 96 108 24% 24% 52% 511,697 9.2 5.1%
* CURRENTLY HAS COMPANIES IN SUB-INDUSTRY THAT PARTICIPATE IN CIWMB RMDZ LOAN PROGRAM
** (IN ORDER OF MOST USED TYPE) ME=MACHINERY/EQUIPMENT, WC=WORKING CAPITAL, RP=REAL PROPERTY, DR=DEBT RESTRUCTURING, LI=LEASEHOLD IMPROVEMENTS
*** INTEREST RATE IS SET SEMIANUALLY, CURRENTLY: 5.7% THROUGH 12/31/01
**** ESTIMATED FROM NATIONAL AND STATE CENSUS AND COUNCIL FOR TEXTILE RECYCLING DATA
47
Milken Institute/Capital Access Group CIWMB RMDZ Loan Leveraging Study – 6/30/2002
TABLE E: PRIME RATE, SURPLUS MONEY INVESTMENT FUND RATE, AND CIWMB’s RMDZ ACTIVE LOAN PORTFOLIO
10.00%
9.00%
8.00% RMDZ
Weighted
Average
7.00%
Active Loan
Interest Rate
6.00%
5.00%
4.00%
3.00%
2.00%
1.00%
0.00%
92
93
94
95
96
97
98
99
00
01
02
19
19
19
19
19
19
19
19
20
20
20
Prime Rate SMIF Rate
48
Milken Institute/Capital Access Group CIWMB RMDZ Loan Leveraging Study – 6/30/2002
TABLE F
OVERVIEW OF LEVERAGING STRATEGIES
New Markets Tax Credit Loan Guaranty Loan Sale EQ2/PRI
Description A new federal incentive program A risk-sharing partnership Selling loans to secondary Forming a financing partnership
under which taxpayers are allowed between CIWMB and one or market investors, such as the with an established non-profit
to reduce their federal income tax more existing small business Community Reinvestment “CDFI” that would agree to use
payments by 39 percent of the loan guarantors – preferably Fund, and using the cash to funds obtained through PRIs, low-
amount invested in a qualifying with a California Financial make more loans. Interest interest loans that foundations
community development entity – a Development Corporation rates on the loans would be provide, or EQ2s, long-term, low
for-profit organization that makes (FDC) that provide guaranties of structured so that loans would interest loans made by commercial
business loans and investments in up to 90 percent on small be sold at a premium. banks to community development
low-income areas. business bank loans of up to organizations.
$350,000.
Borrowers Established: 50% Established: 50% Established: 50% Established: 50%
Early-Stage: 30% Early-Stage: 30% Early-Stage: 30% Early-Stage: 30%
Start-Up: 20% Start-Up: 20% Start-Up: 20% Start-Up: 20%
Products Below-market loans Below-market loans Below-market loans Below-market loans
Subordinate loans Subordinate loans Subordinate loans Subordinate loans
Deferred payment loans Deferred payment loans Deferred payment loans Deferred payment loans
Sources of Financing Investors that expressed interest in California FDCs such as: Possible purchasers of loans Organizations that have made EQ2
purchasing NMTCs such as: Nor-Cal FDC, such as: or PRI investments such as:
Enterprise Social Investment Pacific Coast Regional FDC Community Ford Foundation
Corporation California Southern FDC Reinvestment Fund Citibank
Bank of America Bayview Financial F.B. Heron Foundation
Bear Stearns CBA Receivables
Analysis Rating Rating Rating Rating
Rating: (-) worse than avg. Simplicity (-) Simplicity (+) Simplicity (+) Simplicity (0)
(1) average Practicality (-) Practicality (0) Practicality (+) Practicality (-)
(+) better than avg. Sustainability (+) Sustainability (+) Sustainability (+) Sustainability (0)
Affordability (+) Affordability (0) Affordability (+) Affordability (+)
Implementability (0) Implementability (-) Implementability (+) Implementability (0)
Leverage Base Case: 5 to 1 Base Case: 12 to 1 Base Case: 16 to 1 Base Case: 5 to 1
Best Case: 5 to 1 Best Case: 19 to 1 Best Case: 16 to 1 Best Case: 5 to 1
Return on Investment Base Case: 32.98% Base Case: 10.23% Base Case: 0.01% Base Case: 0.06%
Best Case: 33.30% Best Case: 14.37% Best Case: 15.30% Best Case: 12.50%
49
Appendix One
Mini Business Plan – New Markets Tax Credit Strategy
NEW MARKETS TAX CREDIT STRATEGY
Introduction
The following mini-business plan describes a strategy to enable the California Integrated Waste
Management Board (the “Board” or “CIWMB”) to employ the New Markets Tax Credit (NMTC)
to produce $10 million annually in private financing for small recycling companies that have
difficulty securing affordable financing from banks and venture firms. The NMTC is a new
federal incentive program under which taxpayers are allowed to reduce their federal income tax
payments by 39 percent of the amount invested in a qualifying “community development entity”
(CDE) – a for-profit organization that makes business loans and investments in low-income areas.
For each dollar invested in the CDE, investors are entitled to reduce their federal tax payments by
an average of 5.57 percent annually for seven years.
The plan is based on the proposition that the Board would partner with an independent for-profit
CDE (see Section 5 – Implementation, below, for further detail). . To be more specific, CIWMB
funds, along with private loans and investments (liabilities), would finance a portfolio of
recycling loans (assets). In turn, these assets (the loans to recycling companies) would generate
the income needed for CIWMB to cover operating expenses, losses, interest on borrowed funds
and a return on capital. In other words, the program’s lending capacity and financial viability
would depend on three factors:
The performance of its assets. Loans made under the program must meet two tests. First,
they should provide different types of funding for recycling companies at different stages of
maturity. Second, they must provide sufficient earnings to cover the CDE’s costs.
The structure of its liabilities. The program’s mix of contributed capital and borrowed money
should be such that the principal and interest payments on its assets can retire its debts and
provide a return on its capital.
The level of its operating expenses. The expenses associated with originating, underwriting
and servicing loans, as well as covering loan losses, must not exceed net interest income, i.e.,
the difference the interest paid on borrowed money and the earnings generated by the
portfolio.
The mini business plan is organized into seven brief sections.
Section 1 – Borrowers
Describes the companies whose financing needs the program is designed to meet.
Section 2 – Products
Describes the types of loans the program issues.
Section 3 – Capital Structure & Sources
Describes the mix of debt and equity capital that would be used to fund the CDE, and provides
several potential sources of financing for the program.
Section 4 – Operations
50
Appendix One
Mini Business Plan – New Markets Tax Credit Strategy
Describes how the CDE’s financing program would be managed.
Section 5 – Implementation
Sets forth the tasks and costs required to secure financing commitments for the program.
Section 6 – Analysis
Describes the extent to which the leveraging strategy meets the five criteria discussed as
important in a successful CIWMB loan leveraging program – simplicity, practicality,
sustainability, affordability, implementability.
Section 7 – Financial Analysis
Lays out pro forma five-year financials for the program, including a projected rate of return on
investment.
Section 1 – Borrowers
The Board would need to invest in an existing CDE that has a history of making commercial
loans to for-profit businesses.
The CDE would be designed to meet the financing needs of three types of recycling companies
that make up the RMDZ market.
Established recycling firms. Approximately 50 percent of borrowers would be companies
that have sufficient operating and earnings history to secure credit from conventional sources.
These low-risk companies would be more concerned with the cost of capital than with access
to capital, and would welcome the lower cost capital the CDE could offer.
Expansion-stage companies. Approximately 30 percent of borrowers would be companies
that have survived their formative years and are now seeking to grow. However, these
companies lack the earnings history, capital or collateral needed to support the full amount of
funding needed to finance expansion. The CDE would cover this gap.
Early-stage companies. The remaining 20 percent of borrowers would be companies that are
essentially start-up businesses. Because they are not yet producing positive cash flows, these
high-risk companies require some form of “equity-like” financing to fund continued growth.
Section 2 – Products
The following three products are designed to meet the distinct needs of each these borrower
segments:
Below-market loans. Established recycling companies seeking expansion financing would be
eligible for medium and long-term fixed-asset loans priced, on average, 200 basis points
below the market rate for such financing. Underwriting standards for these loans including
loan-to-value and debt service coverage ratios would be only slightly more liberal than those
employed by commercial lenders. A profile of a borrower might be:
Sunset Manufacturing, a 20-year old company that uses waste materials to produce a
range of furniture products. Its sales are about $1.5 million annually. In order to expand,
it requires $500,000 to upgrade its production facility. At 2.75 percent over prime or 7.5
51
Appendix One
Mini Business Plan – New Markets Tax Credit Strategy
percent, a 15-year SBA loan would cost the firm $56,000 annually in debt service.
However, at two percent below prime, a loan from the CDE would only require $41,000
in debt service, a savings of $15,000 annually.
Subordinate, companion loans. Expansion-stage companies that lack the collateral to secure
senior financing needed for fixed assets or working capital would be candidates for
subordinate debt. These loans would typically be structured as 25-40 percent junior
participations in senior, secured loans extended by banks or other commercial lenders.
Because of the risk associated with junior-lien lending, the CDE’s interest in each transaction
would be priced at 300 to 500 basis points above prime. In addition, as part of each
transaction, a loan loss reserve contribution, equaling four-to-eight percent of the total
financing, would be funded from loan proceeds and retained by the CDE. A profile of a
borrower might be:
MicroCast, a $2.5 million company purchases, that repairs and resells consumer
electronics. The company has grown rapidly but its weak balance sheet makes it
impossible to secure $250,000 in equipment financing that it needs to expand. The CDE
advances $250,000 to MicroCast and then sells a 75 percent senior interest ($187,500) in
the loan to a local bank. The CDE retains a 25 percent ($67,500) subordinate interest in
the loan along with a five percent loan-loss insurance payment ($12,500). The loan
structure provides the bank with a senior loan of $187,500 secured by $250,000 in
equipment. At the same time, the CDE’s risk is covered by an insurance payment of
$12,500 – 20 percent of its exposure. Finally, the CDE’s subordinate interest is
structured with a long amortization, producing lower debt service payments than the
borrower would pay for bank financing alone.
Gives $250,000 note and $12,500 reserve
Lender MicroCast
Makes $250,000 loan
CDE
52
Appendix One
Mini Business Plan – New Markets Tax Credit Strategy
Deferred payment loans. Early-stage companies, including start-up firms, that possess neither
the cash flow (or collateral) to qualify for debt financing nor the “upside” potential to qualify
for venture or angel financing would be candidates for deferred payment loans. The deferred
payment loan would be modeled on the structure employed by SBA for investments in New
Markets Venture Capital Companies. That is, each loan would involve a “discount period” –
two to three years during which no principal or interest payments would be required –
followed by an amortization period. Upon closing, the borrower would receive the full
amount of the loan less the present value of interest for the discount period. At the end of the
discount period, the borrower would repay the loan in regular installments of principal and
interest over a period of up to seven years. Because of the risk that borrowers would be
unable to repay loans during the amortization period, deferred payment loans would priced at
600 basis points above prime. In addition, as with subordinate loans, a cash reserve account
would be funded as part of each transaction. A profile of a borrower might be:
TireWare, an early stage company that has developed a more efficient way of retreading
tires. Although it needs $200,000 to fund its operations, neither venture capital
companies nor angel investors are willing to invest. Using the deferred payment note
structure, the Recycling Loan Program makes a $287,000 loan to the borrower. Of this
amount approximately $67,000, the present value of three years of interest and $20,000
in loan-loss reserve contributions are retained by the CDE. At the end of three years
TireWare begins making payments of $5,000 per month to repay the $287,000 balance
over seven years. Because of the deferred payment note, TireWare has full use of
$200,000 for three years. It has obtained the equivalent of equity without having to
relinquish stock to an outside investor. The loan’s high interest rate and the insurance
reserve provide compensation and credit support for CDE’s risk.
TireWare
Advances $200,000
CDE
53
Appendix One
Mini Business Plan – New Markets Tax Credit Strategy
Section 3 – Capital Structure and Sources4
To meet its need to finance $10 million in loans annually for five years, the CDE would use the
New Markets Tax Credit to raise $50 million in debt and equity financing. As noted above, the
NMTC provides taxpayers a seven-year, 39 percent income tax credit for investments in qualified
community development entities (CDE’s). The financing plan would be as follows:
CIWMB and a selected number of banks or other financial companies would agree to invest a
total of $30 million in the CDE for the purpose of financing businesses located in targeted
Recycling Market Development Zones or other low-income areas.
CIWMB would invest $10 million over three or four years in the CDE in the form of a
long-term, low-interest subordinate loan. The loan would bear an interest rate of 2.75
percent (200 basis points below prime) and would be repaid solely from the earnings of
the CDE.
The banks would invest $30 million in the form of equity in exchange for New Markets
Tax Credit allocations totaling $11.7 million over seven years. The banks would also be
entitled to all profits after interest and principal payments on the CIWMB loan.
With $40 million in equity capital and subordinate debt financing, the CDE could obtain a
$10 million credit facility secured by the CDE’s $50 million loan portfolio and associated
reserves. The credit facility would be priced at no higher than prime.
Investors
$30 million in exchange
for $11.7 million (39%) NMTC
$10 million $10 million
market-rate long-term
loan loan
Lenders CDE CIWMB
4
Under an alternative structure, the Board could enter into a “co-lending” agreement with an existing CDE.
Under that agreement, the CDE would use capital raised through the sale of the NMTC to finance recycling
loans in partnership with the Board.
54
Appendix One
Mini Business Plan – New Markets Tax Credit Strategy
The New Markets Tax Credit is an entirely new incentive program. Thus, it is impossible to say
with certainty what investors would make equity investments in CDE’s in exchange for the
NMTC. Nevertheless, the following investors have either announced their intention to purchase
NMTCs or have experience in purchasing the residential equivalent of the NMTC, the Low-
Income Housing Tax Credit. While they do not specifically focus on recycling companies, the
entities they lend to share similar risk profiles to CIWMB’s target borrowers.
Enterprise Social Investment Corporation. The Enterprise Social Investment Corporation
(ESIC) is a subsidiary of the Enterprise Foundation, a national, non-profit community
development organization. Since 1984, ESIC has used the Low-Income Housing Tax Credit
to raise over $3.2 billion in financing for affordable housing. Its community development
mission and experience in syndicating tax credits make it probable that the ESIC would
assume a significant role in helping qualified CDE’s raise NMTC financing.
Bank of America. Bank of America serves as general partner and placement agent for the
California Tax Credit Funds, a series of limited partnerships established to make Low-Income
Housing Tax Credit investments. The most recent Fund, California Tax Credit Fund III, is
$40 million offering of limited partnership units. It is probable that the Bank would build on
its experience with LIHTC funds to create similar vehicles to raise and invest NMTC
financing for small businesses.
Bear Stearns. Representatives of Bear Stearns, a major Wall Street investment bank, recently
announced the firm’s intention to create a Fund to purchase up to $600 million in New
Markets Tax Credits. While specific details on the Fund are unlikely to emerge until after the
U.S. Treasury and IRS publish final regulations governing NMTC transactions, the size of the
stated commitment makes this firm a strong target investor.
Certified Development Entities are forming for-profit units to participate in the NMTC
program.
Section 4 – Operations
In order to minimize the CDE’s operating costs, the Board, the CDE investors and would assume
the principal functions associated with making and monitoring recycling loans. The ZA’s role
would be to market the program.
Loan origination. Banks, would be responsible for identifying borrowers and packaging their
loan applications.
Loan underwriting. In cooperation with the lenders who comprise the CDE’s equity investors,
the Board would develop a set of underwriting standards and policies for each type of loan
product. The CDE’s credit committee or Chief Credit Officer would use these standards in
approving loans under the program. Under a “co-lending” agreement, the CDE and the
Board would agree on underwriting standards and apply these policies in approving loans.
Loan processing and documentation. For the sake of simplicity, the Board and the CDE (or its
equity investors) would agree on a set of standard loan documents and closing procedures. In
55
Appendix One
Mini Business Plan – New Markets Tax Credit Strategy
all likelihood, procedures and documents now employed by either CIWMB or investing
banks would be adopted by the CDE.
Loan servicing. Loan servicing would be contracted out to one or more banks that are CDE
investors. In a limited number of cases, RMDZ Administrators could assume some sub-
servicing responsibilities.
Section 5 – Implementation5
Raising $50 million in NMTC financing would involve the following tasks:
Organizing a finance team. (The finance team will most likely be composed of Board staff.
The included budgets are merely an estimate of the associated costs). The job of raising
significant amounts of capital from lenders and investors would require a “finance team”
comprising both in-house CIWMB staff and outside advisors. This team’s responsibility
would be to establish the parameters for the financing transaction, prepare the NMTC
application, negotiate terms of an NMTC award with Treasury officials, manage relationships
with prospective investors and lenders, serve as liaison with CIWMB’s senior management
and Board, and guide the capital-raising process to a successful closing. Given the complexity
of most tax-advantaged transactions the team should include, at a minimum, the Board’s
Chief Financial Officer and in-house counsel, as well as a tax partner from its accounting
firm and outside legal counsel with expertise in both tax and corporate finance. If necessary,
a financial advisory firm should be retained to help in preparing the NMTC application and in
structuring and placing the financing transaction.
Defining financing requirements. Although the mini-business plan recommends that
CIWMB raise $50 million in total capital by leveraging $10 million in appropriated funds
with $40 million in private debt and equity financing, the Board staff should determine
whether some change in the amount and mix of capital is needed to accommodate the
amount, type and timing of anticipated loan demand.
Identifying a CDE. In order to qualify for NMTC financing, the Board staff would need to
identify a for-profit vehicle to serve as the NMTC investment vehicle or CDE. The CDE
could be an existing for-profit small business finance organization (such as CEDLI) or a for-
profit affiliate of a non-profit economic development lender. In either event, its management
should have significant loan origination, underwriting and servicing capabilities, thus
obviating the need for the Board to expand its staff.. (NMTC allocations would be
competitively awarded. The CDE would need to prepare a detailed NMTC business plan
describing the small business market to be served, the loan and investment products to be
offered, the CDE’s investment and/or lending strategy and its legal, management governance
structure. The team would also need to describe the CDE’s proposed capital structure and
present proforma financial statements. Assuming success in securing an NMTC award, the
team would then negotiate any terms and conditions associated with the allocation with
Treasury officials).
5
Under a “co-lending” agreement with an existing CDE, the Board might well be spared all tasks
associated with preparing an NMTC allocation application. This would dramatically reduce the cost and
complexity of implementing this particular leveraging option.
56
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Mini Business Plan – New Markets Tax Credit Strategy
Developing an investment structure. Once the program’s capital requirements are
established, an NMTC allocation received, and likely lenders and investors identified, the
team should negotiate the terms under which the Board would invest in the CDE. This effort
is needed to align the investment structure with the Board’s loan origination and return of,
and on, investment goals.
Preparing and reviewing financing documents. Transaction documents may be prepared by
the CDE’s legal counsel, or by counsel for the Board
Closing the transaction. Finally, the Board staff would be responsible for closing the
investment, addressing last-minute issues and oversights that could produce problems in
consummating the transaction.
Sample Budget
This sample budget is based upon the following assumptions regarding hourly billing rates for
CIWMB staff and advisors:
CIWMB staff $150
Outside legal counsel $250
Accounting $175
Financial advisory $250
Financial Total
Task CIWMB Legal Accounting Advisory Hours Cost
1. Organize financing team 30 0 0 0 30 $ 4,500
2. Define financing 24 0 0 16 40 $ 8,400
requirements
3. Identify/prequalify CDE 40 0 0 20 60 $ 12,000
4. Negotiate investment 40 24 16 16 96 $ 18,400
structure
5. Prepare financing 16 120 0 16 152 $ 37,200
documents
6. Close transaction 24 40 0 8 72 $ 12,496
Total Hours 174 184 16 76 450 $ 92,996
57
Appendix One
Mini Business Plan – New Markets Tax Credit Strategy
Section 6 – Analysis
As a source of financing for the CDE, the New Markets Tax Credit has both advantages and
disadvantages. The analysis below considers the proposed leveraging strategy in light of five
criteria discussed as important in a successful CIWMB loan leveraging program:
Simplicity. Because of the inherent complexities associated with using a new tax incentive to
raise capital, New Markets Tax Credit transactions are likely to be more complicated than
other alternatives. For example, because of its previous experience, CIWMB may well find
loan sales simpler and easier to execute.
Practicality. Because the NMTC is new, investor response to NMTC-based financing
transactions cannot be known. For this reason, NMTC-based financing must also be
considered more speculative than other alternatives.
Sustainability. NMTC financing would provide substantial sums of equity for the CDE,
thereby reducing the size of necessary leverage and decreasing the risk that interest income
would be insufficient to cover fixed interest costs and other operating expenses. For
example if CIWMB financed its program with greater amounts of debt, in lieu of equity
generating NMTCs for the investors, the interest costs would be much higher and the income
required to cover them higher. For this reason, a lending program organized around the
NMTC has a higher probability of achieving long-term financial viability than other
leveraging options discussed.
Affordability. As noted, the substantial amounts of equity that can be raised with the NMTC
should reduce need for interest income to pay interest expense. This would allow borrowers
to pay lower interest rates than if debt (especially market-rate debt) were the principal source
of loan financing.
Implementability. Assuming success in securing an NMTC allocation, there is at least a
reasonable likelihood that successful transactions involving the exchange of the NMTC for
equity can be structured. The need of both small and large banks for CRA “investment
credit,” as well as the financial success of Low Income Housing Tax Credit syndications,
should produce a high degree of interest in NMTC financings.
Section 7 – Financial Analysis
General Overview
Following are “best-case” and “base-case” financial forecasts for the CDE. Each set of
forecasts includes three types of financial statements:
Proforma Statement of Financial Condition
Proforma Statement of Financing and Investment Activities
Proforma Statement of Operations
58
Appendix One
Mini Business Plan – New Markets Tax Credit Strategy
Each set of pro-forma financial statements illustrates the economic condition and activities of
the RMDZ Loan Program for a five-year period. Each financial statement is briefly
explained below followed by a more detail explanation of assumptions.
Proforma Statement of Financial Condition
The balance sheet has been prepared assuming an accrual basis of accounting and reflects the
financial condition of the fund as of December 31 of each year. Cash on hand, idle cash in
the form of short-term investments and loan loss reserves are combined as one amount under
current assets. Notes Receivable reflects the combined value of each class of loans as of the
end of each fiscal year. The Accrued Interest Receivable on Deferred Interest Loans is
separated from the value of Notes Receivable and shown as the third item of Current Assets.
Amounts for Furniture & Equipment are estimates of the additional furniture and computer
equipment that may need to be acquired in order to support the RMDZ fund activities. Other
resources and infrastructure costs are assumed to be provided by the managing entity for the
fund.
Although it is anticipated that CIWMB’s investment would take the form of a long-term
subordinate loan, it has been shown under Shareholders’ Equity as its character most closely
resembles fund equity.
Proforma Statement of Financing and Investment Activities
The Statement of Financing and Investment Activities illustrates the inflows and outflows of
funds resulting from financing and investment activities of the fund. The specific types of
financing and investment transactions summarized on this financial include:
Financing activities
Receipt of investment including CIWMB startup funding
Receipt of funds from the issuance of corporate notes (debt)
Repayment of startup funding from CIWMB
Repayment of corporate notes
Investment activities
Receipt of funds from the sale of program assets
Outflow of funds applied to lending activities
Receipt of principal collections on outstanding notes
This report has been provided to enable the reader to track the loan origination and sale by
product category. For a complete picture of total sources and uses of funds, the reader must
combine the activity shown on this report with the activity from operations described on the
next and final set of pro-forma financials.
Pro-forma Statement of Operations
The Pro-forma Statement of Operations illustrates the sources of program income and
summarizes the operating expenses including gains and losses on sales of assets as well as
loan losses. Loan losses are shown as a provisional reserve adjustment and are calculated
59
Appendix One
Mini Business Plan – New Markets Tax Credit Strategy
using a loss factor that is applied to the outstanding asset portfolio. Losses as they are
incurred are written off against the loan loss reserve. (Note that for clarity, the loan loss
reserve, typically shown as a contra to Notes Receivable, have been included as part of the
cash, short term investments and reserves (net).
Assumptions to the Pro-forma Financials
The following assumptions were used to develop the previously described pro-forma
financials depicting the NMTC option.
Investment
NMTC investors provide $30 million of equity in month 2 of Year One.
CIWMB puts in $10 million timed as follows: $3.5M in year 1; $3.5M in Year Two; and
$3M in Year Three. No interest has been assumed on the CIWMB investment carried as
equity on the balance sheet.
Long Term Debt
The fund borrows $10 million in Year Four and paying six percent.
Investment of Idle Funds
Idle funds are invested at four percent increasing to 4.125 percent in Year Four. Cash on
hand averages approximately $250,000 plus 60 days origination volume.
Loan Portfolio Characteristics
% of Average Deferment of
Asset Portfolio Loan Amt Yield Term Payment
Low Interest 50% $200,000 4.25% 5 yrs None
Deferred Payment 20% $80,000 12.25% 10 yrs 3 yrs
Subordinate Debt 30% $120,000 9.5% 5 yrs None
Asset Sales - none
Loan Losses and Insurance Payments
Insurance Base-case Loan Best-case Loan
Asset Payment Losses Net of Losses Net of
Recoveries Recoveries
Low Interest None 3% 1.5%
Deferred Payment 25% 25% 15%
Subordinate Debt 15% 15% 7.5%
60
Appendix One
Mini Business Plan – New Markets Tax Credit Strategy
Operating Expenses
The following functions are assumed to be borne by the CDE:
Chief Credit Officer @ $120,000
Chief Financial/Operations Officer @ $85,000
Two loan officers @ $80,000 total
One support person @ $25,000
Fringe benefits estimated at 35 percent of salaries.
Administration, Marketing and Overhead – Modest levels are included as managing entity is
envisioned to assume operational responsibility and provide infrastructure.
61
Appendix One, Attachment A – Best Case Financials
Mini Business Plan – New Markets Tax Credit Strategy
CALIFORNIA INTEGRATED WASTE MANAGEMENT BOARD
RMDZ LOAN PROGRAM - NEW MARKETS TAX CREDIT STRATEGY - BEST CASE
Proforma Statement of Financing and Investment Activities
Five Years
YEAR ONE Total
Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Month 7 Month 8 Month 9 Month 10 Month 11 Month 12 YEAR 1
FINANCING ACTIVITIES
Funds Received From:
Sale of Shares
CIWMB Investment $3,500,000 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $3,500,000
Private (NMTC) Investors 0 30,000,000 0 0 0 0 0 0 0 0 0 0 30,000,000
Total of Funding From Investors $3,500,000 $30,000,000 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $33,500,000
Funding From Issuance of
Debt
Debt Class 1-Short Term 0 0 0 0 0 0 0 0 0 0 0 0 0
Debt Class 2-Long Term Fixed Rate 0 0 0 0 0 0 0 0 0 0 0 0 0
Total Funding From Issuance of
Debt $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Total Funding From Financing Activities $3,500,000 $30,000,000 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $33,500,000
Less Funds Applied To:
Redemption of Shares
CIWMB Investment/Start Up Cost Reimb. 0 335,996 0 0 0 0 0 0 0 0 0 0 335,996
Private (NMTC) Investors 0 0 0 0 0 0 0 0 0 0 0 0 0
Total Shares Redeemed 0 335,996 0 0 0 0 0 0 0 0 0 0 335,996
Repayment of Corporate Notes
Debt Class 1-Short Term Notes 0 0 0 0 0 0 0 0 0 0 0 0 0
Debt Class 2-Long Term Fixed Rate 0 0 0 0 0 0 0 0 0 0 0 0 0
Total Payments of Corporate Notes $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Total Application of Funds $0 $335,996 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $335,996
FUNDING FROM FINANCING
ACTIVITIES (NET) $3,500,000 $29,664,004 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $33,164,004
INVESTMENT ACTIVITIES
ADD: Funds Received From Sale of Loans:
Sale of Low Cost Loans 0 0 0 0 0 0 0 0 0 0 0 0 0
Sale of Deferred Payment Loans 0 0 0 0 0 0 0 0 0 0 0 0 0
Sale of Subordinate Debt Loans
Total Funds Received From Sale of Loans $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
LESS: Funds Applied to Lending Activities:
Low Cost Loans 0 150,000 450,000 450,000 450,000 450,000 450,000 450,000 450,000 450,000 450,000 450,000 4,650,000
Deferred Payment Loans 0 60,000 180,000 180,000 180,000 180,000 180,000 180,000 180,000 180,000 180,000 180,000 1,860,000
Subordinate Debt 0 90,000 270,000 270,000 270,000 270,000 270,000 270,000 270,000 270,000 270,000 270,000 2,790,000
Total Lending Activities $0 $300,000 $900,000 $900,000 $900,000 $900,000 $900,000 $900,000 $900,000 $900,000 $900,000 $900,000 $9,299,999
ADD: Principal Collections $0 $0 $3,421 $13,700 $24,033 $34,419 $44,859 $55,353 $65,902 $76,505 $87,163 $97,877 $503,232
PROCEEDS FROM INVESTMENT
ACTIVITIES (NET) $0 ($300,000) ($896,579) ($886,300) ($875,967) ($865,581) ($855,141) ($844,647) ($834,098) ($823,495) ($812,837) ($802,123) ($8,796,767)
NET INCREASE (DECREASE) IN FUNDS FROM
FUNDING AND INVESTMENT ACTIVITIES $3,500,000 $29,364,004 ($896,579) ($886,300) ($875,967) ($865,581) ($855,141) ($844,647) ($834,098) ($823,495) ($812,837) ($802,123) $24,367,237
62
Appendix One, Attachment A – Best Case Financials
Mini Business Plan – New Markets Tax Credit Strategy
CALIFORNIA INTEGRATED WASTE MANAGEMENT BOARD
RMDZ LOAN PROGRAM - NEW MARKETS TAX CREDIT STRATEGY - BASE CASE
Proforma Statement of Financing and Investment Activities
Five Years
YEAR TWO Total YEAR THREE Total
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr YEAR 2 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr YEAR 3
FINANCING ACTIVITIES
Funds Received From:
Sale of Shares
CIWMB Investment $3,500,000 $0 $0 $0 $3,500,000 $3,000,000 $0 $0 $0 $3,000,000
Private (NMTC) Investors 0 0 0 0 0 0 0 0 0 0
Total of Funding From Investors $3,500,000 $0 $0 $0 $3,500,000 $3,000,000 $0 $0 $0 $3,000,000
Funding From Issuance of
Debt
Debt Class 1-Short Term 0 0 0 0 0 0 0 0 0 0
Debt Class 2-Long Term Fixed Rate 0 0 0 0 0 0 0 0 0 0
Total Funding From Issuance of
Debt $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Total Funding From Financing Activities $3,500,000 $0 $0 $0 $3,500,000 $3,000,000 $0 $0 $0 $3,000,000
Less Funds Applied To:
Redemption of Shares
CIWMB Investment/Start Up Cost Reimb. 0 0 0 0 0 0 0 0 0 0
Private (NMTC) Investors 0 0 0 0 0 0 0 0 0 0
Total Shares Redeemed 0 0 0 0 0 0 0 0 0 0
Repayment of Corporate Notes
Debt Class 1-Short Term Notes 0 0 0 0 0 0 0 0 0 0
Debt Class 2-Long Term Fixed Rate 0 0 0 0 0 0 0 0 0 0
Total Payments of Corporate Notes $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Total Application of Funds $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
FUNDING FROM FINANCING
ACTIVITIES (NET) $3,500,000 $0 $0 $0 $3,500,000 $3,000,000 $0 $0 $0 $3,000,000
INVESTMENT ACTIVITIES
ADD: Funds Received From Sale of Loans:
Sale of Low Cost Loans 0 0 0 0 0 0 0 0 0 0
Sale of Deferred Payment Loans 0 0 0 0 0 0 0 0 0 0
Sale of Subordinate Debt Loans
Total Funds Received From Sale of Loans $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
LESS: Funds Applied to Lending Activities:
Low Cost Loans 750,000 1,050,000 1,200,000 1,500,000 4,500,000 1,200,000 1,200,000 1,200,000 1,200,000 4,800,000
Deferred Payment Loans 480,000 420,000 480,000 600,000 1,980,000 480,000 480,000 480,000 480,000 1,920,000
Subordinate Debt 450,000 630,000 720,000 900,000 2,700,000 720,000 720,000 720,000 720,000 2,880,000
Total Lending Activities $1,680,000 $2,100,000 $2,400,000 $3,000,000 $9,180,000 $2,400,000 $2,400,000 $2,400,000 $2,400,000 $9,600,000
ADD: Principal Collections $220,317 $225,636 $355,028 $494,857 $1,295,838 $573,769 $709,674 $843,273 $955,217 $3,081,933
PROCEEDS FROM INVESTMENT
ACTIVITIES (NET) ($1,459,683) ($1,874,364) ($2,044,972) ($2,505,143) ($7,884,162) ($1,826,231) ($1,690,326) ($1,556,727) ($1,444,783) ($6,518,067)
NET INCREASE (DECREASE) IN FUNDS FROM
FUNDING AND INVESTMENT ACTIVITIES $2,040,317 ($1,874,364) ($2,044,972) ($2,505,143) ($4,384,162) $1,173,769 ($1,690,326) ($1,556,727) ($1,444,783) ($3,518,067)
63
Appendix One, Attachment A – Best Case Financials
Mini Business Plan – New Markets Tax Credit Strategy
CALIFORNIA INTEGRATED WASTE MANAGEMENT BOARD
RMDZ LOAN PROGRAM - NEW MARKETS TAX CREDIT STRATEGY - BASE CASE
Proforma Statement of Financing and Investment Activities
Five Years
YEAR FOUR Total YEAR FIVE Total
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr YEAR 4 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr YEAR 5
FINANCING ACTIVITIES
Funds Received From:
Sale of Shares
CIWMB Investment $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Private (NMTC) Investors 0 0 0 0 0 0 0 0 0 0
Total of Funding From Investors $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Funding From Issuance of
Debt
Debt Class 1-Short Term 0 0 0 0 0 0 0 0 0 0
Debt Class 2-Long Term Fixed Rate 10,000,000 0 0 0 10,000,000 0 0 0 0 0
Total Funding From Issuance of
Debt $10,000,000 $0 $0 $0 $10,000,000 $0 $0 $0 $0 $0
Total Funding From Financing Activities $10,000,000 $0 $0 $0 $10,000,000 $0 $0 $0 $0 $0
Less Funds Applied To:
Redemption of Shares
CIWMB Investment/Start Up Cost Reimb. 0 0 0 0 0 0 0 0 0 0
Private (NMTC) Investors 0 0 0 0 0 0 0 0 0 0
Total Shares Redeemed 0 0 0 0 0 0 0 0 0 0
Repayment of Corporate Notes
Debt Class 1-Short Term Notes 0 0 0 0 0 0 0 0 0 0
Debt Class 2-Long Term Fixed Rate 0 0 0 0 0 0 0 0 0 0
Total Payments of Corporate Notes $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Total Application of Funds $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
FUNDING FROM FINANCING
ACTIVITIES (NET) $10,000,000 $0 $0 $0 $10,000,000 $0 $0 $0 $0 $0
INVESTMENT ACTIVITIES
ADD: Funds Received From Sale of Loans:
Sale of Low Cost Loans 0 0 0 0 0 0 0 0 0 0
Sale of Deferred Payment Loans 0 0 0 0 0 0 0 0 0 0
Sale of Subordinate Debt Loans
Total Funds Received From Sale of Loans $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
LESS: Funds Applied to Lending Activities:
Low Cost Loans 1,200,000 1,200,000 1,200,000 1,200,000 4,800,000 1,200,000 1,200,000 1,200,000 1,200,000 4,800,000
Deferred Payment Loans 480,000 480,000 480,000 480,000 1,920,000 480,000 480,000 480,000 480,000 1,920,000
Subordinate Debt 720,000 720,000 720,000 720,000 2,880,000 720,000 720,000 720,000 720,000 2,880,000
Total Lending Activities $2,400,000 $2,400,000 $2,400,000 $2,400,000 $9,600,000 $2,400,000 $2,400,000 $2,400,000 $2,400,000 $9,600,000
ADD: Principal Collections $951,570 $1,111,448 $1,270,681 $1,400,893 $4,734,593 $1,460,095 $1,620,576 $1,782,750 $1,916,353 $6,779,774
PROCEEDS FROM INVESTMENT
ACTIVITIES (NET) ($1,448,430) ($1,288,552) ($1,129,319) ($999,107) ($4,865,407) ($939,905) ($779,424) ($617,250) ($483,647) ($2,820,226)
NET INCREASE (DECREASE) IN FUNDS FROM
FUNDING AND INVESTMENT ACTIVITIES $8,551,570 ($1,288,552) ($1,129,319) ($999,107) $5,134,593 ($939,905) ($779,424) ($617,250) ($483,647) ($2,820,226)
64
Appendix One, Attachment A – Best Case Financials
Mini Business Plan – New Markets Tax Credit Strategy
CALIFORNIA INTEGRATED WASTE MANAGEMENT BOARD
RMDZ LOAN PROGRAM
RMDZ LOAN PROGRAM - NEW MARKETS TAX CREDIT STRATEGY - BEST CASE
Proforma Statement of Financial Condition
At December 31
December 31 December 31 December 31 December 31 December 31
ASSETS FY Year 1 FY Year 2 FY Year 3 FY Year 4 FY Year 5
Current Assets
Cash, Short Term Investments and Reserves $24,781,432 $20,808,895 $17,687,728 $23,117,245 $20,371,062
Notes Receivable 8,796,767 16,680,931 23,198,997 28,064,404 30,884,630
Interest Receivable-Deferred Interest Notes 30,813 160,225 374,425 637,799 871,186
Total Current Assets $33,609,012 $37,650,050 $41,261,150 $51,819,448 $52,126,878
Fixed Assets and Other
Furniture & Equipment $90,000 $91,350 $92,761 $94,235 $95,776
Less Accumulated Depreciation (18,000) (36,270) (54,822) (73,669) (92,824)
Total Fixed Assets $72,000 $55,080 $37,939 $20,566 $2,951
Other Assets $25,000 $25,000 $25,000 $25,000 $25,000
Total Assets $33,706,012 $37,730,130 $41,324,089 $51,865,014 $52,154,829
LIABILITIES & SHAREHOLDERS' EQUITY
Current Liabilities
Accounts Payable & Accrued Expenses $52,375 $54,757 $57,247 $59,851 $62,573
Current Portion of Long Term Debt 0 0 0 0 0
Total Current Liabilities $52,375 $54,757 $57,247 $59,851 $62,573
Long Term Debt
Corporate Notes Payable $0 $0 $0 $10,000,000 $10,000,000
Total Long Term Debt $0 $0 $0 $10,000,000 $10,000,000
Total Liabilities $52,375 $54,757 $57,247 $10,059,851 $10,062,573
Shareholders' Equity
CIWMB Equity-Like Investment $3,164,004 $6,664,004 $9,664,004 $9,664,004 $9,664,004
NMTC Investment-Common Stock 30,000,000 30,000,000 30,000,000 30,000,000 30,000,000
Retained Earnings 489,633 1,011,369 1,602,838 2,012,144 2,428,252
Total Shareholders' Equity $33,653,637 $37,675,373 $41,266,842 $41,676,148 $42,092,256
Total Liabilities and Shareholders' Equity $33,706,012 $37,730,130 $41,324,089 $51,735,999 $52,154,829
65
Appendix One, Attachment A – Best Case Financials
Mini Business Plan – New Markets Tax Credit Strategy
CALIFORNIA INTEGRATED WASTE MANAGEMENT BOARD
RMDZ LOAN PROGRAM - NEW MARKETS TAX CREDIT STRATEGY - BEST CASE
Proforma Statement of Operations
Five Years
YEAR ONE Total
Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Month 7 Month 8 Month 9 Month 10 Month 11 Month 12 YEAR 1
Investment Income
Loan Loss Reserves $0 $19,800 $59,400 $59,400 $59,400 $59,400 $59,400 $59,400 $59,400 $59,400 $59,400 $59,400 $613,800
Interest on loans 0 1,324 5,496 10,059 14,588 19,082 23,541 27,965 32,354 36,708 41,026 45,309 257,453
Interest on Idle Funds 10,473 108,239 105,163 102,062 99,075 96,132 93,246 90,410 87,610 84,860 82,160 79,498 1,038,928
TOTAL INCOME $10,473 $129,363 $170,059 $171,521 $173,063 $174,614 $176,187 $177,776 $179,364 $180,968 $182,586 $184,207 $1,910,181
Expenses
Operating Expenses
Administration, marketing and overhead 36,872 36,872 36,872 36,872 39,905 39,905 39,905 39,905 44,405 44,405 44,405 47,375 487,698
Legal, audit and other professional fees 7,500 4,167 4,167 4,167 4,167 6,250 4,167 4,167 4,167 4,167 4,167 5,000 56,250
Subtotal fund management $44,372 $41,039 $41,039 $41,039 $44,072 $46,155 $44,072 $44,072 $48,572 $48,572 $48,572 $52,375 $543,948
Cost of financing activities
Interest Cost Incurred
Debt Class 1-Short Term Notes 0 0 0 0 0 0 0 0 0 0 0 0 0
Debt Class 2 - Long Term Fixed Rate Notes 0 0 0 0 0 0 0 0 0 0 0 0 0
Gain or Loss on Sale of Notes 0 0 0 0 0 0 0 0 0 0 0 0 0
Provision for Loan Losses 0 18,000 53,949 53,794 53,640 53,484 53,327 53,170 53,011 52,852 52,693 52,532 550,452
Subtotal cost of financing activities $0 $18,000 $53,949 $53,794 $53,640 $53,484 $53,327 $53,170 $53,011 $52,852 $52,693 $52,532 $550,452
TOTAL EXPENSES $44,372 $59,039 $94,987 $94,833 $97,711 $99,639 $97,399 $97,241 $101,583 $101,424 $101,264 $104,907 $1,094,400
PRE-TAX OPERATING PROFIT (LOSS) ($33,899) $70,324 $75,072 $76,688 $75,352 $74,975 $78,788 $80,534 $77,781 $79,544 $81,322 $79,300 $815,781
Less: Provision for Corp Income Taxes (13,553) 28,116 30,014 30,660 30,126 29,975 31,499 32,197 31,097 31,801 32,512 31,704 326,149
NET OPERATING PROFIT (LOSS) ($20,346) $42,209 $45,058 $46,028 $45,226 $45,000 $47,289 $48,337 $46,684 $47,742 $48,810 $47,596 $489,633
66
Appendix One, Attachment A – Best Case Financials
Mini Business Plan – New Markets Tax Credit Strategy
CALIFORNIA INTEGRATED WASTE MANAGEMENT BOARD
RMDZ LOAN PROGRAM - NEW MARKETS TAX CREDIT STRATEGY - BEST CASE
Proforma Statement of Operations
Five Years
YEAR TWO Total YEAR THREE Total
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr YEAR 2 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr YEAR 3
Investment Income
Loan Loss Reserves $131,400 $138,600 $158,400 $198,000 $626,400 $158,400 $158,400 $158,400 $158,400 $633,600
Interest on loans 103,753 122,226 142,365 167,029 535,374 184,982 201,575 216,832 230,970 834,359
Interest on Idle Funds 258,521 239,569 219,135 194,917 912,143 206,570 190,254 175,461 161,945 734,230
TOTAL INCOME $493,675 $500,394 $519,901 $559,947 $2,073,916 $549,952 $550,229 $550,693 $551,315 $2,202,189
Expenses
Operating Expenses
Administration, marketing and overhead 148,521 148,521 148,521 148,521 594,083 155,204 155,204 155,204 155,204 620,816
Legal, audit and other professional fees 15,750 15,750 15,750 15,750 63,000 16,538 16,538 16,538 16,538 66,150
Subtotal fund management $164,271 $164,271 $164,271 $164,271 $657,083 $171,742 $171,742 $171,742 $171,742 $686,966
Cost of financing activities
Interest Cost Incurred
Debt Class 1-Short Term Notes 0 0 0 0 0 0 0 0 0 0
Debt Class 2 - Long Term Fixed Rate Notes 0 0 0 0 0 0 0 0 0 0
Gain or Loss on Sale of Notes 0 0 0 0 0 0 0 0 0 0
Provision for Loan Losses 113,695 122,615 138,675 172,577 547,562 135,393 133,355 131,351 129,672 529,771
Subtotal cost of financing activities $113,695 $122,615 $138,675 $172,577 $547,562 $135,393 $133,355 $131,351 $129,672 $529,771
TOTAL EXPENSES $277,966 $286,886 $302,945 $336,848 $1,204,645 $307,135 $305,096 $303,092 $301,413 $1,216,737
PRE-TAX OPERATING PROFIT (LOSS) $215,709 $213,508 $216,955 $223,099 $869,271 $242,817 $245,133 $247,601 $249,902 $985,452
Less: Provision for Corp Income Taxes 86,240 85,361 86,739 89,195 347,535 97,078 98,004 98,991 99,911 393,984
NET OPERATING PROFIT (LOSS) $129,468 $128,148 $130,217 $133,904 $521,737 $145,739 $147,129 $148,610 $149,991 $591,468
67
Appendix One, Attachment A – Best Case Financials
Mini Business Plan – New Markets Tax Credit Strategy
CALIFORNIA INTEGRATED WASTE MANAGEMENT BOARD
RMDZ LOAN PROGRAM - NEW MARKETS TAX CREDIT STRATEGY - BEST CASE
Proforma Statement of Operations
Five Years
YEAR FOUR Total YEAR FIVE Total
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr YEAR 4 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr YEAR 5
Investment Income
Loan Loss Reserves $158,400 $158,400 $158,400 $158,400 $633,600 $158,400 $158,400 $158,400 $158,400 $633,600
Interest on loans 245,354 257,965 268,674 277,772 1,049,765 285,976 292,308 296,770 299,600 1,174,654
Interest on Idle Funds 246,696 233,220 221,476 211,185 912,576 201,517 193,545 187,301 182,470 764,833
TOTAL INCOME $650,450 $649,584 $648,551 $647,356 $2,595,941 $645,893 $644,253 $642,471 $640,470 $2,573,087
Expenses
Operating Expenses
Administration, marketing and overhead 162,188 162,188 162,188 162,188 648,753 169,487 169,487 169,487 169,487 677,947
Legal, audit and other professional fees 17,364 17,364 17,364 17,364 69,458 18,233 18,233 18,233 18,233 72,930
Subtotal fund management $179,553 $179,553 $179,553 $179,553 $718,210 $187,719 $187,719 $187,719 $187,719 $750,877
Cost of financing activities
Interest Cost Incurred
Debt Class 1-Short Term Notes 0 0 0 0 0 0 0 0 0 0
Debt Class 2 - Long Term Fixed Rate Notes 168,750 168,750 168,750 168,750 675,000 168,750 168,750 168,750 168,750 675,000
Gain or Loss on Sale of Notes 0 0 0 0 0 0 0 0 0 0
Provision for Loan Losses 137,310 132,511 127,689 123,270 520,781 120,225 115,973 111,329 106,401 453,927
Subtotal cost of financing activities $306,060 $301,261 $296,439 $292,020 $1,195,781 $288,975 $284,723 $280,079 $275,151 $1,128,927
TOTAL EXPENSES $485,613 $480,814 $475,992 $471,573 $1,913,991 $476,694 $472,442 $467,798 $462,870 $1,879,804
PRE-TAX OPERATING PROFIT (LOSS) $164,837 $168,770 $172,559 $175,784 $681,950 $169,199 $171,811 $174,673 $177,600 $693,283
Less: Provision for Corp Income Taxes 65,902 67,474 68,989 70,278 272,643 67,646 68,690 69,834 71,005 277,175
NET OPERATING PROFIT (LOSS) $98,935 $101,296 $103,570 $105,505 $409,306 $101,553 $103,121 $104,839 $106,596 $416,108
68
Appendix One, Attachment B – Base Case Financials
Mini Business Plan – New Markets Tax Credit Strategy
CALIFORNIA INTEGRATED WASTE MANAGEMENT BOARD
RMDZ LOAN PROGRAM - NEW MARKETS TAX CREDIT STRATEGY - BASE CASE
Proforma Statement of Financing and Investment Activities
Five Years
YEAR ONE Total
Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Month 7 Month 8 Month 9 Month 10 Month 11 Month 12 YEAR 1
FINANCING ACTIVITIES
Funds Received From:
Sale of Shares
CIWMB Investment $3,500,000 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $3,500,000
Private (NMTC) Investors 0 30,000,000 0 0 0 0 0 0 0 0 0 0 30,000,000
Total of Funding From Investors $3,500,000 $30,000,000 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $33,500,000
Funding From Issuance of
Debt
Debt Class 1-Short Term 0 0 0 0 0 0 0 0 0 0 0 0 0
Debt Class 2-Long Term Fixed Rate 0 0 0 0 0 0 0 0 0 0 0 0 0
Total Funding From Issuance of
Debt $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Total Funding From Financing Activities $3,500,000 $30,000,000 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $33,500,000
Less Funds Applied To:
Redemption of Shares
CIWMB Investment/Start Up Cost Reimb. 0 335,996 0 0 0 0 0 0 0 0 0 0 335,996
Private (NMTC) Investors 0 0 0 0 0 0 0 0 0 0 0 0 0
Total Shares Redeemed $0 $335,996 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $335,996
Repayment of Corporate Notes
Debt Class 1-Short Term Notes 0 0 0 0 0 0 0 0 0 0 0 0 0
Debt Class 2-Long Term Fixed Rate 0 0 0 0 0 0 0 0 0 0 0 0 0
Total Payments of Corporate Notes $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Total Application of Funds $0 $335,996 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $335,996
FUNDING FROM FINANCING
ACTIVITIES (NET) $3,500,000 $29,664,004 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $33,164,004
INVESTMENT ACTIVITIES
ADD: Funds Received From Sale of Loans:
Sale of Low Cost Loans 0 0 0 0 0 0 0 0 0 0 0 0 0
Sale of Deferred Payment Loans 0 0 0 0 0 0 0 0 0 0 0 0 0
Sale of Subordinate Debt Loans
Total Funds Received From Sale of Loans $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
LESS: Funds Applied to Lending Activities:
Low Cost Loans 0 150,000 450,000 450,000 450,000 450,000 450,000 450,000 450,000 450,000 450,000 450,000 4,650,000
Deferred Payment Loans 0 60,000 180,000 180,000 180,000 180,000 180,000 180,000 180,000 180,000 180,000 180,000 1,860,000
Subordinate Debt 0 90,000 270,000 270,000 270,000 270,000 270,000 270,000 270,000 270,000 270,000 270,000 2,790,000
Total Lending Activities $0 $300,000 $900,000 $900,000 $900,000 $900,000 $900,000 $900,000 $900,000 $900,000 $900,000 $900,000 $9,299,999
ADD: Principal Collections $0 $0 $3,421 $13,700 $24,033 $34,419 $44,859 $55,353 $65,902 $76,505 $87,163 $97,877 $503,232
PROCEEDS FROM INVESTMENT
ACTIVITIES (NET) $0 ($300,000) ($896,579) ($886,300) ($875,967) ($865,581) ($855,141) ($844,647) ($834,098) ($823,495) ($812,837) ($802,123) ($8,796,767)
NET INCREASE (DECREASE) IN FUNDS FROM
FUNDING AND INVESTMENT ACTIVITIES $3,500,000 $29,364,004 ($896,579) ($886,300) ($875,967) ($865,581) ($855,141) ($844,647) ($834,098) ($823,495) ($812,837) ($802,123) $24,367,237
69
Appendix One, Attachment B – Base Case Financials
Mini Business Plan – New Markets Tax Credit Strategy
CALIFORNIA INTEGRATED WASTE MANAGEMENT BOARD
RMDZ LOAN PROGRAM - NEW MARKETS TAX CREDIT STRATEGY - BASE CASE
Proforma Statement of Financing and Investment Activities
Five Years
YEAR TWO Total YEAR THREE Total
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr YEAR 2 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr YEAR 3
FINANCING ACTIVITIES
Funds Received From:
Sale of Shares
CIWMB Investment $3,500,000 $0 $0 $0 $3,500,000 $3,000,000 $0 $0 $0 $3,000,000
Private (NMTC) Investors 0 0 0 0 0 0 0 0 0 0
Total of Funding From Investors $3,500,000 $0 $0 $0 $3,500,000 $3,000,000 $0 $0 $0 $3,000,000
Funding From Issuance of
Debt
Debt Class 1-Short Term 0 0 0 0 0 0 0 0 0 0
Debt Class 2-Long Term Fixed Rate 0 0 0 0 0 0 0 0 0 0
Total Funding From Issuance of
Debt $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Total Funding From Financing Activities $3,500,000 $0 $0 $0 $3,500,000 $3,000,000 $0 $0 $0 $3,000,000
Less Funds Applied To:
Redemption of Shares
CIWMB Investment/Start Up Cost Reimb. 0 0 0 0 0 0 0 0 0 0
Private (NMTC) Investors 0 0 0 0 0 0 0 0 0 0
Total Shares Redeemed $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Repayment of Corporate Notes
Debt Class 1-Short Term Notes 0 0 0 0 0 0 0 0 0 0
Debt Class 2-Long Term Fixed Rate 0 0 0 0 0 0 0 0 0 0
Total Payments of Corporate Notes $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Total Application of Funds $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
FUNDING FROM FINANCING
ACTIVITIES (NET) $3,500,000 $0 $0 $0 $3,500,000 $3,000,000 $0 $0 $0 $3,000,000
INVESTMENT ACTIVITIES
ADD: Funds Received From Sale of Loans:
Sale of Low Cost Loans 0 0 0 0 0 0 0 0 0 0
Sale of Deferred Payment Loans 0 0 0 0 0 0 0 0 0 0
Sale of Subordinate Debt Loans
Total Funds Received From Sale of Loans $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
LESS: Funds Applied to Lending Activities:
Low Cost Loans 750,000 1,050,000 1,200,000 1,500,000 4,500,000 1,200,000 1,200,000 1,200,000 1,200,000 4,800,000
Deferred Payment Loans 480,000 420,000 480,000 600,000 1,980,000 480,000 480,000 480,000 480,000 1,920,000
Subordinate Debt 450,000 630,000 720,000 900,000 2,700,000 720,000 720,000 720,000 720,000 2,880,000
Total Lending Activities $1,680,000 $2,100,000 $2,400,000 $3,000,000 $9,180,000 $2,400,000 $2,400,000 $2,400,000 $2,400,000 $9,600,000
ADD: Principal Collections $220,317 $225,636 $355,028 $494,857 $1,295,838 $573,769 $709,674 $843,273 $955,217 $3,081,933
PROCEEDS FROM INVESTMENT
ACTIVITIES (NET) ($1,459,683) ($1,874,364) ($2,044,972) ($2,505,143) ($7,884,162) ($1,826,231) ($1,690,326) ($1,556,727) ($1,444,783) ($6,518,067)
NET INCREASE (DECREASE) IN FUNDS FROM
FUNDING AND INVESTMENT ACTIVITIES $2,040,317 ($1,874,364) ($2,044,972) ($2,505,143) ($4,384,162) $1,173,769 ($1,690,326) ($1,556,727) ($1,444,783) ($3,518,067)
70
Appendix One, Attachment B – Base Case Financials
Mini Business Plan – New Markets Tax Credit Strategy
CALIFORNIA INTEGRATED WASTE MANAGEMENT BOARD
RMDZ LOAN PROGRAM - NEW MARKETS TAX CREDIT STRATEGY - BASE CASE
Proforma Statement of Financing and Investment Activities
Five Years
YEAR FOUR Total YEAR FIVE Total
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr YEAR 4 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr YEAR 5
FINANCING ACTIVITIES
Funds Received From:
Sale of Shares
CIWMB Investment $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Private (NMTC) Investors 0 0 0 0 0 0 0 0 0 0
Total of Funding From Investors $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Funding From Issuance of
Debt
Debt Class 1-Short Term 0 0 0 0 0 0 0 0 0 0
Debt Class 2-Long Term Fixed Rate 10,000,000 0 0 0 10,000,000 0 0 0 0 0
Total Funding From Issuance of
Debt $10,000,000 $0 $0 $0 $10,000,000 $0 $0 $0 $0 $0
Total Funding From Financing Activities $10,000,000 $0 $0 $0 $10,000,000 $0 $0 $0 $0 $0
Less Funds Applied To:
Redemption of Shares
CIWMB Investment/Start Up Cost Reimb. 0 0 0 0 0 0 0 0 0 0
Private (NMTC) Investors 0 0 0 0 0 0 0 0 0 0
Total Shares Redeemed $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Repayment of Corporate Notes
Debt Class 1-Short Term Notes 0 0 0 0 0 0 0 0 0 0
Debt Class 2-Long Term Fixed Rate 0 0 0 0 0 0 0 0 0 0
Total Payments of Corporate Notes $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Total Application of Funds $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
FUNDING FROM FINANCING
ACTIVITIES (NET) $10,000,000 $0 $0 $0 $10,000,000 $0 $0 $0 $0 $0
INVESTMENT ACTIVITIES
ADD: Funds Received From Sale of Loans:
Sale of Low Cost Loans 0 0 0 0 0 0 0 0 0 0
Sale of Deferred Payment Loans 0 0 0 0 0 0 0 0 0 0
Sale of Subordinate Debt Loans
Total Funds Received From Sale of Loans $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
LESS: Funds Applied to Lending Activities:
Low Cost Loans 1,200,000 1,200,000 1,200,000 1,200,000 4,800,000 1,200,000 1,200,000 1,200,000 1,200,000 4,800,000
Deferred Payment Loans 480,000 480,000 480,000 480,000 1,920,000 480,000 480,000 480,000 480,000 1,920,000
Subordinate Debt 720,000 720,000 720,000 720,000 2,880,000 720,000 720,000 720,000 720,000 2,880,000
Total Lending Activities $2,400,000 $2,400,000 $2,400,000 $2,400,000 $9,600,000 $2,400,000 $2,400,000 $2,400,000 $2,400,000 $9,600,000
ADD: Principal Collections $951,570 $1,111,448 $1,270,681 $1,400,893 $4,734,593 $1,460,095 $1,620,576 $1,782,750 $1,916,353 $6,779,774
PROCEEDS FROM INVESTMENT
ACTIVITIES (NET) ($1,448,430) ($1,288,552) ($1,129,319) ($999,107) ($4,865,407) ($939,905) ($779,424) ($617,250) ($483,647) ($2,820,226)
NET INCREASE (DECREASE) IN FUNDS FROM
FUNDING AND INVESTMENT ACTIVITIES $8,551,570 ($1,288,552) ($1,129,319) ($999,107) $5,134,593 ($939,905) ($779,424) ($617,250) ($483,647) ($2,820,226)
71
Appendix One, Attachment B – Base Case Financials
Mini Business Plan – New Markets Tax Credit Strategy
CALIFORNIA INTEGRATED WASTE MANAGEMENT BOARD
RMDZ LOAN PROGRAM
RMDZ LOAN PROGRAM - NEW MARKETS TAX CREDIT STRATEGY - BASE CASE
Proforma Statement of Financial Condition
At December 31
ASSETS December 31 December 31 December 31 December 31 December 31
Current Assets FY Year 1 FY Year 2 FY Year 3 FY Year 4 FY Year 5
Cash, Short Term Investments and Reserves
Notes Receivable $ 24,666,582 $ 20,582,111 $ 17,356,593 $ 22,687,104 $ 19,871,428
Interest Receivable-Deferred Interest Notes 8,796,767 16,680,931 23,198,997 28,064,404 30,884,630
Total Current Assets 30,813 160,225 374,425 637,799 871,186
33,494,162 37,423,266 40,930,015 51,389,307 51,627,244
Fixed Assets and Other
Furniture & Equipment
Less Accumulated Depreciation $ 90,000 $ 91,350 $ 92,761 $ 94,235 $ 95,776
Total Fixed Assets (18,000) (36,270) (54,822) (73,669) (92,824)
72,000 55,080 37,939 20,566 2,951
Other Assets
25,000 25,000 25,000 25,000 25,000
Total Assets
$ 33,591,162 $ 37,503,346 $ 40,992,954 $ 51,434,873 $ 51,655,195
LIABILITIES & SHAREHOLDERS' EQUITY
Current Liabilities
Accounts Payable & Accrued Expenses
Current Portion of Long Term Debt $ 52,375 $ 54,757 $ 57,247 $ 59,851 $ 62,573
Total Current Liabilities 0 0 0 0 0
$52,375 $54,757 $57,247 $59,851 $62,573
Long Term Debt
Corporate Notes Payable
Total Long Term Debt $0 $0 $0 $10,000,000 $10,000,000
$0 $0 $0 $10,000,000 $10,000,000
Total Liabilities
$52,375 $54,757 $57,247 $10,059,851 $10,062,573
Shareholders' Equity
CIWMB Equity-Like Investment
NMTC Investment-Common Stock $ 3,500,000 $ 7,000,000 $ 10,000,000 $ 10,000,000 $ 10,000,000
Retained Earnings 29,664,000 29,664,000 29,664,000 29,664,000 29,664,000
Total Shareholders' Equity 374,783 784,585 1,271,703 1,582,003 1,928,618
$33,538,787 $37,448,589 $40,935,707 $41,246,007 $41,592,622
Total Liabilities and Shareholders' Equity
$ 33,591,162 $ 37,503,346 $ 40,992,954 $ 51,305,857 $ 51,655,195
72
Appendix One, Attachment B – Base Case Financials
Mini Business Plan – New Markets Tax Credit Strategy
CALIFORNIA INTEGRATED WASTE MANAGEMENT BOARD
RMDZ LOAN PROGRAM - NEW MARKETS TAX CREDIT STRATEGY - BASE CASE
Proforma Statement of Operations
Five Years
YEAR ONE Total
Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Month 7 Month 8 Month 9 Month 10 Month 11 Month 12 YEAR 1
Program Income
Loan Loss Reserves $0 $28,500 $85,500 $85,500 $85,500 $85,500 $85,500 $85,500 $85,500 $85,500 $85,500 $85,500 $883,500
Interest on loans 0 1,324 5,496 10,059 14,588 19,082 23,541 27,965 32,354 36,708 41,026 45,309 257,453
Interest on Idle Funds 10,473 108,218 105,079 101,916 98,867 95,863 92,916 90,020 87,160 84,351 81,592 78,872 1,035,327
TOTAL INCOME $10,473 $138,042 $196,075 $197,475 $198,955 $200,445 $201,957 $203,485 $205,014 $206,559 $208,119 $209,681 $2,176,280
Expenses
Operating Expenses
Administration, marketing and overhead 36,872 36,872 36,872 36,872 39,905 39,905 39,905 39,905 44,405 44,405 44,405 47,375 487,698
Legal, audit and other professional fees 7,500 4,167 4,167 4,167 4,167 6,250 4,167 4,167 4,167 4,167 4,167 5,000 56,250
Subtotal fund management $44,372 $41,039 $41,039 $41,039 $44,072 $46,155 $44,072 $44,072 $48,572 $48,572 $48,572 $52,375 $543,948
Cost of financing activities
Interest Cost Incurred
Debt Class 1-Short Term Notes 0 0 0 0 0 0 0 0 0 0 0 0 0
Debt Class 2 - Long Term Fixed Rate Notes 0 0 0 0 0 0 0 0 0 0 0 0 0
Gain or Loss on Sale of Notes 0 0 0 0 0 0 0 0 0 0 0 0 0
Provision for Loan Losses 0 33,000 98,897 98,589 98,279 97,967 97,654 97,339 97,023 96,705 96,385 96,064 1,007,903
Subtotal cost of financing activities $0 $33,000 $98,897 $98,589 $98,279 $97,967 $97,654 $97,339 $97,023 $96,705 $96,385 $96,064 $1,007,903
TOTAL EXPENSES $44,372 $74,039 $139,936 $139,628 $142,351 $144,122 $141,726 $141,411 $145,595 $145,277 $144,957 $148,439 $1,551,851
PRE-TAX OPERATING PROFIT (LOSS) ($33,899) $64,003 $56,139 $57,847 $56,604 $56,322 $60,231 $62,074 $59,420 $61,282 $63,162 $61,242 $624,429
Less: Provision for Corp Income Taxes (13,553) 25,588 22,444 23,127 22,630 22,518 24,080 24,817 23,756 24,501 25,252 24,485 249,646
NET OPERATING PROFIT (LOSS) ($20,346) $38,415 $33,695 $34,720 $33,974 $33,805 $36,151 $37,257 $35,664 $36,782 $37,910 $36,758 $374,783
73
Appendix One, Attachment B – Base Case Financials
Mini Business Plan – New Markets Tax Credit Strategy
CALIFORNIA INTEGRATED WASTE MANAGEMENT BOARD
RMDZ LOAN PROGRAM - NEW MARKETS TAX CREDIT STRATEGY - BASE CASE
Proforma Statement of Operations
Five Years
YEAR TWO Total YEAR THREE Total
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr YEAR 2 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr YEAR 3
Program Income
Loan Loss Reserves $187,500 $199,500 $228,000 $285,000 $900,000 $228,000 $228,000 $228,000 $228,000 $912,000
Interest on loans 103,753 122,226 142,365 167,029 535,374 184,982 201,575 216,832 230,970 834,359
Interest on Idle Funds 256,308 236,948 216,064 191,290 900,610 202,525 185,811 170,641 156,764 715,742
TOTAL INCOME $547,561 $558,674 $586,429 $643,319 $2,335,984 $615,507 $615,386 $615,473 $615,734 $2,462,100
Expenses
Operating Expenses
Administration, marketing and overhead 148,521 148,521 148,521 148,521 594,083 155,204 155,204 155,204 155,204 620,816
Legal, audit and other professional fees 15,750 15,750 15,750 15,750 63,000 16,538 16,538 16,538 16,538 66,150
Subtotal fund management $164,271 $164,271 $164,271 $164,271 $657,083 $171,742 $171,742 $171,742 $171,742 $686,966
Cost of financing activities
Interest Cost Incurred
Debt Class 1-Short Term Notes 0 0 0 0 0 0 0 0 0 0
Debt Class 2 - Long Term Fixed Rate Notes 0 0 0 0 0 0 0 0 0 0
Gain or Loss on Sale of Notes 0 0 0 0 0 0 0 0 0 0
Provision for Loan Losses 203,390 224,231 253,349 315,154 996,125 246,787 242,710 238,702 235,343 963,542
Subtotal cost of financing activities $203,390 $224,231 $253,349 $315,154 $996,125 $246,787 $242,710 $238,702 $235,343 $963,542
TOTAL EXPENSES $367,661 $388,502 $417,620 $479,425 $1,653,207 $418,528 $414,451 $410,443 $407,085 $1,650,508
PRE-TAX OPERATING PROFIT (LOSS) $179,900 $170,172 $168,810 $163,895 $682,776 $196,978 $200,935 $205,030 $208,649 $811,592
Less: Provision for Corp Income Taxes 71,924 68,035 67,490 65,525 272,974 78,752 80,334 81,971 83,418 324,474
NET OPERATING PROFIT (LOSS) $107,976 $102,137 $101,319 $98,370 $409,802 $118,226 $120,601 $123,059 $125,231 $487,117
74
Appendix One, Attachment B – Base Case Financials
Mini Business Plan – New Markets Tax Credit Strategy
CALIFORNIA INTEGRATED WASTE MANAGEMENT BOARD
RMDZ LOAN PROGRAM - NEW MARKETS TAX CREDIT STRATEGY - BASE CASE
Proforma Statement of Operations
Five Years
YEAR FOUR Total YEAR FIVE Total
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr YEAR 4 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr YEAR 5
Program Income
Loan Loss Reserves $228,000 $228,000 $228,000 $228,000 $912,000 $228,000 $228,000 $228,000 $228,000 $912,000
Interest on loans 245,354 257,965 268,674 277,772 1,049,765 285,976 292,308 296,770 299,600 1,174,654
Interest on Idle Funds 241,106 227,260 215,186 204,598 888,150 194,658 186,448 180,005 175,013 736,124
TOTAL INCOME $714,460 $713,225 $711,860 $710,370 $2,849,915 $708,633 $706,756 $704,775 $702,613 $2,822,778
Expenses
Operating Expenses
Administration, marketing and overhead 162,188 162,188 162,188 162,188 648,753 169,487 169,487 169,487 169,487 677,947
Legal, audit and other professional fees 17,364 17,364 17,364 17,364 69,458 18,233 18,233 18,233 18,233 72,930
Subtotal fund management $179,553 $179,553 $179,553 $179,553 $718,210 $187,719 $187,719 $187,719 $187,719 $750,877
Cost of financing activities
Interest Cost Incurred
Debt Class 1-Short Term Notes 0 0 0 0 0 0 0 0 0 0
Debt Class 2 - Long Term Fixed Rate Notes 168,750 168,750 168,750 168,750 675,000 168,750 168,750 168,750 168,750 675,000
Gain or Loss on Sale of Notes 0 0 0 0 0 0 0 0 0 0
Provision for Loan Losses 247,812 239,103 230,360 222,435 939,710 217,143 209,323 200,854 192,081 819,401
Subtotal cost of financing activities $416,562 $407,853 $399,110 $391,185 $1,614,710 $385,893 $378,073 $369,604 $360,831 $1,494,401
TOTAL EXPENSES $596,114 $587,406 $578,663 $570,738 $2,332,921 $573,613 $565,792 $557,323 $548,550 $2,245,278
PRE-TAX OPERATING PROFIT (LOSS) $118,345 $125,819 $133,197 $139,633 $516,994 $135,021 $140,964 $147,452 $154,064 $577,500
Less: Provision for Corp Income Taxes 47,314 50,302 53,252 55,825 206,694 53,981 56,357 58,951 61,595 230,884
NET OPERATING PROFIT (LOSS) $71,031 $75,517 $79,945 $83,808 $310,300 $81,039 $84,607 $88,501 $92,469 $346,615
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Mini Business Plan – Loan Guaranty Strategy
LOAN GUARANTY STRATEGY
Introduction
The following mini-business plan describes a strategy for a Co-Guaranty Program (COP) that
would produce at least $10 million annually in private financing for small recycling companies
that have difficulty securing affordable financing from banks and venture firms. Under the COP,
the Board’s appropriated funds would be used for two purposes:
To back loan guaranties on both market and below-market rate loans.
To pay subsidies on below-market loans made by guaranteed lenders.
To implement this loan guarantee strategy, Board staff would meet with the Ca. Technology,
Trade and Commerce Agency that has state oversight for the program and meet with the The
Association of Regional Corporations (TARC) that represents the 11 Financial Development
Corporations that issue the state loan guarantee’s. Some of these FDC;’s have CDFI and/or CDE
certification and plan on utilizing the NMTC program.
Success of COP would depend on
The performance of guaranteed loans. (The historic 5-year FDC loss rate is only 1.55%)
Prudent underwriting developed by each of the FDC’s have proved successful in issuing loan
guarantees to banks for small business subordinate and deferred-payment loans.
Amount of exposure. Although the maximum guaranty authorized under the COP would be
90 percent of the loan amount, the average guaranty percentage could conceivably be lower.
Lower loss exposure levels would allow the Board to achieve greater leverage.
Revenues generated by reserve funds and guarantee premiums. To the extent that guaranty
premiums (paid by borrowers) and interest earned from the invested reserves are able to
finance guaranty payments on defaulted loans, CIWMB would be able to reduce the level of
reserves need to (a) to back reserves and pay losses and (b) finance subsidy payments in
connection with below-market loans.
Under the other three leveraging alternatives to be presented, the Board or an affiliated
organization would use borrowed and invested capital to finance loans to recycling companies.
However, under the COP, the Board would use its funds to provide “credit support” for recycling
loans made by commercial lenders. Nevertheless, the guaranty program’s capacity to generate
recycling loans – as well as its financial viability-- would depend on two of the factors that
govern the success of direct lending programs
The performance of loan assets. Loans made under the program should provide different
types of funding for recycling companies at different stages of maturity. At the same time
losses must be limited to levels that would not exhaust COP’s guaranty reserves.
The right level of operating expenses. The expenses associated with underwriting loan
guaranties should not exceed what the Board can earn from investing the reserves held
against its guaranties. Under an existing arrangement with an outside investor in the state
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loan guarantee program, the FDC’s can use that investors funds to collect a $3,500 fee per
loan and the FDC’s can use all the interest earnings to cover part of their operating costs.
The mini business plan is organized into seven brief sections.
Section 1 – Borrowers
Describes the companies whose financing needs the program is designed to meet.
Section 2 – Products
Describes the types of loans the program issues.
Section 3 – Capital Structure & Sources
Describes how the Co-Guaranty Program would be financed.
Section 4 – Operations
Describes how the Co-Guaranty Program would be managed.
Section 5 – Implementation
Sets forth the tasks and costs required to secure commitments for the program
Section 6 – Analysis
Describes the extent to which the leveraging strategy meets the five criteria discussed as
important in a successful CIWMB loan leveraging program – simplicity, practicality,
sustainability, affordability, implementability.
Section 7 – Financial Analysis
Lays out pro forma five-year financials for the program, including a projected rate of return on
investment.
Section 1 – Borrowers
The COP would be designed to meet the financing needs of three types of recycling companies
that make up the RMDZ market.
Established recycling firms. Approximately 50 percent of its borrowers would be companies
that have sufficient operating and earnings history to secure credit from conventional sources.
These low-risk companies would be more concerned with the cost of capital than with access
to capital.
Expansion-stage companies. Approximately 30 percent of borrowers would be companies
that have survived their formative years and are now seeking to grow. However, these
companies lack the earnings history, capital or collateral needed to support the full amount of
funding needed to finance expansion.
Early-stage companies. The remaining 20 percent of COP borrowers would be companies
that are essentially start-up businesses. Because they are not yet producing positive cash
flows, these high-risk companies require some form of “equity” financing to fund continued
growth.
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Section 2 – Loans
Following are the types of loans that would be guaranteed under COP. Each is designed to meet
the peculiar needs of a particular borrower segment:
Below-market loans. Established recycling companies seeking expansion financing would be
eligible for medium and long-term fixed-asset loans priced, on average, 200 basis points
below the market rate for such financing. Underwriting standards for these loans including
loan-to-value and debt service coverage ratios would be only slightly more liberal than those
employed by commercial lenders.
Sunset Manufacturing is a 20-year old company that uses waste materials to produce a
range of furniture products. Its sales are about $1.5 million annually. In order to expand,
it requires $500,000 to upgrade its production facility. At 2.75 percent over prime or 7.5
percent, a 15-year, market-rate loan would cost the firm $56,000 annually in debt
service. However, at 2 percent below prime, a below-market loan would only require
$41,000 in debt service, a savings of $15,000 annually. A bank agrees to make the loan
at 2.75 percent in exchange for an 80 percent guaranty and the payment of sufficient
points, by COP, to bring its yield on the loan to prime, 4.75 percent.
Subordinate, companion loans. Expansion-stage companies that lack the collateral to secure
senior financing needed for fixed assets or working capital would be candidates for
subordinate debt. These loans would typically be structured as 25 to 40 percent junior
participations in senior, secured loans extended by banks or other commercial lenders.
Because of the risk associated with junior-lien lending, the junior interest in each transaction
would be priced at 300 to 500 basis points above prime. In addition, as part of each
transaction, a loan loss reserve contribution, equaling four to eight percent of the total
financing, would be funded from loan proceeds and retained in a dedicated insurance fund.
MicroCast, a $2.5 million company purchases, repairs and resells consumer electronics.
The company has grown rapidly but its weak balance sheet makes it impossible to secure
$250,000 in equipment financing that it needs to expand. A local bank agrees to make
the equipment loan under a two-part structure. It makes a $187,500 loan backed by a 75
percent SBA guarantee and a 7-year, $80,000 subordinate loan backed by an COP
guarantee. The subordinate loan includes a $12,500 insurance payment to the COP
program. The loan structure provides the bank with earning assets of $267,500 but with
total exposure of only $72,250 and allows MicroCast to grow.
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Gives $250,000 note and $12,500 reserve
RFP Makes $250,000 loan MicroCast
Sells $187,500 senior interest
Lender
Deferred payment loans. Early-stage companies, including start-up firms, that possess neither
the cash flow (or collateral) to qualify for debt financing nor the “upside” potential to qualify
for venture or angel financing would be candidates for deferred payment loans. The deferred
payment loan would be modeled on the structure employed by SBA for investments in New
Markets Venture Capital Companies. That is, each loan would involve a “discount period”—
2 to 3 years during which no principal or interest payments would be required --followed by
an amortization period. Upon closing, the borrower would receive the full amount of the loan
less the present value of interest for the discount period. At the end of the discount period, the
borrower would repay the loan in regular installments of principal and interest over a period
of up to seven years. The COP program would assume part of the risk that borrowers would
be unable to repay loans during the amortization period by providing up to an 80 percent
guarantee. As with subordinate loans, a cash reserve account would be funded as part of each
transaction
TireWare is an early stage company that has developed a more efficient way of
retreading tires. Although it needs $200,000 to fund its operations, neither venture
capital companies nor angel investors are willing to invest. Using the deferred payment
note structure, a bank makes a $287,000 loan to the borrower. Of this amount
approximately $67,000, the present value of three years of interest and $20,000 in loan-
loss reserve contributions are retained by the bank. At the end of three years TireWare
begins making payments of $5,000 per month to repay the $287,000 balance over seven
years. In order to protect the bank from default risk during the amortization period, COP
provides an 80 percent guaranty. The guaranteed deferred payment note structure gives
TireWare has full use of $200,000 for three years—essentially equity without the need to
relinquish shares. At the same time, it provides the bank protection against loan default
during both the discount period and the amortization period.
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Borrower
Gives $287,000 note with
3-year discount period and
Advances $200,000 7-year amortization
Lender
Section 3 – Program Structure
Guaranties
In order to maximize leverage while minimizing program administration costs, the COP would be
undertaken as a partnership between the Board and an existing small business loan guarantor,
preferably one or more of California’s Regional Financial Development Corporations (FDCs).
FDC’s are non-profit companies that employ a dedicated reserve fund of the California
Technology, Trade and Commerce Agency to provide guaranties of up to 90 percent on small
business loans made by commercial banks. Preliminary conversations with at least both Nor-Cal
FDC and California Southern FDC indicate significant interest in a program designed to finance
recycling companies. As we envisage the partnership:
CIWMB would enter into a master contract with the CTTCA to issue loan guarantee to
recycling companies.
Under the agreement, CIWMB would pay 50 percent of the FDC’s guaranty expenses on
loans of up to, say, $1 million. Because FDC’s are limited to guaranties on loans of no
greater than $350,000, COP may have to be structured so that the FDC’s pay losses incurred
on the first $350,000 of each guaranteed loan with CIWMB paying losses on amounts over
$350,000. The following table compares how much CIWMB and the FDC would pay for
losses incurred on three different loan guaranty agreements, each involving an 80 percent
guaranty.
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Mini Business Plan – Loan Guaranty Strategy
Loan Amount $350,000 $700,000 $1,000,000
Total guaranty (80%) $280,000 $560,000 $ 800,000
FDC share $280,000 $280,000) $ 280,000
CIWMB share -0- $280,000 $ 520,000
Total exposure $280,000 $560,000) $ 800,000
The proposed co-guaranty program structure enables both CIWMB and the FDC to achieve
greater leverage with their limited guaranty reserve funds without increasing the guaranteed
lender’s exposure to loss.
Because CIWMB’s would share the risk on loans with FDCs, it would be able to achieve
higher leverage than would be the case were it responsible for paying 100 percent of loan
losses. For example, assuming that CIWMB were to set aside 25 percent of its exposure for
each loan guaranty (the amount that FDC’s are required to hold in reserve), and that the
average guaranty contract covers 80 percent of the loan balance, each $1 in reserves could
achieve leverage ranging from about 8:1 to 40:1 (or more) depending on the average size of
loans guaranteed.
Average loan size $400,000 $1,000,000
Guaranty exposure $320,000 $ 800,000
FDC exposure $280,000 $ 280,000
CIWMB exposure $ 40,000 $ 520,000
CIWMB reserves (25%) $ 10,000 $ 130,000
Leverage 40:1 7.69:1
By sharing guaranty risk on recycling loans with CIWMB, FDC’s would also achieve higher
leverage and provide banks higher guaranty levels (at least on recycling loans) without
increasing their risk.
Subsidies
We expect that approximately half of the recycling loans made under the guaranty program would
be below-market loans to established companies. Because lenders would be reluctant to
subsidize borrowers, CIWMB would need to create a subsidy fund to pay lenders an amount that
would produce market-rate yields on guaranteed loans. Assuming that that would be on average
a 300 basis point difference between the CIWMB’s “below-market” rate and a lender’s market
rate, CIWMB would need to make an up-front payment to the lender of between 8 to 18 percent
of the loan, depending on the contractual life of the loan. Given an average payment at the
midpoint between the two amounts, annual contributions to the subsidy of fund of approximately
$650,000 (13 percent of $5 million) should be sufficient to provide lenders the yields they
require.
Financial Requirements
Assuming an average guaranteed loan size of $700,000, CIWMB would need to contribute
approximately $8.2 million to guaranty reserves and subsidy funds over a five-year period in
order to support $50 million in lending over a five-year period.
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Year 1 Year 2 Year 3 Year 4 Year 5 Total
Guaranty $1.000 $1.000 $1.000 $1.000 $1.000 $5.000
reserves
Subsidy .650 .650 .650 .650 .6 50 3.250
fund
Total $1.650 $1.650 $1.650 $1.650 $1.650 $8.250
Financing Sources
Following is a list of three FDC’s that are possible candidates for the proposed co-guaranty
program. Under the current state-sponsored small business loan guaranty program, FDCs
provide risk protection for bank loans to companies that do not meet normal standards of
creditworthiness. The maximum guaranty is 80 percent on loans of up to $350,000. The typical
FDC has guaranty authority of about $15-$20 million backed by approximately $4 million in
reserves.
Nor-Cal Financial Development Corporation, Pleasanton, CA
Pacific Coast Regional Financial Development Corporation, Los Angeles, CA,
California Southern Financial Development Corporation, San Diego, CA
Section 4 – Operations
In order to minimize the CIWMB’s staffing requirements and operating costs, the principal
functions associated with managing the guaranty program would be assumed by banks and
cooperating FDCs.
Loan origination. FDCs, banks and Recycling Market Development the Board would be
responsible for identifying borrowers and packaging their loan applications.
Guaranty underwriting. In cooperation with its FDC partners, CIWMB would develop a set
of underwriting standards and policies for each type of guaranteed loan. The FDC would use
these standards in approving loan guaranties.
Processing and documentation. Guaranties would be processed and documented by the FDC.
In all likelihood, procedures and documents now employed by the FDC could be used for the
COP.
Loan servicing. Loan servicing would be carried out by the lender under an agreement with
the FDC.
Section 5 – Implementation
Organizing the COP would involve the following tasks
Organizing finance team. (The finance team will most likely be composed of Board staff. The
included budgets are merely an estimate of the associated costs). The task of developing a
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co-guaranty agreement with one or more FDCs would require a “finance team” comprising
mainly in-house CIWMB staff. At a minimum, CIWMB’s chief credit officer and in-house
attorney should be members of the team. The services of outside counsel and of a financial
advisory firm may also be needed. This team’s responsibility would be to establish the
parameters for the guaranty program, to identify co-guaranty partners and to negotiate co-
guaranty agreements with these partners.
Defining initial financing goals. Based on past lending experience, discussions with Zone
Administrators and interviews with commercial lenders, the finance team should make a
preliminary estimate of the timing, percentage and average size of loan guaranties needed to
meet recycling company loan demand. Based on this estimate, a forecast can be made of
reserve and subsidy funds that the program would require.
Identify co-guaranty partners. Armed with the loan guaranty forecast, the team should
identify, and begin discussions with, organizations that are likely partners for the co-guaranty
program. The principal candidates as co-guarantors are, once again, California’s regional
small business financial development corporations.
Develop co-guaranty and subsidy agreement. Discussions with co-guaranty partners should
result in detailed risk sharing agreements including underwriting standards for various types
of loan products, required reserve and subsidy levels for each type of loan or guaranty and
procedures for establishing and maintaining reserve and subsidy funds.
Review and refine agreement. A draft of the co-guaranty agreement should be presented to,
and discussed with, CIWMB senior management and Board, selected and lenders. Their
comments, suggestions and criticisms should be employed to prepare a revised version of the
agreement.
Cost Budget
The following budget is based upon the following assumptions regarding hourly billing rates for
CIWMB staff and advisors:
CIWMB staff $150
Outside legal counsel $250
Accounting $175
Financial advisory $300
Financial Total
CIWMB Legal Accounting Advisory Hours Cost
Task
1. Organize financing team 30 0 0 0 30 4,500
2. Define financing goals 24 0 0 16 40 8,400
3. Recruit partners 80 24 24 40 168 34,000
4. Develop agreement 40 120 16 24 200 46,000
5. Refine agreement. 40 60 8 16 124 27,200
Total 214 204 48 96 562 120,100
Attachments C and D set forth a schedule for the completion of these tasks.
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Section 6 – Analysis
As a source of financing for the RFP, COP has both advantages and disadvantages. The analysis
bellows considers the proposed leveraging strategy in light of five criteria.
Simplicity. Because the co-guaranty plan requires CIWMB to raise no outside capital, it
would be relatively simple to implement. The fact that the co-guaranty partner, RMDZ
administrators and commercial banks would carry out loan origination, underwriting and loan
servicing functions would further reduce the plan’s complexity.
Practicality. The CEOs of two regional corporations have expressed great interest in serving
as partners in the co-guaranty program attesting to the practicality of the plan. Furthermore,
the $8.2 million in financing required by the plan is well within CIWMB’s three-year $10.5
million budget. However, because credit decisions would be reserved for commercial banks
and other participating lenders, the extent to which the guaranty program would produce
increased lending to recycling loans is uncertain.
Sustainability. For five years, program reserves would be adequate to sustain cumulative
losses exceeding 16 percent on $50 million in loans. This loss rate is almost three times the
loss rate for SBA and CalCAP loans. In addition, reserve “insurance” or loan-loss
contributions made in connection with each loan and approximately $2.3 million in additional
CIWMB reserves --the difference between its available 3-year budget of $10.5 million and
the $8.2 called for in the mini-business plan—should make the program viable beyond the
five-year horizon.
Affordability. Annual subsidy contributions would ensure the affordability of below-market
loans to established borrowers. Deferred payment and subordinate loan borrowers would
generally be rate-insensitive firms and would generally consider the financing affordable as
long as debt payments can be serviced with relative ease from available cash flows.
Implementability. The existence of willing co-guaranty partners (the regional FDCs) to share
risks and manage the COP programs should make COP relatively simple to institute and
operate. However, two possible problems could create implementation difficulties. First,
recruiting banks to make loans that employ relatively novel structures could prove more time-
consuming than expected. Second, if regulatory approval is required for FDCs to participate
in guaranties above $350,000, the completion of risk-sharing agreements could prove a
relatively protracted process.
Section 7 – Financial Analysis
The following Statements of Sources, Uses and Portfolio Activity are “best-case” and “base-case”
financial forecasts for the COP which illustrate the economic condition and activities of the COP
Program for a five-year period. Under both scenarios, COP’s guaranty commitments are
supported by reserves funds coming from the following sources:
CIWMB contributions.
Transaction proceeds.
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Interest on idle funds
The forecasts are based on the following the assumptions
CIWMB contributes $2.5 million in reserves annually for three years
Total reserves as a percentage of guaranty exposure are maintained at ratio of 1:4
Losses occur for each cohort of loans starting in the third year.
Following is a summary of the five-year performance of COP under both scenarios.
Origination Guaranty Reserves Loan Remaining
Exposure Losses/Subsidy Reserves
Payments
Best Case 47,280 17,924 4,481 2,531 8,767
Base Case 47,280 17,924 4,481 3,952 7,291
Operating Expenses
The following functions are assumed to be borne by the fund:
Chief Credit Officer @ $120,000
Chief Financial/Operations Officer @ $85,000
Two loan officers @ $80,000 total
One support person @ $25,000
Fringe benefits estimated at 35 percent of salaries.
Administration, Marketing and Overhead -- Modest levels are included as managing entity is
envisioned to assume operational responsibility and provide infrastructure.
85
Appendix Two, Attachment C – Best Case Financials
Mini Business Plan – Loan Guaranty Strategy
CALIFORNIA INTEGRATED WASTE MANAGEMENT BOARD
RMDZ LOAN PROGRAM-COP BEST CASE
Statement of Sources, Uses and Porfolio Activity
Five Years
YEAR ONE Total
Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Month 7 Month 8 Month 9 Month 10 Month 11 Month 12 FY 01
LOAN PORTFOLIO ACTIVITY
Loan Originations
Below Market Loans 0 1,050,000 0 900,000 0 900,000 0 900,000 0 900,000 4,650,000
Subordinate Loans 0 0 630,000 0 0 600,000 0 750,000 0 0 810,000 0 2,790,000
Deferred Payment Loans 0 60,000 180,000 180,000 180,000 180,000 180,000 180,000 180,000 180,000 180,000 180,000 1,860,000
Total Loan Origination 0 1,110,000 810,000 180,000 180,000 1,680,000 180,000 1,830,000 180,000 1,080,000 990,000 1,080,000 9,300,000
Defaults Losses
Below Market Loans
Subordinate Loans
Deferred Payment Loans
Total Losses
Principal Curtailments
Below Market Loans 0 8,569 8,569 8,569 8,569 15,914 15,914 23,259 23,259 30,604 30,604 37,949 211,780
Subordinate Loans 0 752 3,008 5,264 7,520 9,775 12,031 14,287 16,543 18,799 21,055 23,311 132,345
Deferred Payment Loans 0 0 0 0 0 0 0 0 0 0 0 0 0
Total Principal Curtailments 0 9,321 11,577 13,833 16,089 25,690 27,945 37,546 39,802 49,403 51,659 61,260 344,125
Loan Guaranty Commitments
Below Market Loans 0 560,000 0 0 0 440,000 0 440,000 0 440,000 0 440,000 2,320,000
Subordinate Loans 0 0 224,000 0 0 200,000 0 320,000 0 0 368,000 0 1,112,000
Deferred Payment Loans 0 0 0 0 0 0 0 0 0 0 0 0 0
Total Guarantees Issued 0 560,000 224,000 0 0 640,000 0 760,000 0 440,000 368,000 440,000 3,432,000
Beginning Balance of Guarantees Issued 0 0 560,000 784,000 784,000 784,000 1,424,000 1,424,000 2,184,000 2,184,000 2,624,000 2,992,000 0
Cumulative Guarantee Commitments 0 560,000 784,000 784,000 784,000 1,424,000 1,424,000 2,184,000 2,184,000 2,624,000 2,992,000 3,432,000 3,432,000
LOAN LOSS RESERVES (@25%) 0 140,000 196,000 196,000 196,000 356,000 356,000 546,000 546,000 656,000 748,000 858,000 858,000
LEVERAGE 0 7.93 9.80 10.71 11.63 11.12 11.63 10.93 11.26 11.02 10.99 10.84
SOURCES AND USES OF FUNDS
Sources of Funds:
CIWMB Investment 2,500,000 2,500,000
Loan Reserves 0 72,617 52,991 11,776 11,776 109,907 11,776 119,720 11,776 70,654 64,766 70,654 608,411
Interest On Idle Funds 5,156 5,156 5,156 5,156 5,156 5,156 5,156 5,156 5,156 5,156 5,156 5,156 61,875
Total Source of Funds 2,505,156 77,773 58,147 16,932 16,932 115,063 16,932 124,876 16,932 75,810 69,923 75,810 3,170,286
Uses of Funds:
Interest Subsidies 0 1,750 1,729 1,735 1,728 3,220 3,206 4,692 4,672 6,152 6,125 7,598 42,607
Loan Guarantee Loss Payments 0 0 0 0 0 0 0 0 0 0 0 0 0
COP Operating Expenses 17,892 16,401 14,910 13,419 11,928 10,437 8,946 7,455 5,964 4,473 2,982 1,491 116,300
Total Use of Funds 17,892 18,151 16,639 15,154 13,656 13,657 12,153 12,148 10,636 10,625 9,107 9,089 158,907
Funds on Hand at Beginning of Period 0 2,487,264 2,546,886 2,588,394 2,590,171 2,593,447 2,694,853 2,699,632 2,812,360 2,818,656 2,883,842 2,944,658 0
Ending Balance of Funds on Hand 2,487,264 2,546,886 2,588,394 2,590,171 2,593,447 2,694,853 2,699,632 2,812,360 2,818,656 2,883,842 2,944,658 3,011,380 3,011,380
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Appendix Two, Attachment C – Best Case Financials
Mini Business Plan – Loan Guaranty Strategy
CALIFORNIA INTEGRATED WASTE MANAGEMENT BOARD
RMDZ LOAN PROGRAM-COP BEST CASE
Statement of Sources, Uses and Porfolio Activity
Five Years
YEAR TWO Total YEAR THREE Total
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr FY 02 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr FY 03
LOAN PORTFOLIO ACTIVITY
Loan Originations
Below Market Loans 750,000 1,050,000 1,200,000 1,500,000 4,500,000 1,200,000 1,200,000 1,200,000 1,200,000 4,800,000
Subordinate Loans 450,000 630,000 720,000 900,000 2,700,000 720,000 720,000 720,000 720,000 2,880,000
Deferred Payment Loans 480,000 420,000 480,000 600,000 1,980,000 480,000 480,000 480,000 480,000 1,920,000
Total Loan Origination 1,680,000 2,100,000 2,400,000 3,000,000 9,180,000 2,400,000 2,400,000 2,400,000 2,400,000 9,600,000
Defaults Losses
Below Market Loans
Subordinate Loans
Deferred Payment Loans
Total Losses
Principal Curtailments
Below Market Loans 48,100 49,142 43,992 41,253 182,487 70,633 29,380 129,393 158,772 388,178
Subordinate Loans 39,716 55,507 73,554 96,113 264,888 114,160 132,207 150,254 168,301 564,921
Deferred Payment Loans 0 0 0 0 0 0 0 0 0 0
Total Principal Curtailments 87,815 104,649 117,546 137,366 447,376 184,793 161,586 279,646 327,073 953,099
Loan Guaranty Commitments
Below Market Loans 320,000 560,000 680,000 690,000 2,250,000 680,000 680,000 680,000 510,000 2,550,000
Subordinate Loans 80,000 224,000 296,000 440,000 1,040,000 296,000 296,000 296,000 296,000 1,184,000
Deferred Payment Loans 0 0 0 0 0 0 0 0 0 0
Total Guarantees Issued 400,000 784,000 976,000 1,130,000 3,290,000 976,000 976,000 976,000 806,000 3,734,000
Beginning Balance of Guarantees Issued 3,432,000 3,832,000 4,616,000 5,592,000 3,432,000 6,722,000 7,698,000 8,674,000 9,650,000 6,722,000
Cumulative Guarantee Commitments 3,832,000 4,616,000 5,592,000 6,722,000 6,722,000 7,698,000 8,674,000 9,650,000 10,456,000 10,456,000
LOAN LOSS RESERVES (@25%) 958,000 1,154,000 1,398,000 1,680,500 1,680,500 1,924,500 2,168,500 2,412,500 2,614,000 2,614,000
LEVERAGE 11.46 11.33 11.07 11.00 10.85 10.74 10.64 10.74
SOURCES AND USES OF FUNDS
Sources of Funds:
CIWMB Investment 2,500,000 2,500,000 2,500,000 2,500,000
Loan Reserves 109,907 137,383 157,009 196,262 600,561 157,009 157,009 157,009 157,009 628,037
Interest On Idle Funds 36,094 36,094 36,094 36,094 144,375 56,719 56,719 56,719 56,719 226,875
Total Source of Funds 2,646,000 173,477 193,103 232,355 3,244,936 2,713,728 213,728 213,728 213,728 3,354,912
Uses of Funds:
Interest Subsidies 48,752 58,264 69,198 82,341 258,555 93,404 103,924 113,986 123,790 435,103
Loan Guarantee Loss Payments 0 0 0 0 0 0 0 0 0 0
COP Operating Expenses 7,500 7,500 7,500 7,500 30,000 7,500 7,500 7,500 7,500 30,000
Total Use of Funds 56,252 65,764 76,698 89,841 288,555 100,904 111,424 121,486 131,290 465,103
Funds on Hand at Beginning of Period 3,011,380 5,601,128 5,708,840 5,825,246 3,011,380 5,967,760 8,580,584 8,682,889 8,775,131 5,967,760
Ending Balance of Funds on Hand 5,601,128 5,708,840 5,825,246 5,967,760 5,967,760 8,580,584 8,682,889 8,775,131 8,857,570 8,857,570
87
Appendix Two, Attachment C – Best Case Financials
Mini Business Plan – Loan Guaranty Strategy
CALIFORNIA INTEGRATED WASTE MANAGEMENT BOARD
RMDZ LOAN PROGRAM-COP BEST CASE
Statement of Sources, Uses and Porfolio Activity
Five Years
YEAR FOUR Total YEAR FIVE Total
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr FY 04 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr FY 05
LOAN PORTFOLIO ACTIVITY
Loan Originations
Below Market Loans 1,200,000 1,200,000 1,200,000 1,200,000 4,800,000 1,200,000 1,200,000 1,200,000 1,200,000 4,800,000
Subordinate Loans 720,000 720,000 720,000 720,000 2,880,000 720,000 720,000 720,000 720,000 2,880,000
Deferred Payment Loans 480,000 480,000 480,000 480,000 1,920,000 480,000 480,000 480,000 480,000 1,920,000
Total Loan Origination 2,400,000 2,400,000 2,400,000 2,400,000 9,600,000 2,400,000 2,400,000 2,400,000 2,400,000 9,600,000
Defaults Losses
Below Market Loans 16,800 13,200 13,200 26,400 69,600 13,200 26,400 79,200 57,900 176,700
Subordinate Loans 33,600 6,000 9,600 11,040 60,240 48,000 11,040 35,760 28,800 123,600
Deferred Payment Loans 0 0 0 0 0 0 0 0 0 0
Total Losses 50,400 19,200 22,800 37,440 129,840 61,200 37,440 114,960 86,700 300,300
Principal Curtailments
Below Market Loans 188,152 217,532 246,912 276,292 928,888 305,672 335,052 364,431 393,811 1,398,966
Subordinate Loans 186,348 204,395 222,442 240,489 853,674 258,536 276,583 294,630 312,677 1,142,426
Deferred Payment Loans 28,930 56,482 90,922 128,118 304,452 276,899 454,611 665,385 917,488 2,314,384
Total Principal Curtailments 403,430 478,409 560,276 644,898 2,087,014 841,107 1,066,246 1,324,447 1,623,976 4,855,776
Loan Guaranty Commitments
Below Market Loans 680,000 680,000 680,000 510,000 2,550,000 680,000 680,000 680,000 510,000 2,550,000
Subordinate Loans 296,000 296,000 296,000 296,000 1,184,000 296,000 296,000 296,000 296,000 1,184,000
Deferred Payment Loans 0 0 0 0 0 0 0 0 0 0
Total Guarantees Issued 976,000 976,000 976,000 806,000 3,734,000 976,000 976,000 976,000 806,000 3,734,000
Beginning Balance of Guarantees Issued 10,456,000 11,432,000 12,408,000 13,384,000 10,456,000 14,190,000 15,166,000 16,142,000 17,118,000 14,190,000
Cumulative Guarantee Commitments 11,432,000 12,408,000 13,384,000 14,190,000 14,190,000 15,166,000 16,142,000 17,118,000 17,924,000 17,924,000
LOAN LOSS RESERVES (@25%) 2,858,000 3,102,000 3,346,000 3,547,500 3,547,500 3,791,500 4,035,500 4,279,500 4,481,000 4,481,000
LEVERAGE 10.66 10.60 10.54 10.62 10.57 10.53 10.49 10.55
SOURCES AND USES OF FUNDS
Sources of Funds:
CIWMB Investment
Loan Reserves 157,009 157,009 157,009 157,009 628,037 157,009 157,009 157,009 157,009 628,037
Interest On Idle Funds 56,719 56,719 56,719 56,719 226,875 56,719 56,719 56,719 56,719 226,875
Total Source of Funds 213,728 213,728 213,728 213,728 854,912 213,728 213,728 213,728 213,728 854,912
Uses of Funds:
Interest Subsidies 133,026 142,609 151,617 160,353 587,606 168,414 176,990 184,884 192,490 722,778
Loan Guarantee Loss Payments 50,400 19,200 22,800 37,440 129,840 61,200 37,440 114,960 86,700 300,300
COP Operating Expenses 7,500 7,500 7,500 7,500 30,000 7,500 7,500 7,500 7,500 30,000
Total Use of Funds 190,926 169,309 181,917 205,293 747,446 237,114 221,930 307,344 286,690 1,053,078
Funds on Hand at Beginning of Period 8,857,570 8,880,372 8,924,791 8,956,601 8,857,570 8,965,036 8,941,651 8,933,449 8,839,833 8,965,036
Ending Balance of Funds on Hand 8,880,372 8,924,791 8,956,601 8,965,036 8,965,036 8,941,651 8,933,449 8,839,833 8,766,871 8,766,871
88
Appendix Two, Attachment D – Base Case Financials
Mini Business Plan – Loan Guaranty Strategy
CALIFORNIA INTEGRATED WASTE MANAGEMENT BOARD
RMDZ LOAN PROGRAM-COP BASE CASE
Statement of Sources, Uses and Porfolio Activity
Five Years
YEAR ONE Total
Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Month 7 Month 8 Month 9 Month 10 Month 11 Month 12 Year 1
LOAN PORTFOLIO ACTIVITY
Loan Originations
Below Market Loans 0 1,050,000 0 900,000 0 900,000 0 900,000 0 900,000 4,650,000
Subordinate Loans 0 0 630,000 0 0 600,000 0 750,000 0 0 810,000 0 2,790,000
Deferred Payment Loans 0 60,000 180,000 180,000 180,000 180,000 180,000 180,000 180,000 180,000 180,000 180,000 1,860,000
Total Loan Origination 0 1,110,000 810,000 180,000 180,000 1,680,000 180,000 1,830,000 180,000 1,080,000 990,000 1,080,000 9,300,000
Defaults Losses
Below Market Loans
Subordinate Loans
Deferred Payment Loans
Total Losses
Principal Curtailments
Below Market Loans 0 8,569 8,569 8,569 8,569 15,914 15,914 23,259 23,259 30,604 30,604 37,949 211,780
Subordinate Loans 0 752 3,008 5,264 7,520 9,775 12,031 14,287 16,543 18,799 21,055 23,311 132,345
Deferred Payment Loans 0 0 0 0 0 0 0 0 0 0 0 0 0
Total Principal Curtailments 0 9,321 11,577 13,833 16,089 25,690 27,945 37,546 39,802 49,403 51,659 61,260 344,125
Loan Guaranty Commitments
Below Market Loans 0 560,000 0 0 0 440,000 0 440,000 0 440,000 0 440,000 2,320,000
Subordinate Loans 0 0 224,000 0 0 200,000 0 320,000 0 0 368,000 0 1,112,000
Deferred Payment Loans 0 0 0 0 0 0 0 0 0 0 0 0 0
Total Guarantees Issued 0 560,000 224,000 0 0 640,000 0 760,000 0 440,000 368,000 440,000 3,432,000
Beginning Balance of Guarantees Issued 0 0 560,000 784,000 784,000 784,000 1,424,000 1,424,000 2,184,000 2,184,000 2,624,000 2,992,000 0
Cumulative Guarantee Commitments 0 560,000 784,000 784,000 784,000 1,424,000 1,424,000 2,184,000 2,184,000 2,624,000 2,992,000 3,432,000 3,432,000
LOAN LOSS RESERVES (@25%) 0 140,000 196,000 196,000 196,000 356,000 356,000 546,000 546,000 656,000 748,000 858,000 858,000
LEVERAGE 0 7.93 9.80 10.71 11.63 11.12 11.63 10.93 11.26 11.02 10.99 10.84
SOURCES AND USES OF FUNDS
Sources of Funds:
CIWMB Investment 2,500,000 2,500,000
Loan Reserves 0 72,617 52,991 11,776 11,776 109,907 11,776 119,720 11,776 70,654 64,766 70,654 608,411
Interest On Idle Funds 5,156 5,156 5,156 5,156 5,156 5,156 5,156 5,156 5,156 5,156 5,156 5,156 61,875
Total Source of Funds 2,505,156 77,773 58,147 16,932 16,932 115,063 16,932 124,876 16,932 75,810 69,923 75,810 3,170,286
Uses of Funds:
Interest Subsidies 0 1,750 1,729 1,735 1,728 3,220 3,206 4,692 4,672 6,152 6,125 7,598 42,607
Loan Guarantee Loss Payments 0 0 0 0 0 0 0 0 0 0 0 0 0
COP Operating Expenses 17,892 16,401 14,910 13,419 11,928 10,437 8,946 7,455 5,964 4,473 2,982 1,491 116,300
Total Use of Funds 17,892 18,151 16,639 15,154 13,656 13,657 12,153 12,148 10,636 10,625 9,107 9,089 158,907
Funds on Hand at Beginning of Period 0 2,487,264 2,546,886 2,588,394 2,590,171 2,593,447 2,694,853 2,699,632 2,812,360 2,818,656 2,883,842 2,944,658 0
Ending Balance of Funds on Hand 2,487,264 2,546,886 2,588,394 2,590,171 2,593,447 2,694,853 2,699,632 2,812,360 2,818,656 2,883,842 2,944,658 3,011,380 3,011,380
89
Appendix Two, Attachment D – Base Case Financials
Mini Business Plan – Loan Guaranty Strategy
CALIFORNIA INTEGRATED WASTE MANAGEMENT BOARD
RMDZ LOAN PROGRAM-COP BASE CASE
Statement of Sources, Uses and Porfolio Activity
Five Years
YEAR TWO Total YEAR THREE Total
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr Year 2 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr Year 3
LOAN PORTFOLIO ACTIVITY
Loan Originations
Below Market Loans 750,000 1,050,000 1,200,000 1,500,000 4,500,000 1,200,000 1,200,000 1,200,000 1,200,000 4,800,000
Subordinate Loans 450,000 630,000 720,000 900,000 2,700,000 720,000 720,000 720,000 720,000 2,880,000
Deferred Payment Loans 480,000 420,000 480,000 600,000 1,980,000 480,000 480,000 480,000 480,000 1,920,000
Total Loan Origination 1,680,000 2,100,000 2,400,000 3,000,000 9,180,000 2,400,000 2,400,000 2,400,000 2,400,000 9,600,000
Defaults Losses
Below Market Loans
Subordinate Loans
Deferred Payment Loans
Total Losses
Principal Curtailments
Below Market Loans 48,100 49,142 43,992 41,253 182,487 70,633 29,380 129,393 158,772 388,178
Subordinate Loans 39,716 55,507 73,554 96,113 264,888 114,160 132,207 150,254 168,301 564,921
Deferred Payment Loans 0 0 0 0 0 0 0 0 0 0
Total Principal Curtailments 87,815 104,649 117,546 137,366 447,376 184,793 161,586 279,646 327,073 953,099
Loan Guaranty Commitments
Below Market Loans 320,000 560,000 680,000 690,000 2,250,000 680,000 680,000 680,000 510,000 2,550,000
Subordinate Loans 80,000 224,000 296,000 440,000 1,040,000 296,000 296,000 296,000 296,000 1,184,000
Deferred Payment Loans 0 0 0 0 0 0 0 0 0 0
Total Guarantees Issued 400,000 784,000 976,000 1,130,000 3,290,000 976,000 976,000 976,000 806,000 3,734,000
Beginning Balance of Guarantees Issued 3,432,000 3,832,000 4,616,000 5,592,000 3,432,000 6,722,000 7,698,000 8,674,000 9,650,000 6,722,000
Cumulative Guarantee Commitments 3,832,000 4,616,000 5,592,000 6,722,000 6,722,000 7,698,000 8,674,000 9,650,000 10,456,000 10,456,000
LOAN LOSS RESERVES (@25%) 958,000 1,154,000 1,398,000 1,680,500 1,680,500 1,924,500 2,168,500 2,412,500 2,614,000 2,614,000
LEVERAGE 11.46 11.33 11.07 11.00 10.85 10.74 10.64 10.74
SOURCES AND USES OF FUNDS
Sources of Funds:
CIWMB Investment 2,500,000 2,500,000 2,500,000 2,500,000
Loan Reserves 109,907 137,383 157,009 196,262 600,561 157,009 157,009 157,009 157,009 628,037
Interest On Idle Funds 36,094 36,094 36,094 36,094 144,375 56,719 56,719 56,719 56,719 226,875
Total Source of Funds 2,646,000 173,477 193,103 232,355 3,244,936 2,713,728 213,728 213,728 213,728 3,354,912
Uses of Funds:
Interest Subsidies 48,752 58,264 69,198 82,341 258,555 93,404 103,924 113,986 123,790 435,103
Loan Guarantee Loss Payments 0 0 0 0 0 0 0 0 0 0
COP Operating Expenses 7,500 7,500 7,500 7,500 30,000 7,500 7,500 7,500 7,500 30,000
Total Use of Funds 56,252 65,764 76,698 89,841 288,555 100,904 111,424 121,486 131,290 465,103
Funds on Hand at Beginning of Period 3,011,380 5,601,128 5,708,840 5,825,246 3,011,380 5,967,760 8,580,584 8,682,889 8,775,131 5,967,760
Ending Balance of Funds on Hand 5,601,128 5,708,840 5,825,246 5,967,760 5,967,760 8,580,584 8,682,889 8,775,131 8,857,570 8,857,570
90
Appendix Two, Attachment D – Base Case Financials
Mini Business Plan – Loan Guaranty Strategy
CALIFORNIA INTEGRATED WASTE MANAGEMENT BOARD
RMDZ LOAN PROGRAM-COP BASE CASE
Statement of Sources, Uses and Porfolio Activity
Five Years
YEAR FOUR Total YEAR FIVE Total
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr Year 4 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr Year 5
LOAN PORTFOLIO ACTIVITY
Loan Originations
Below Market Loans 1,200,000 1,200,000 1,200,000 1,200,000 4,800,000 1,200,000 1,200,000 1,200,000 1,200,000 4,800,000
Subordinate Loans 720,000 720,000 720,000 720,000 2,880,000 720,000 720,000 720,000 720,000 2,880,000
Deferred Payment Loans 480,000 480,000 480,000 480,000 1,920,000 480,000 480,000 480,000 480,000 1,920,000
Total Loan Origination 2,400,000 2,400,000 2,400,000 2,400,000 9,600,000 2,400,000 2,400,000 2,400,000 2,400,000 9,600,000
Defaults Losses
Below Market Loans 84,000 66,000 66,000 132,000 348,000 66,000 132,000 396,000 289,500 883,500
Subordinate Loans 67,200 30,000 48,000 55,200 200,400 96,000 55,200 178,800 144,000 474,000
Deferred Payment Loans 0 0 0 0 0 0 0 0 0 0
Total Losses 151,200 96,000 114,000 187,200 548,400 162,000 187,200 574,800 433,500 1,357,500
Principal Curtailments
Below Market Loans 188,152 217,532 246,912 276,292 928,888 305,672 335,052 364,431 393,811 1,398,966
Subordinate Loans 186,348 204,395 222,442 240,489 853,674 258,536 276,583 294,630 312,677 1,142,426
Deferred Payment Loans 28,930 56,482 90,922 128,118 304,452 276,899 454,611 665,385 917,488 2,314,384
Total Principal Curtailments 403,430 478,409 560,276 644,898 2,087,014 841,107 1,066,246 1,324,447 1,623,976 4,855,776
Loan Guaranty Commitments
Below Market Loans 680,000 680,000 680,000 510,000 2,550,000 680,000 680,000 680,000 510,000 2,550,000
Subordinate Loans 296,000 296,000 296,000 296,000 1,184,000 296,000 296,000 296,000 296,000 1,184,000
Deferred Payment Loans 0 0 0 0 0 0 0 0 0 0
Total Guarantees Issued 976,000 976,000 976,000 806,000 3,734,000 976,000 976,000 976,000 806,000 3,734,000
Beginning Balance of Guarantees Issued 10,456,000 11,432,000 12,408,000 13,384,000 10,456,000 14,190,000 15,166,000 16,142,000 17,118,000 14,190,000
Cumulative Guarantee Commitments 11,432,000 12,408,000 13,384,000 14,190,000 14,190,000 15,166,000 16,142,000 17,118,000 17,924,000 17,924,000
LOAN LOSS RESERVES (@25%) 2,858,000 3,102,000 3,346,000 3,547,500 3,547,500 3,791,500 4,035,500 4,279,500 4,481,000 4,481,000
LEVERAGE 10.66 10.60 10.54 10.62 10.57 10.53 10.49 10.55
SOURCES AND USES OF FUNDS
Sources of Funds:
CIWMB Investment
Loan Reserves 157,009 157,009 157,009 157,009 628,037 157,009 157,009 157,009 157,009 628,037
Interest On Idle Funds 56,719 56,719 56,719 56,719 226,875 56,719 56,719 56,719 56,719 226,875
Total Source of Funds 213,728 213,728 213,728 213,728 854,912 213,728 213,728 213,728 213,728 854,912
Uses of Funds:
Interest Subsidies 133,026 142,609 151,617 160,353 587,606 168,414 176,990 184,884 192,490 722,778
Loan Guarantee Loss Payments 151,200 96,000 114,000 187,200 548,400 162,000 187,200 574,800 433,500 1,357,500
COP Operating Expenses 7,500 7,500 7,500 7,500 30,000 7,500 7,500 7,500 7,500 30,000
Total Use of Funds 291,726 246,109 273,117 355,053 1,166,006 337,914 371,690 767,184 633,490 2,110,278
Funds on Hand at Beginning of Period 8,857,570 8,779,572 8,747,191 8,687,801 8,857,570 8,546,476 8,422,291 8,264,329 7,710,873 8,546,476
Ending Balance of Funds on Hand 8,779,572 8,747,191 8,687,801 8,546,476 8,546,476 8,422,291 8,264,329 7,710,873 7,291,111 7,291,111
91
Appendix Three
Mini Business Plan – Loan Sale Strategy
LOAN SALE STRATEGY
Introduction
The following mini-business plan describes a strategy for a loan sale program—the Recycling
Asset Sale Program (RASP) that would produce at least $10 million annually in private financing
for small recycling companies that have difficulty securing affordable financing from banks and
venture firms. Under the Program, the Board would use its appropriated funds to fund recycling
loans that would then be sold to investors. The proceeds from the sale would then be used to
make new loans
The success RASP would depend almost entirely on the characteristics of the loans to be sold,
specifically the:
Interest rate. The value of each loan sold under RASP would depend, in part, on the
discounted value of its expected cash flows. Because the discount rate used by the purchaser
would reflect its required yield or rate of return, loans that bear below-market interest rates
would have to be sold at a discount.
Credit quality. Seasoned performing loans that are well-collateralized and extended to
creditworthy borrowers would have a higher value than loans to marginal borrowers or loans
with a history of delinquency or default.
However RASP is also the simplest of the four “leveraging” alternatives to implement because it
requires no:
Outside source of equity or debt investment. Rather, as well more fully described below,
CIWMB funds can be used to fund $10 million annually in recycling loans.
Non-profit or for-profit structure. The fact that RASP requires no external investment
obviates the creation of a new for-profit or non-profit entity to obtain debt or equity
investments from private lenders or investors.
The mini business plan is organized into seven brief sections.
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Mini Business Plan – Loan Sale Strategy
Section 1 – Borrowers
Describes the companies whose financing needs the program is designed to meet.
Section 2 – Products
Describes the types of loans the program issues.
Section 3 – Capital Structure & Sources
Describes how RASP would be financed.
Section 4 – Operations
Describes how RASP would be managed.
Section 5 – Implementation
Sets forth the tasks and costs required to secure commitments for the program
Section 6 – Analysis
Describes the extent to which the leveraging strategy meets the five criteria discussed as
important in a successful CIWMB loan leveraging program – simplicity, practicality,
sustainability, affordability, implementability.
Section 7 – Financial Analysis
Lays out pro forma five-year financials for the program, including a projected rate of return on
investment.
Section 1 – Borrowers
RASP would be designed to meet the financing needs of three types of recycling companies that
make up the RMDZ market.
Established recycling firms. Approximately 50 percent of its borrowers would be companies
that have sufficient operating and earnings history to secure credit from conventional sources.
These low-risk companies would be more concerned with the cost of capital than with access
to capital.
Expansion-stage companies. Approximately 30 percent of borrowers would be companies
that have survived their formative years and are now seeking to grow. However, these
companies lack the earnings history, capital or collateral needed to support the full amount of
funding needed to finance expansion.
Early-stage companies. The remaining 20 percent of the borrowers under RASP would be
companies that are essentially start-up businesses. Because they are not yet producing
positive cash flows, these high-risk companies require some form of “equity” financing to
fund continued growth.
Section 2 – Loans
Following are the types of loans that would be guaranteed under RASP. Each is designed to meet
the peculiar needs of a particular borrower segment:
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Appendix Three
Mini Business Plan – Loan Sale Strategy
Below-market loans. Established recycling companies seeking expansion financing would be
eligible for medium and long-term fixed-asset loans priced, on average, 200 basis points
below the market rate for such financing. Underwriting standards for these loans including
loan-to-value and debt service coverage ratios would be only slightly more liberal than those
employed by commercial lenders.
Sunset Manufacturing is a 20-year old company that uses waste materials to produce a
range of furniture products. Its sales are about $1.5 million annually. In order to expand,
it requires $500,000 to upgrade its production facility. At 2.75 percent over prime or 7.5
percent, a 15-year, market-rate loan would cost the firm $56,000 annually in debt
service. However, at 2 percent below prime, a below-market loan would only require
$41,000 in debt service, a savings of $15,000 annually. A bank agrees to make the loan
at 2.75 percent provided that it is immediately purchased under RASP.
Subordinate, companion loans. Expansion-stage companies that lack the collateral to secure
senior financing needed for fixed assets or working capital would be candidates for
subordinate debt. These loans would typically be structured as 25-40 percent junior
participations in senior, secured loans extended by banks or other commercial lenders.
Because of the risk associated with junior-lien lending, the Board’s interest in each
transaction would be priced at 300 to 500 basis points above prime. In addition, as part of
each transaction, a loan loss reserve contribution, equaling four to eight percent of the total
financing, would be funded from loan proceeds and retained in a dedicated insurance fund.
MicroCast, a $2.5 million company purchases, repairs and resells consumer electronics.
The company has grown rapidly but its weak balance sheet makes it impossible to secure
$250,000 in equipment financing that it needs to expand. A local bank agrees to make
the equipment loan under a two-part structure. It makes a $187,500 loan backed by a 75
percent SBA guarantee and a 7-year, $80,000 subordinate loan funded by the Board.
The subordinate loan includes a $12,500 insurance payment. The loan structure
provides the bank with earning assets of $267,500 but with total exposure of only
$72,250 and allows MicroCast to grow.
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Appendix Three
Mini Business Plan – Loan Sale Strategy
Gives $250,000 note and $12,500 reserve
Board Makes $250,000 loan MicroCast
Sells $187,500 senior interest
Lender
Deferred payment loans. Early-stage companies, including start-up firms, that possess neither
the cash flow (or collateral) to qualify for debt financing nor the “upside” potential to qualify
for venture or angel financing would be candidates for deferred payment loans. The deferred
payment loan would be modeled on the structure employed by SBA for investments in New
Markets Venture Capital Companies. That is, each loan would involve a “discount period”—
2 to 3 years during which no principal or interest payments would be required --followed by
an amortization period. Upon closing, the borrower would receive the full amount of the loan
less the present value of interest for the discount period. At the end of the discount period, the
borrower would repay the loan in regular installments of principal and interest over a period
of up to seven years. As with subordinate loans, a cash reserve account would be funded as
part of each transaction
TireWare is an early stage company that has developed a more efficient way of
retreading tires. Although it needs $200,000 to fund its operations, neither venture
capital companies nor angel investors are willing to invest. Using the deferred payment
note structure, a bank makes a $287,000 loan to the borrower. Of this amount
approximately $67,000, the present value of three years of interest and $20,000 in loan-
loss reserve contributions are retained by the bank. At the end of three years TireWare
begins making payments of $5,000 per month to repay the $287,000 balance over seven
years. Once again, the Board immediately purchases the loan from the bank with the
intention of selling under RASP. The deferred payment note structure gives TireWare full
use of $200,000 for three years—essentially equity without the need to relinquish shares.
95
Appendix Three
Mini Business Plan – Loan Sale Strategy
$200,000
TireWare
$287,000 deferred payment note
RASP $287,000 note Bank
Section 3 – Program Structure
In order to maximize leverage while minimizing program administration costs, the job of making
and servicing loans under RASP could be would be undertaken in cooperation with “participating
lenders”. “Participating lenders” would be banks, CDFIs, FDCs and other small business finance
organizations that agree to use underwriting policies established by the Board to make loans that
would be purchased under RASP. As we envisage the Program--
The Board would establish underwriting policies for each type of recycling loan. These
policies would be employed by CIWMB’s staff, RMDZ loan administrators and
“participating lenders” to originate loans to eligible recycling companies.
Loans would be funded either by the Board or by participating lenders. Under an agreement
with the Board, “participating lenders” would immediately be able to sell the loans to the
Board under RASP.
Under RASP, the Board would then sell the loans to a secondary market investor and would
use the cash to make more loans.
Financial Requirements
Assuming quarterly loans sales, total capital of $3 million is sufficient to fund approximately $50
million in lending over a five-year period.
Financing Sources
Following is a list of three organizations that are possible purchasers of loans under RASP
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Mini Business Plan – Loan Sale Strategy
Community Reinvestment Fund (CRF). CRF is a non-profit secondary market for economic
development loans that has provided $200 million to lenders in 22 states since 1989.
Bayview Financial. Bayview is a private investment banking firm owned by Allstate
Insurance that purchases and securitizes both mortgage and commercial loans from a wide
variety of lenders. The company specializes in loans to borrowers with imperfect credit.
CBA Receivables. CBA buys and securitizes loans from smaller financial companies that
originate loans on a scale that fails to attract larger investment banking firms
Section 4 – Operations
In order to minimize the CIWMB’s staffing requirements and operating costs, the principal
functions associated with making loans under RASP would be assumed by banks and cooperating
FDCs.
Loan origination. Participating lenders and the Board would be responsible for identifying
borrowers and packaging their loan applications.
Loan underwriting. CIWMB would develop a set of underwriting standards and policies for
each type of loan. Participating lenders would use these standards in approving loans.
Funding, processing and documentation. Loans would be closed and funded by participating
lenders using documentation approved by CIWMB.
Loan servicing. Loan servicing would be carried out by the lender under an agreement with
the CIWMB.
Section 5 – Implementation
Organizing the RASP would involve the following tasks
Organizing finance team. (The finance team will most likely be composed of Board staff. The
included budgets are merely an estimate of the associated costs). The task of developing
RASP would require a “finance team” comprising mainly in-house CIWMB staff. At a
minimum, CIWMB’s chief credit officer and in-house attorney should be members of the
team. The services of outside counsel and of a financial advisory firm may also be needed.
This team’s responsibility would be to establish expected loan origination levels, to determine
the frequency, structure and size of required loan sales, to identify prospective purchasers and
to negotiate forward loan purchase commitments.
Defining origination program. Based on past lending experience, discussions with Zone
Administrators and interviews with participating lenders, the finance team should forecast the
number, principal balance, average interest rate, average maturity and credit quality of the
recycling loan that would be sold. Based on this estimate, a projection of loan sale
requirements can be prepared.
Identify investors. Armed with the loan origination forecast, the team should identify, and
begin discussions with, organizations that are likely purchasers of RASP loans.
97
Appendix Three
Mini Business Plan – Loan Sale Strategy
Develop loan sales plan. Discussions with investors should be the basis for a loan sales plan
that aligns the requirements of investors with the amount and characteristics of loans to be
sold. The need for changes to loan pricing or underwriting policies should be identified.
Secure forward purchase commitments. The loan sale plan should be the basis for forward
purchase agreements between the Board and investors. Among other provisions, the
agreement should specify the volume and timing of expected purchases as well as the pricing
formula for these purchases.
Cost Budget
The following budget is based upon the following assumptions regarding hourly billing rates for
CIWMB staff and advisors:
CIWMB staff $150
Outside legal counsel $250
Accounting $175
Financial advisory $300
Task CIWMB Financial Total Cost
Legal Accounting Advisory Hours
1. Organize financing team 30 0 0 0 30 $ 4,500
2. Define origination program 24 0 0 16 40 $ 8,400
3. Identify investors 24 0 0 40 64 $ 15,600
4. Develop loan sales plan 48 24 24 8 104 $ 18,000
5. Secure forward purchase 48 24 24 24 120 $ 22,800
commitment
Total Hours 174 48 48 88 358 $ 69,300
Attachments E and F set forth a schedule for the completion of these tasks.
Section 6 – Analysis
As a source of financing for the CDE, the New Markets Tax Credit has both advantages and
disadvantages. The analysis bellows considers the proposed leveraging strategy in light of five
criteria.
Simplicity. Because RASP requires no outside capital nor new entity, it should be the
simplest of the four leveraging strategies to implement. The fact that participating banks and
98
Appendix Three
Mini Business Plan – Loan Sale Strategy
RMDZ administrators would carry out a substantial amount of out loan origination and loan
servicing would further reduce the plan’s complexity.
Practicality. The Board has already completed one successful loan sale, thus proving the
feasibility of loan sales as a technique for leveraging capital. Increased investor interest in
buying economic development loans increase the likelihood of securing forward purchase
commitments on attractive terms.
Sustainability. RASP can be structured so that discounts from the sale of below-market loans
are offset by premiums received from the sale of market-rate loans. As the attached financial
analysis shows, this approach allows the Program to operate on a self-sustaining basis.
Affordability. Subordinate and deferred payment loans would be structured so that their
higher interest rates are more than offset by extended and deferred amortization features. The
subsidy implicit in the interest rate for below-market loans would ensure their affordability to
established borrowers
Implementability. The increased willingness of investors to purchase economic development
loans should make RASP relatively simple to institute and operate
Section 7 – Financial Analysis
Following are “best-case” and “base-case” financial forecasts for the RASP Program. Each set of
forecasts includes two types of financial statements:
Proforma Statement of Operations.
Proforma Statement of Financing and Investment Activities
Each set of pro-forma financial statements illustrates the economic condition and activities of
RASP for a five-year period.
Proforma Statement of Financing and Investment Activities
This Statement sets forth sources and applications of RASP funds for all five years of the
forecast. The section of the Statement entitled “Financing Activities” includes the sources of
funds used to fund RASP. “Investment Activities” represents the application of funds described
under Financing Activities to loan origination and loan sale activities.
Pro-forma Statement of Operations
The Pro-forma Statement of Operations illustrates the sources of program income and
summarizes the operating expenses including gains and losses on sales of assets as well as loan
losses. Loan-loss reserve revenues represent “insurance” contributions made as part of each new
loan transaction. Losses on loans as well as gains and losses on sale are accounted for as expense
adjustments as incurred.
Assumptions to the Pro-forma Financials
The following assumptions were used to develop the previously described pro-forma financials
depicting RASP.
99
Appendix Three
Mini Business Plan – Loan Sale Strategy
CIWMB puts in $3 million in year 1.
Loans originated with the proceeds of CIWMB’s investment are sold on a quarterly basis.
Idle funds are invested at four percent increasing to 4.125 percent in Year Four.
Loan Portfolio Characteristics
% of Average Deferment of
Asset Portfolio Loan Amt Yield Term Payment
Low Interest 50% $200,000 2.75% 5 yrs None
Deferred Payment 20% $80,000 12.25% 10 yrs 3 yrs
Subordinate Debt 30% $120,000 10.50% 5 yrs None
Loan Losses and Insurance Payments
Insurance Base-case Loan Best-case Loan
Asset Payment Losses Net of Losses Net of
Recoveries* Recoveries*
Low Interest 5% 0% 0%
Deferred Payment 18% 0% 0%
Subordinate Debt 10% 0% 0%
* Loans are sold on a quarterly basis thus shifting all losses to the purchaser. Insurance payments
transferred to the purchaser finance these losses.
Operating Expenses
The following functions are assumed to be borne by the fund:
Chief Credit Officer @ $120,000
Chief Financial/Operations Officer @ $85,000
Two loan officers @ $80,000 total
One support person @ $25,000
Fringe benefits estimated at 35 percent of salaries.
Administration, Marketing and Overhead – Modest levels are included as managing entity is
envisioned to assume operational responsibility and provide infrastructure.
100
Appendix Three
Mini Business Plan – Loan Sale Strategy
Financial Total
CIWMB Legal Accounting Advisory Hours Cost
Task
1. Organize financing team 30 0 0 0 30 $ 4,500
2. Define financing
requirements 24 0 0 16 40 $ 8,400
3. Develop initial
financing structure 48 24 24 24 120 $ 22,800
4. Identify/prequalify
investors 24 0 0 80 104 $ 27,600
5. Organize financing
proposal 48 24 48 32 152 $ 27,600
6. Conduct presentations 120 0 0 40 160 $ 30,000
7. Negotiate term sheet 72 40 0 40 152 $ 32,800
8. Organize structure/
meet conditions 48 60 24 24 156 $ 31,800
9. Prepare financing
documents 16 80 0 16 112 $ 27,200
10. Close transaction 24 40 0 24 88 $ 17,296
Total Hours 454 268 96 296 1114 $ 229,996
101
Appendix Three
Mini Business Plan – Loan Sale Strategy
Transactions
Provides subsidies and guaranties to loan transactions
Pays losses on loans Pays subsidies
over $350,000 on below-market loans
FDC
Guaranty Subsidy
Fund Fund
CIWMB
Allocates appropriated funds
Allocates appropriated
funds and insurance
payments
102
Appendix Three, Attachment E – Best Case Financials
Mini Business Plan – Loan Sale Strategy
CALIFORNIA INTEGRATED WASTE MANAGEMENT BOARD
RMDZ LOAN PROGRAM-LOAN SALE STRATEGY-BEST CASE
Statement of Financing and Investment Activities
Five Years
YEAR ONE Total
Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Month 7 Month 8 Month 9 Month 10 Month 11 Month 12 YEAR 1
FINANCING ACTIVITIES
Funds Received From:
Sale of Shares
CIWMB Investment 3,000,000 0 0 0 0 0 0 0 0 0 0 0 3,000,000
Private (NMTC) Investors 0 0 0 0 0 0 0 0 0 0 0 0 0
Total of Funding From Investors 3,000,000 0 0 0 0 0 0 0 0 0 0 0 3,000,000
Funding From Issuance of
Debt
Debt Class 1-Short Term 0 0 0 0 0 0 0 0 0 0 0 0 0
Debt Class 2-Long Term Fixed Rate 0 0 0 0 0 0 0 0 0 0 0 0 0
Total Funding From Issuance of
Debt 0 0 0 0 0 0 0 0 0 0 0 0 0
Total Funding From Financing Activities 3,000,000 0 0 0 0 0 0 0 0 0 0 0 3,000,000
Less Funds Applied To:
Redemption of Shares
CIWMB Investment/Start Up Cost Reimb. 0 0 0 0 0 0 0 0 0 0 0 0 0
Private (NMTC) Investors 0 0 0 0 0 0 0 0 0 0 0 0 0
Total Shares Redeemed 0 0 0 0 0 0 0 0 0 0 0 0 0
Repayment of Corporate Notes
Debt Class 1-Short Term Notes 0 0 0 0 0 0 0 0 0 0 0 0 0
Debt Class 2-Long Term Fixed Rate 0 0 0 0 0 0 0 0 0 0 0 0 0
Total Payments of Corporate Notes 0 0 0 0 0 0 0 0 0 0 0 0 0
Total Application of Funds 0 0 0 0 0 0 0 0 0 0 0 0 0
FUNDING FROM FINANCING
ACTIVITIES (NET) 3,000,000 0 0 0 0 0 0 0 0 0 0 0 3,000,000
INVESTMENT ACTIVITIES
ADD: Funds Received From Sale of Loans:
Sale of Low Cost Loans 0 0 0 588,320 0 0 1,308,634 0 0 1,308,072 0 0 3,205,026
Sale of Deferred Payment Loans 0 0 0 240,000 0 0 540,000 0 0 540,000 0 0 1,320,000
Sale of Subordinate Debt Loans 0 0 0 354,255 0 0 788,861 0 0 787,485 0 0 1,930,601
Total Funds Received From Sale of Loans 0 0 0 1,182,575 0 0 2,637,495 0 0 2,635,557 0 0 6,455,627
LESS: Funds Applied to Lending Activities:
Low Cost Loans 0 150,000 450,000 450,000 450,000 450,000 450,000 450,000 450,000 450,000 450,000 450,000 4,650,000
Deferred Payment Loans 0 60,000 180,000 180,000 180,000 180,000 180,000 180,000 180,000 180,000 180,000 180,000 1,860,000
Subordinate Debt 0 90,000 270,000 270,000 270,000 270,000 270,000 270,000 270,000 270,000 270,000 270,000 2,790,000
Total Lending Activities 0 300,000 900,000 900,000 900,000 900,000 900,000 900,000 900,000 900,000 900,000 900,000 9,299,999
ADD: Principal Collections 0 3,482 13,943 9,429 21,268 31,808 8,972 22,463 33,008 10,206 23,702 34,253 212,533
PROCEEDS FROM INVESTMENT
ACTIVITIES (NET) 0 -296,518 -886,057 292,005 -878,732 -868,192 1,746,467 -877,537 -866,992 1,745,763 -876,298 -865,747 -2,631,839
NET INCREASE (DECREASE) IN FUNDS FROM
FUNDING AND INVESTMENT ACTIVITIES 3,000,000 -296,518 -886,057 292,005 -878,732 -868,192 1,746,467 -877,537 -866,992 1,745,763 -876,298 -865,747 368,161
103
Appendix Three, Attachment E – Best Case Financials
Mini Business Plan – Loan Sale Strategy
CALIFORNIA INTEGRATED WASTE MANAGEMENT BOARD
RMDZ LOAN PROGRAM-LOAN SALE STRATEGY-BEST CASE
Statement of Financing and Investment Activities
Five Years
YEAR TWO Total YEAR THREE Total
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr YEAR 2 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr YEAR 3
FINANCING ACTIVITIES
Funds Received From:
Sale of Shares
CIWMB Investment 0 0 0 500,000 500,000 0 0 0 0 0
Private (NMTC) Investors 0 0 0 0 0 0 0 0 0 0
Total of Funding From Investors 0 0 0 500,000 500,000 0 0 0 0 0
Funding From Issuance of
Debt
Debt Class 1-Short Term 0 0 0 0 0 0 0 0 0 0
Debt Class 2-Long Term Fixed Rate 0 0 0 0 0 0 0 0 0 0
Total Funding From Issuance of
Debt 0 0 0 0 0 0 0 0 0 0
Total Funding From Financing Activities 0 0 0 500,000 500,000 0 0 0 0 0
Less Funds Applied To:
Redemption of Shares
CIWMB Investment/Start Up Cost Reimb. 0 0 0 0 0 0 0 0 0 0
Private (NMTC) Investors 0 0 0 0 0 0 0 0 0 0
Total Shares Redeemed 0 0 0 0 0 0 0 0 0 0
Repayment of Corporate Notes
Debt Class 1-Short Term Notes 0 0 0 0 0 0 0 0 0 0
Debt Class 2-Long Term Fixed Rate 0 0 0 0 0 0 0 0 0 0
Total Payments of Corporate Notes 0 0 0 0 0 0 0 0 0 0
Total Application of Funds 0 0 0 0 0 0 0 0 0 0
FUNDING FROM FINANCING
ACTIVITIES (NET) 0 0 0 500,000 500,000 0 0 0 0 0
INVESTMENT ACTIVITIES
ADD: Funds Received From Sale of Loans:
Sale of Low Cost Loans 1,305,819 716,267 1,000,209 1,143,509 4,165,804 1,429,144 1,144,482 1,143,836 1,143,834 4,861,296
Sale of Deferred Payment Loans 540,000 480,000 420,000 480,000 1,920,000 600,000 480,000 480,000 480,000 2,040,000
Sale of Subordinate Debt Loans 786,021 432,796 605,914 692,473 2,517,204 865,591 692,473 692,473 692,473 2,943,011
Total Funds Received From Sale of Loans 2,631,840 1,629,063 2,026,124 2,315,982 8,603,008 2,894,735 2,316,955 2,316,309 2,316,308 9,844,307
LESS: Funds Applied to Lending Activities:
Low Cost Loans 750,000 1,050,000 1,200,000 1,500,000 4,500,000 1,200,000 1,200,000 1,200,000 1,200,000 4,800,000
Deferred Payment Loans 480,000 420,000 480,000 600,000 1,980,000 480,000 480,000 480,000 480,000 1,920,000
Subordinate Debt 450,000 630,000 720,000 900,000 2,700,000 720,000 720,000 720,000 720,000 2,880,000
Total Lending Activities 1,680,000 2,100,000 2,400,000 3,000,000 9,180,000 2,400,000 2,400,000 2,400,000 2,400,000 9,600,000
ADD: Principal Collections 62,565 68,577 81,807 100,525 313,474 88,107 83,478 83,692 83,692 338,969
PROCEEDS FROM INVESTMENT
ACTIVITIES (NET) 1,014,404 -402,360 -292,070 -583,494 -263,518 582,842 433 1 0 583,275
NET INCREASE (DECREASE) IN FUNDS FROM
FUNDING AND INVESTMENT ACTIVITIES 1,014,404 -402,360 -292,070 -83,494 236,482 582,842 433 1 0 583,275
104
Appendix Three, Attachment E – Best Case Financials
Mini Business Plan – Loan Sale Strategy
CALIFORNIA INTEGRATED WASTE MANAGEMENT BOARD
RMDZ LOAN PROGRAM-LOAN SALE STRATEGY-BEST CASE
Statement of Financing and Investment Activities
Five Years
YEAR FOUR Total YEAR FIVE Total
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr YEAR 4 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr YEAR 5
FINANCING ACTIVITIES
Funds Received From:
Sale of Shares
CIWMB Investment 0 0 0 0 0 0 0 0 0 0
Private (NMTC) Investors 0 0 0 0 0 0 0 0 0 0
Total of Funding From Investors 0 0 0 0 0 0 0 0 0 0
Funding From Issuance of
Debt
Debt Class 1-Short Term 0 0 0 0 0 0 0 0 0 0
Debt Class 2-Long Term Fixed Rate 0 0 0 0 0 0 0 0 0 0
Total Funding From Issuance of
Debt 0 0 0 0 0 0 0 0 0 0
Total Funding From Financing Activities 0 0 0 0 0 0 0 0 0 0
Less Funds Applied To:
Redemption of Shares
CIWMB Investment/Start Up Cost Reimb. 0 0 0 0 0 0 0 0 0 0
Private (NMTC) Investors 0 0 0 0 0 0 0 0 0 0
Total Shares Redeemed 0 0 0 0 0 0 0 0 0 0
Repayment of Corporate Notes
Debt Class 1-Short Term Notes 0 0 0 0 0 0 0 0 0 0
Debt Class 2-Long Term Fixed Rate 0 0 0 0 0 0 0 0 0 0
Total Payments of Corporate Notes 0 0 0 0 0 0 0 0 0 0
Total Application of Funds 0 0 0 0 0 0 0 0 0 0
FUNDING FROM FINANCING
ACTIVITIES (NET) 0 0 0 0 0 0 0 0 0 0
INVESTMENT ACTIVITIES
ADD: Funds Received From Sale of Loans:
Sale of Low Cost Loans 1,143,834 1,143,834 1,143,834 1,143,834 4,575,338 1,143,834 1,143,834 1,143,834 1,143,834 4,575,338
Sale of Deferred Payment Loans 480,000 480,000 480,000 480,000 1,920,000 480,000 480,000 480,000 480,000 1,920,000
Sale of Subordinate Debt Loans 692,473 692,473 692,473 692,473 2,769,893 692,473 692,473 692,473 692,473 2,769,893
Total Funds Received From Sale of Loans 2,316,308 2,316,308 2,316,308 2,316,308 9,265,231 2,316,308 2,316,308 2,316,308 2,316,308 9,265,231
LESS: Funds Applied to Lending Activities:
Low Cost Loans 1,200,000 1,200,000 1,200,000 1,200,000 4,800,000 1,200,000 1,200,000 1,200,000 1,200,000 4,800,000
Deferred Payment Loans 480,000 480,000 480,000 480,000 1,920,000 480,000 480,000 480,000 480,000 1,920,000
Subordinate Debt 720,000 720,000 720,000 720,000 2,880,000 720,000 720,000 720,000 720,000 2,880,000
Total Lending Activities 2,400,000 2,400,000 2,400,000 2,400,000 9,600,000 2,400,000 2,400,000 2,400,000 2,400,000 9,600,000
ADD: Principal Collections 83,692 83,692 83,692 83,692 334,769 83,692 83,692 83,692 83,692 334,769
PROCEEDS FROM INVESTMENT
ACTIVITIES (NET) 0 0 0 0 0 0 0 0 0 0
NET INCREASE (DECREASE) IN FUNDS FROM
FUNDING AND INVESTMENT ACTIVITIES 0 0 0 0 0 0 0 0 0 0
105
Appendix Three, Attachment E – Best Case Financials
Mini Business Plan – Loan Sale Strategy
CALIFORNIA INTEGRATED WASTE MANAGEMENT BOARD
RMDZ LOAN PROGRAM-LOAN SALE STRATEGY-BEST CASE
Proforma Statement of Operations
Five Years
YEAR ONE Total
Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Month 7 Month 8 Month 9 Month 10 Month 11 Month 12 YEAR 1
Investment Income
Loan Loss Reserves 0 22,800 68,400 -39,642 68,400 68,400 -173,118 68,400 68,400 -172,952 68,400 68,400 115,889
Interest on loans 0 841 3,494 3,077 5,438 8,326 3,767 5,439 8,324 3,765 5,434 8,316 56,220
Interest on Idle Funds 9,333 8,345 5,391 6,365 3,436 542 6,363 3,438 548 6,367 3,446 561 54,136
TOTAL INCOME 9,333 31,986 77,285 -30,200 77,274 77,268 -162,987 77,277 77,272 -162,820 77,280 77,277 226,244
Expenses
Operating Expenses
Administration, Legal and overhead 34,499 31,624 25,555 23,000 20,444 17,889 12,831 12,831 12,831 12,831 12,831 12,830 229,996
Subtotal fund management 34,499 31,624 25,555 23,000 20,444 17,889 12,831 12,831 12,831 12,831 12,831 12,830 229,996
Cost of financing activities
Interest Cost Incurred
Debt Class 1-Short Term Notes 0 0 0 0 0 0 0 0 0 0 0 0 0
Debt Class 2 - Long Term Fixed Rate Notes 0 0 0 0 0 0 0 0 0 0 0 0 0
(Gain) or Loss on Sale of Notes 0 0 0 -3,719 0 0 -8,505 0 0 -8,488 0 0 -20,712
Loan Loss Payments 0 0 0 0 0 0 0 0 0 0 0 0 0
Subtotal cost of financing activities 0 0 0 -3,719 0 0 -8,505 0 0 -8,488 0 0 -20,712
TOTAL EXPENSES 34,499 31,624 25,555 19,281 20,444 17,889 4,326 12,831 12,831 4,343 12,831 12,830 209,285
PROGRAM OPERATING PROFIT (LOSS) -25,166 361 51,730 -49,481 56,830 59,379 -167,314 64,446 64,441 -167,163 64,449 64,447 16,959
106
Appendix Three, Attachment E – Best Case Financials
Mini Business Plan – Loan Sale Strategy
CALIFORNIA INTEGRATED WASTE MANAGEMENT BOARD
RMDZ LOAN PROGRAM-LOAN SALE STRATEGY-BEST CASE
Proforma Statement of Operations
Five Years
YEAR TWO Total YEAR THREE Total
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr YEAR 2 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr YEAR 3
Investment Income
Loan Loss Reserves -94,693 -5,893 -3,802 15,177 -89,211 -83,616 2,753 2,753 2,753 -75,358
Interest on loans 16,849 18,568 20,371 25,210 80,998 21,615 20,786 20,786 20,786 83,974
Interest on Idle Funds 11,826 7,802 4,881 4,046 28,555 3,292 3,293 3,293 3,293 13,171
TOTAL INCOME -66,018 20,477 21,451 44,434 20,343 -58,709 26,832 26,832 26,832 21,786
Expenses
Operating Expenses
Administration, Legal and overhead 0 0 0 0 0 0 0 0 0 0
Subtotal fund management 0 0 0 0 0 0 0 0 0 0
Cost of financing activities
Interest Cost Incurred
Debt Class 1-Short Term Notes 0 0 0 0 0 0 0 0 0 0
Debt Class 2 - Long Term Fixed Rate Notes 0 0 0 0 0 0 0 0 0 0
(Gain) or Loss on Sale of Notes -8,504 -11,131 -6,814 -7,779 -34,228 -9,729 -7,760 -7,773 -7,773 -33,034
Loan Loss Payments 0 0 0 0 0 0 0 0 0 0
Subtotal cost of financing activities -8,504 -11,131 -6,814 -7,779 -34,228 -9,729 -7,760 -7,773 -7,773 -33,034
TOTAL EXPENSES -8,504 -11,131 -6,814 -7,779 -34,228 -9,729 -7,760 -7,773 -7,773 -33,034
PROGRAM OPERATING PROFIT (LOSS) -57,514 31,607 28,265 52,213 54,571 -48,980 34,592 34,605 34,605 54,821
107
Appendix Three, Attachment E – Best Case Financials
Mini Business Plan – Loan Sale Strategy
CALIFORNIA INTEGRATED WASTE MANAGEMENT BOARD
RMDZ LOAN PROGRAM-LOAN SALE STRATEGY-BEST CASE
Proforma Statement of Operations
Five Years
YEAR FOUR Total YEAR FIVE Total
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr YEAR 4 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr YEAR 5
Investment Income
Loan Loss Reserves 2,753 2,753 2,753 2,753 11,011 2,753 2,753 2,753 2,753 11,011
Interest on loans 21,536 19,549 23,261 26,974 91,319 20,786 20,786 20,786 20,786 83,144
Interest on Idle Funds 9,379 9,379 9,379 9,379 37,517 9,379 9,379 9,379 9,379 37,517
TOTAL INCOME 33,668 31,680 35,393 39,105 139,847 32,918 32,918 32,918 32,918 131,672
Expenses
Operating Expenses
Administration, Legal and overhead 0 0 0 0 0 0 0 0 0 0
Subtotal fund management 0 0 0 0 0 0 0 0 0 0
Cost of financing activities
Interest Cost Incurred
Debt Class 1-Short Term Notes 0 0 0 0 0 0 0 0 0 0
Debt Class 2 - Long Term Fixed Rate Notes 0 0 0 0 0 0 0 0 0 0
(Gain) or Loss on Sale of Notes -7,773 -7,773 -7,773 -7,773 -31,091 -7,773 -7,773 -7,773 -7,773 -31,091
Loan Loss Payments 0 0 0 0 0 0 0 0 0 0
Subtotal cost of financing activities -7,773 -7,773 -7,773 -7,773 -31,091 -7,773 -7,773 -7,773 -7,773 -31,091
TOTAL EXPENSES -7,773 -7,773 -7,773 -7,773 -31,091 -7,773 -7,773 -7,773 -7,773 -31,091
PROGRAM OPERATING PROFIT (LOSS) 41,441 39,453 43,166 46,878 170,938 40,691 40,691 40,691 40,691 162,763
108
Appendix Three, Attachment F – Base Case Financials
Mini Business Plan – Loan Sale Strategy
CALIFORNIA INTEGRATED WASTE MANAGEMENT BOARD
RMDZ LOAN PROGRAM-LOAN SALE STRATEGY-BASE CASE
Statement of Financing and Investment Activities
Five Years
YEAR ONE Total
Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Month 7 Month 8 Month 9 Month 10 Month 11 Month 12 Year 1
FINANCING ACTIVITIES
Funds Received From:
Sale of Shares
CIWMB Investment 3,000,000 0 0 0 0 0 0 0 0 0 0 0 3,000,000
Private (NMTC) Investors 0 0 0 0 0 0 0 0 0 0 0 0 0
Total of Funding From Investors 3,000,000 0 0 0 0 0 0 0 0 0 0 0 3,000,000
Funding From Issuance of
Debt
Debt Class 1-Short Term 0 0 0 0 0 0 0 0 0 0 0 0 0
Debt Class 2-Long Term Fixed Rate 0 0 0 0 0 0 0 0 0 0 0 0 0
Total Funding From Issuance of
Debt 0 0 0 0 0 0 0 0 0 0 0 0 0
Total Funding From Financing Activities 3,000,000 0 0 0 0 0 0 0 0 0 0 0 3,000,000
Less Funds Applied To:
Redemption of Shares
CIWMB Investment/Start Up Cost Reimb. 0 0 0 0 0 0 0 0 0 0 0 0 0
Private (NMTC) Investors 0 0 0 0 0 0 0 0 0 0 0 0 0
Total Shares Redeemed 0 0 0 0 0 0 0 0 0 0 0 0 0
Repayment of Corporate Notes
Debt Class 1-Short Term Notes 0 0 0 0 0 0 0 0 0 0 0 0 0
Debt Class 2-Long Term Fixed Rate 0 0 0 0 0 0 0 0 0 0 0 0 0
Total Payments of Corporate Notes 0 0 0 0 0 0 0 0 0 0 0 0 0
Total Application of Funds 0 0 0 0 0 0 0 0 0 0 0 0 0
FUNDING FROM FINANCING
ACTIVITIES (NET) 3,000,000 0 0 0 0 0 0 0 0 0 0 0 3,000,000
INVESTMENT ACTIVITIES
ADD: Funds Received From Sale of Loans:
Sale of Low Cost Loans 0 0 0 588,320 0 0 1,308,634 0 0 1,308,072 0 0 3,205,026
Sale of Deferred Payment Loans 0 0 0 240,000 0 0 540,000 0 0 540,000 0 0 1,320,000
Sale of Subordinate Debt Loans 0 0 0 354,255 0 0 788,861 0 0 787,485 0 0 1,930,601
Total Funds Received From Sale of Loans 0 0 0 1,182,575 0 0 2,637,495 0 0 2,635,557 0 0 6,455,627
LESS: Funds Applied to Lending Activities:
Low Cost Loans 0 150,000 450,000 450,000 450,000 450,000 450,000 450,000 450,000 450,000 450,000 450,000 4,650,000
Deferred Payment Loans 0 60,000 180,000 180,000 180,000 180,000 180,000 180,000 180,000 180,000 180,000 180,000 1,860,000
Subordinate Debt 0 90,000 270,000 270,000 270,000 270,000 270,000 270,000 270,000 270,000 270,000 270,000 2,790,000
Total Lending Activities 0 300,000 900,000 900,000 900,000 900,000 900,000 900,000 900,000 900,000 900,000 900,000 9,299,999
ADD: Principal Collections 0 3,482 13,943 9,429 21,268 31,808 8,972 22,463 33,008 10,206 23,702 34,253 212,533
PROCEEDS FROM INVESTMENT
ACTIVITIES (NET) 0 -296,518 -886,057 292,005 -878,732 -868,192 1,746,467 -877,537 -866,992 1,745,763 -876,298 -865,747 -2,631,839
NET INCREASE (DECREASE) IN FUNDS FROM
FUNDING AND INVESTMENT ACTIVITIES 3,000,000 -296,518 -886,057 292,005 -878,732 -868,192 1,746,467 -877,537 -866,992 1,745,763 -876,298 -865,747 368,161
109
Appendix Three, Attachment F – Base Case Financials
Mini Business Plan – Loan Sale Strategy
CALIFORNIA INTEGRATED WASTE MANAGEMENT BOARD
RMDZ LOAN PROGRAM-LOAN SALE STRATEGY-BASE CASE
Statement of Financing and Investment Activities
Five Years
YEAR TWO Total YEAR THREE Total
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr Year 2 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr Year 3
FINANCING ACTIVITIES
Funds Received From:
Sale of Shares
CIWMB Investment 0 0 0 500,000 500,000 0 0 0 0 0
Private (NMTC) Investors 0 0 0 0 0 0 0 0 0 0
Total of Funding From Investors 0 0 0 500,000 500,000 0 0 0 0 0
Funding From Issuance of
Debt
Debt Class 1-Short Term 0 0 0 0 0 0 0 0 0 0
Debt Class 2-Long Term Fixed Rate 0 0 0 0 0 0 0 0 0 0
Total Funding From Issuance of
Debt 0 0 0 0 0 0 0 0 0 0
Total Funding From Financing Activities 0 0 0 500,000 500,000 0 0 0 0 0
Less Funds Applied To:
Redemption of Shares
CIWMB Investment/Start Up Cost Reimb. 0 0 0 0 0 0 0 0 0 0
Private (NMTC) Investors 0 0 0 0 0 0 0 0 0 0
Total Shares Redeemed 0 0 0 0 0 0 0 0 0 0
Repayment of Corporate Notes
Debt Class 1-Short Term Notes 0 0 0 0 0 0 0 0 0 0
Debt Class 2-Long Term Fixed Rate 0 0 0 0 0 0 0 0 0 0
Total Payments of Corporate Notes 0 0 0 0 0 0 0 0 0 0
Total Application of Funds 0 0 0 0 0 0 0 0 0 0
FUNDING FROM FINANCING
ACTIVITIES (NET) 0 0 0 500,000 500,000 0 0 0 0 0
INVESTMENT ACTIVITIES
ADD: Funds Received From Sale of Loans:
Sale of Low Cost Loans 1,305,819 716,267 1,000,209 1,143,509 4,165,804 1,429,144 1,144,482 1,143,836 1,143,834 4,861,296
Sale of Deferred Payment Loans 540,000 480,000 420,000 480,000 1,920,000 600,000 480,000 480,000 480,000 2,040,000
Sale of Subordinate Debt Loans 786,021 432,796 605,914 692,473 2,517,204 865,591 692,473 692,473 692,473 2,943,011
Total Funds Received From Sale of Loans 2,631,840 1,629,063 2,026,124 2,315,982 8,603,008 2,894,735 2,316,955 2,316,309 2,316,308 9,844,307
LESS: Funds Applied to Lending Activities:
Low Cost Loans 750,000 1,050,000 1,200,000 1,500,000 4,500,000 1,200,000 1,200,000 1,200,000 1,200,000 4,800,000
Deferred Payment Loans 480,000 420,000 480,000 600,000 1,980,000 480,000 480,000 480,000 480,000 1,920,000
Subordinate Debt 450,000 630,000 720,000 900,000 2,700,000 720,000 720,000 720,000 720,000 2,880,000
Total Lending Activities 1,680,000 2,100,000 2,400,000 3,000,000 9,180,000 2,400,000 2,400,000 2,400,000 2,400,000 9,600,000
ADD: Principal Collections 62,565 68,577 81,807 100,525 313,474 88,107 83,478 83,692 83,692 338,969
PROCEEDS FROM INVESTMENT
ACTIVITIES (NET) 1,014,404 -402,360 -292,070 -583,494 -263,518 582,842 433 1 0 583,275
NET INCREASE (DECREASE) IN FUNDS FROM
FUNDING AND INVESTMENT ACTIVITIES 1,014,404 -402,360 -292,070 -83,494 236,482 582,842 433 1 0 583,275
110
Appendix Three, Attachment F – Base Case Financials
Mini Business Plan – Loan Sale Strategy
CALIFORNIA INTEGRATED WASTE MANAGEMENT BOARD
RMDZ LOAN PROGRAM-LOAN SALE STRATEGY-BASE CASE
Statement of Financing and Investment Activities
Five Years
YEAR FOUR Total YEAR FIVE Total
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr Year 4 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr Year 5
FINANCING ACTIVITIES
Funds Received From:
Sale of Shares
CIWMB Investment 0 0 0 0 0 0 0 0 0 0
Private (NMTC) Investors 0 0 0 0 0 0 0 0 0 0
Total of Funding From Investors 0 0 0 0 0 0 0 0 0 0
Funding From Issuance of
Debt
Debt Class 1-Short Term 0 0 0 0 0 0 0 0 0 0
Debt Class 2-Long Term Fixed Rate 0 0 0 0 0 0 0 0 0 0
Total Funding From Issuance of
Debt 0 0 0 0 0 0 0 0 0 0
Total Funding From Financing Activities 0 0 0 0 0 0 0 0 0 0
Less Funds Applied To:
Redemption of Shares
CIWMB Investment/Start Up Cost Reimb. 0 0 0 0 0 0 0 0 0 0
Private (NMTC) Investors 0 0 0 0 0 0 0 0 0 0
Total Shares Redeemed 0 0 0 0 0 0 0 0 0 0
Repayment of Corporate Notes
Debt Class 1-Short Term Notes 0 0 0 0 0 0 0 0 0 0
Debt Class 2-Long Term Fixed Rate 0 0 0 0 0 0 0 0 0 0
Total Payments of Corporate Notes 0 0 0 0 0 0 0 0 0 0
Total Application of Funds 0 0 0 0 0 0 0 0 0 0
FUNDING FROM FINANCING
ACTIVITIES (NET) 0 0 0 0 0 0 0 0 0 0
INVESTMENT ACTIVITIES
ADD: Funds Received From Sale of Loans:
Sale of Low Cost Loans 1,143,834 1,143,834 1,143,834 1,143,834 4,575,338 1,143,834 1,143,834 1,143,834 1,143,834 4,575,338
Sale of Deferred Payment Loans 480,000 480,000 480,000 480,000 1,920,000 480,000 480,000 480,000 480,000 1,920,000
Sale of Subordinate Debt Loans 692,473 692,473 692,473 692,473 2,769,893 692,473 692,473 692,473 692,473 2,769,893
Total Funds Received From Sale of Loans 2,316,308 2,316,308 2,316,308 2,316,308 9,265,231 2,316,308 2,316,308 2,316,308 2,316,308 9,265,231
LESS: Funds Applied to Lending Activities:
Low Cost Loans 1,200,000 1,200,000 1,200,000 1,200,000 4,800,000 1,200,000 1,200,000 1,200,000 1,200,000 4,800,000
Deferred Payment Loans 480,000 480,000 480,000 480,000 1,920,000 480,000 480,000 480,000 480,000 1,920,000
Subordinate Debt 720,000 720,000 720,000 720,000 2,880,000 720,000 720,000 720,000 720,000 2,880,000
Total Lending Activities 2,400,000 2,400,000 2,400,000 2,400,000 9,600,000 2,400,000 2,400,000 2,400,000 2,400,000 9,600,000
ADD: Principal Collections 83,692 83,692 83,692 83,692 334,769 83,692 83,692 83,692 83,692 334,769
PROCEEDS FROM INVESTMENT
ACTIVITIES (NET) 0 0 0 0 0 0 0 0 0 0
NET INCREASE (DECREASE) IN FUNDS FROM
FUNDING AND INVESTMENT ACTIVITIES 0 0 0 0 0 0 0 0 0 0
111
Appendix Three, Attachment F – Base Case Financials
Mini Business Plan – Loan Sale Strategy
CALIFORNIA INTEGRATED WASTE MANAGEMENT BOARD
RMDZ LOAN PROGRAM-LOAN SALE STRATEGY-BASE CASE
Proforma Statement of Operations
Five Years
YEAR ONE Total
Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Month 7 Month 8 Month 9 Month 10 Month 11 Month 12 YEAR 1
Investment Income
Loan Loss Reserves 0 22,800 68,400 -39,642 68,400 68,400 -173,118 68,400 68,400 -172,952 68,400 68,400 115,889
Interest on loans 0 841 3,494 3,077 5,438 8,326 3,767 5,439 8,324 3,765 5,434 8,316 56,220
Interest on Idle Funds 9,333 8,345 5,391 6,365 3,436 542 6,363 3,438 548 6,367 3,446 561 54,136
TOTAL INCOME 9,333 31,986 77,285 -30,200 77,274 77,268 -162,987 77,277 77,272 -162,820 77,280 77,277 226,244
Expenses
Operating Expenses
Administration, Legal and overhead 34,499 31,624 25,555 23,000 20,444 17,889 12,831 12,831 12,831 12,831 12,831 12,830 229,996
Subtotal fund management 34,499 31,624 25,555 23,000 20,444 17,889 12,831 12,831 12,831 12,831 12,831 12,830 229,996
Cost of financing activities
Interest Cost Incurred
Debt Class 1-Short Term Notes 0 0 0 0 0 0 0 0 0 0 0 0 0
Debt Class 2 - Long Term Fixed Rate Notes 0 0 0 0 0 0 0 0 0 0 0 0 0
(Gain) or Loss on Sale of Notes 0 0 0 11,766 0 0 26,173 0 0 26,161 0 0 64,101
Loan Loss Payments 0 0 0 0 0 0 0 0 0 0 0 0 0
Subtotal cost of financing activities 0 0 0 11,766 0 0 26,173 0 0 26,161 0 0 64,101
TOTAL EXPENSES 34,499 31,624 25,555 34,766 20,444 17,889 39,004 12,831 12,831 38,992 12,831 12,830 294,097
PROGRAM OPERATING PROFIT (LOSS) -25,166 361 51,730 -64,966 56,830 59,379 -201,991 64,446 64,441 -201,812 64,449 64,447 -67,853
112
Appendix Three, Attachment F – Base Case Financials
Mini Business Plan – Loan Sale Strategy
CALIFORNIA INTEGRATED WASTE MANAGEMENT BOARD
RMDZ LOAN PROGRAM-LOAN SALE STRATEGY-BASE CASE
Statement of Financing and Investment Activities
Five Years
YEAR TWO Total YEAR THREE Total
Investment Income 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr YEAR 2 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr YEAR 3
Loan Loss Reserves -94,693 -5,893 -3,802 15,177 -89,211 -83,616 2,753 2,753 2,753 -75,358
Interest on loans 16,849 18,568 20,371 25,210 80,998 21,615 20,786 20,786 20,786 83,974
Interest on Idle Funds 11,826 7,802 4,881 4,046 28,555 3,292 3,293 3,293 3,293 13,171
TOTAL INCOME -66,018 20,477 21,451 44,434 20,343 -58,709 26,832 26,832 26,832 21,786
Expenses
Operating Expenses
Administration, Legal and overhead 0 0 0 0 0 0 0 0 0 0
Subtotal fund management 0 0 0 0 0 0 0 0 0 0
Cost of financing activities
Interest Cost Incurred
Debt Class 1-Short Term Notes 0 0 0 0 0 0 0 0 0 0
Debt Class 2 - Long Term Fixed Rate Notes 0 0 0 0 0 0 0 0 0 0
(Gain) or Loss on Sale of Notes 26,116 14,325 20,004 22,870 83,316 28,583 22,890 22,877 22,877 97,226
Loan Loss Payments 0 0 0 0 0 0 0 0 0 0
Subtotal cost of financing activities 26,116 14,325 20,004 22,870 83,316 28,583 22,890 22,877 22,877 97,226
TOTAL EXPENSES 26,116 14,325 20,004 22,870 83,316 28,583 22,890 22,877 22,877 97,226
PROGRAM OPERATING PROFIT (LOSS) -92,135 6,151 1,447 21,564 -62,973 -87,292 3,942 3,955 3,955 -75,440
113
Appendix Three, Attachment F – Base Case Financials
Mini Business Plan – Loan Sale Strategy
CALIFORNIA INTEGRATED WASTE MANAGEMENT BOARD
RMDZ LOAN PROGRAM-LOAN SALE STRATEGY-BASE CASE
Statement of Financing and Investment Activities
Five Years
YEAR FOUR Total YEAR FIVE Total
Investment Income 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr YEAR 4 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr YEAR 5
Loan Loss Reserves 2,753 2,753 2,753 2,753 11,011 2,753 2,753 2,753 2,753 11,011
Interest on loans 21,536 19,549 23,261 26,974 91,319 20,786 20,786 20,786 20,786 83,144
Interest on Idle Funds 9,379 9,379 9,379 9,379 37,517 9,379 9,379 9,379 9,379 37,517
TOTAL INCOME 33,668 31,680 35,393 39,105 139,847 32,918 32,918 32,918 32,918 131,672
Expenses
Operating Expenses
Administration, Legal and overhead 0 0 0 0 0 0 0 0 0 0
Subtotal fund management 0 0 0 0 0 0 0 0 0 0
Cost of financing activities
Interest Cost Incurred
Debt Class 1-Short Term Notes 0 0 0 0 0 0 0 0 0 0
Debt Class 2 - Long Term Fixed Rate Notes 0 0 0 0 0 0 0 0 0 0
(Gain) or Loss on Sale of Notes 22,877 22,877 22,877 22,877 91,507 22,877 22,877 22,877 22,877 91,507
Loan Loss Payments 0 0 0 0 0 0 0 0 0 0
Subtotal cost of financing activities 22,877 22,877 22,877 22,877 91,507 22,877 22,877 22,877 22,877 91,507
TOTAL EXPENSES 22,877 22,877 22,877 22,877 91,507 22,877 22,877 22,877 22,877 91,507
PROGRAM OPERATING PROFIT (LOSS) 10,791 8,804 12,516 16,229 48,340 10,041 10,041 10,041 10,041 40,165
114
Appendix Four
Mini Business Plan – Equity Equivalent/Program-Related Investment Strategy
EQUITY EQUIVALENT/PROGRAM-RELATED INVESTMENT STRATEGY
Introduction
The following mini-business plan describes a strategy for employing Equity Equivalent
Investments (EQ2) and Program-related Investments (PRIs) to produce $10 million annually in
private financing for small recycling companies that have difficulty securing affordable financing
from banks and venture firms.
Equity Equivalent Investments are long-term, low-interest loans made by commercial banks to
non-profit organizations for the purpose of financing loans and investments in low-income areas.
The typical EQ2 loan is structured with a rolling “maturity” entailing automatic annual extensions
of the loan as long as the borrower complies with the terms of the loan agreement. In addition,
interest payments are made solely from the net cash flows of the borrower. Because of these
liberal terms, EQ2’s serve as a form of “quasi-equity” for non-profit lenders.
PRIs are low-interest loans that foundations use, as an alternative to grants, to finance charitable
activities.
The plan is based on the proposition that the Recycling Finance Program must be structured with
the same financial discipline that characterizes a bank or other commercial lender. That is,
California Integrated Waste Management Board (the “Board” or “CIWMB”) funds along with
EQ2’s and PRIs (liabilities) would finance a portfolio of recycling loans (assets). In turn, these
assets—loans—must produce the income needed to cover operating expenses, losses and interest
on borrowed funds. In other words, the program’s lending capacity and financial viability would
depend on three factors:
The Board would invest in a CDFI who already has a successful track record of attracting EQ2
and PRI investors, and makes commercial loans to for-profit businesses. With the Board’s
investment, the CDFI would be able to attract even more outside funds, especially from
foundations that want an environmental purpose and use of their funds.
The performance of its assets. Loans made under the program must meet two tests. First,
they should provide the type of financing required by recycling companies. At the same time,
they must provide sufficient earnings to cover the program’s costs.
The structure of its liabilities. The program’s mix of contributed capital and borrowed money
should be such that the principal and interest payments on its assets can retire its debts and
provide a return on its capital.
The right level of operating expenses. The expenses associated with originating,
underwriting and servicing loans – as well as covering loan losses – must not exceed net
interest income, the difference the interest paid on borrowed money and the earnings
generated by the portfolio.
The mini business plan is organized into seven brief sections:
Section 1 – Borrowers
Describes the companies whose financing needs the program is designed to meet.
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Mini Business Plan – Equity Equivalent/Program-Related Investment Strategy
Section 2 – Products
Describes the types of loans the program issues.
Section 3 – Capital Structure & Sources
Describes the mix of debt and equity capital that would be used to fund the RFP and provides
several potential sources of financing for the program.
Section 4 – Operations
Describes how the Program would be managed.
Section 5 – Implementation
Sets forth the tasks and costs required to secure financing commitments for the program.
Section 6 – Analysis
Describes the extent to which the leveraging strategy meets the five criteria discussed as
important in a successful CIWMB loan leveraging program – simplicity, practicality,
sustainability, affordability, implementability.
Section 7 – Financial Analysis
Lays out pro forma five-year financials for the program, including a projected rate of return on
investment.
Section 1 – Borrowers
The Recycling Finance Program is designed to meet the financing needs of three types of
recycling companies that make up the RMDZ market.
Established recycling firms. Approximately 50 percent of borrowers would be companies
that have sufficient operating and earnings history to secure credit from conventional sources.
These low-risk companies would be more concerned with the cost of capital than with access
to capital.
Expansion-stage companies. Approximately 30 percent of borrowers would be companies
that have survived their formative years and are now seeking to grow. However, these
companies lack the earnings history, capital or collateral needed to support the full amount of
funding needed to finance expansion.
Early-stage companies. The remaining borrowers would be companies that are essentially
start-up businesses. Because they are not yet producing positive cash flows, these high-risk
companies require some form of “equity” financing to fund continued growth.
Section 2 – Loans
The following three products are designed to meet the distinct needs of each these borrower
segments:
Below-market loans. Established recycling companies seeking expansion financing would be
eligible for medium and long-term fixed-asset loans priced, on average, 200 basis points
below the market rate for such financing. Underwriting standards for these loans including
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Mini Business Plan – Equity Equivalent/Program-Related Investment Strategy
loan-to-value and debt service coverage ratios would be only slightly more liberal than those
employed by commercial lenders.
Sunset Manufacturing is a 20-year old company that uses waste materials to produce a
range of furniture products. Its sales are about $1.5 million annually. In order to expand,
it requires $500,000 to upgrade its production facility. At 2.75 percent over prime or 7.5
percent, a 15-year SBA loan would cost the firm $56,000 annually in debt service.
However, at 2 percent below prime, a loan from the Recycling Finance Program would
only require $41,000 in debt service, a savings of $15,000 annually.
Subordinate, companion loans. Expansion-stage companies that lack the collateral to secure
senior financing needed for fixed assets or working capital would be candidates for
subordinate debt. These loans would typically be structured as 25-40 percent junior
participations in senior, secured loans extended by banks or other commercial lenders.
Because of the risk associated with junior-lien lending, the Recycling Finance Program’s
interest in each transaction would be priced at 300 to 500 basis points above prime. In
addition, as part of each transaction, a loan loss reserve contribution, equaling four to eight
percent of the total financing, would be funded from loan proceeds and retained by the
Recycling Program.
MicroCast, a $2.5 million company purchases, repairs and resells consumer electronics.
The company has grown rapidly but its weak balance sheet makes it impossible to secure
$250,000 in equipment financing that it needs to expand. The Recycling Finance
Program advances $250,000 to MicroCast and then sells a 75 percent senior interest
($187,500) in the loan to a local bank. The RFP retains a 25 percent ($67,500)
subordinate interest in the loan along with a 5 percent loan-loss insurance payment
($12,500). The loan structure provides the bank with a senior loan of $187,500 secured
by $250,000 in equipment. At the same time, the Recycling Finance Program’s risk is
covered by an insurance payment of $12,500 or 20 percent of its exposure. Finally, the
RFP’s subordinate interest is structured with a long amortization, thus producing lower
debt service payments than the borrower would pay for bank financing alone.
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Gives $250,000 note and $12,500 reserve
RFP MicroCast
Makes $250,000 loan
Sells $187,500 senior interest
Lender
Deferred payment loans. Early-stage companies, including start-up firms, that possess neither
the cash flow (or collateral) to qualify for debt financing nor the “upside” potential to qualify
for venture or angel financing would be candidates for deferred payment loans. The deferred
payment loan would be modeled on the structure employed by SBA for investments in New
Markets Venture Capital Companies. That is, each loan would involve a “discount period”—
2 to 3 years during which no principal or interest payments would be required –followed by
an amortization period. Upon closing, the borrower would receive the full amount of the loan
less the present value of interest for the discount period. At the end of the discount period, the
borrower would repay the loan in regular installments of principal and interest over a period
of up to seven years. Because of the risk that borrowers would be unable to repay loans
during the amortization period, deferred payment loans would priced at 600 basis points
above prime. In addition, as with subordinate loans, a cash reserve account would be funded
as part of each transaction
TireWare is an early stage company that has developed a more efficient way of
retreading tires. Although it needs $200,000 to fund its operations, neither venture
capital companies nor angel investors are willing to invest. Using the deferred payment
note structure, the Recycling Loan Program makes a $287,000 loan to the borrower. Of
this amount approximately $67,000, the present value of three years of interest and
$20,000 in loan-loss reserve contributions are retained by the RFP. At the end of three
years TireWare begins making payments of $5,000 per month to repay the $287,000
balance over seven years. Because of the deferred payment note, TireWare has full use
of $200,000 for three years. It has obtained the equivalent of equity without having to
relinquish stock to an outside investor. The loan’s high interest rate and the insurance
reserve provide compensation and credit support for RFP’s risk.
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Borrower
Gives $287,000 note with
Advances $200,000 3-year discount period and
7-year amortization
RFP
Section 3 – Capital Structure and Sources
Many foundations, banks and insurance companies provide below-market “double-bottom-line”
financing only to “certified” community development financial institutions (CDFIs). CDFIs are
financial services organizations that make loans and investments primarily in low-income areas.
To meet this eligibility requirement, the RFP would be carried out through an established non-
profit “CDFI” that would agree to use funds obtained through the plan described below for the
purpose of lending $10 million annually to eligible recycling companies. The financing plan
would be as follows:
CIWMB would agree to contribute $3.5 million annually to the CDFI for the three years in
the form of a recoverable grant or long-term loan. In either event, CIWMB would be entitled
to recover its capital contribution only after EQ2 and PRIs had been repaid.
Commercial banks, financial services companies and foundations would provide the CDFI
$10 million in EQ2 investments and PRIs structured as long-term, low-interest subordinate
loan. The loans would bear an interest rate of 2.75 percent (200 basis points below prime)
and would be repaid solely from the earnings of the RFP.
Finally, a consortium of commercial banks would provide $30 million in credit secured by
the assets of the RFP. The credit line would be priced at prime plus a small spread of 100
basis points.
Following are the names of three organizations that have made EQ2 or PRI investments in the
past and may find intriguing the idea of helping a CDFI expand its lending program to recycling
companies.
Ford Foundation. With $14.5 billion in assets, the Ford Foundation is the largest private
foundation in America and has allocated $180 million for program-related investment
activity.
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Citibank. The nation’s largest bank with over $1 trillion assets, Citibank has a commitment
to lend and invest $115 billion in low and moderate income communities over a 10-year
period. It is one of the pioneers in the use of EQ2 investments to finance community
development finance institutions
F.B. Heron Foundation. The F.B. Heron Foundation is a $300 million charitable organization
with an exclusive focus on community development. It has the stated aim of investing its
entire corpus in community development assets.
Section 4 – Operations
In order to minimize the RFP’s operating costs, the CDFI would assume the principal functions
associated with making and monitoring recycling loans.
Loan origination. The CDFI, local banks as well as the Board would be responsible for
identifying borrowers and packaging their loan applications.
Loan underwriting. In cooperation with its CDFI partner, CIWMB would develop a set of
underwriting standards and policies for each type of loan product. The CDFI’s credit
committee or chief credit officer would use these standards in approving loans under the
program.
Loan processing and documentation. For the sake of simplicity, CIWMB would employ the
CDFI’s standard loan documents and closing procedures.
Loan servicing. Loan servicing would be performed by the CDFI or contracted out to one or
more banks that are EQ2 investors. If desirable, CIWMB would assume sub-servicing
responsibilities.
Loan origination CDFI, banks
Loan underwriting CDFI
Loan processing/documentation CDFI using existing documentation and procedures
Loan servicing CDFI, banks
Section 5 – Implementation
Implementing the financing plan would involve the following tasks
Organizing a finance team. (The finance team will most likely be composed of Board staff.
The included budgets are merely an estimate of the associated costs). The job of raising
significant amounts of capital from lenders and investors would require a “finance team”
comprising both in-house CIWMB staff, staff of the CDFI “partner” and outside advisors.
This team’s responsibility would be to establish the parameters for the financing transaction,
manage CIWMB’s relationships with prospective investors and lenders, provide CIWMB’s
senior management and board required decision-making information and guide the capital-
raising process to a successful closing. The team should include CIWMB’s chief financial
officer and designated senior management of the CDFI as well as CIWMB’s in-house
attorney. If necessary, a financial advisory firm should be retained to help in structuring and
placing the transaction.
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Defining financing requirements. Although the mini-business plan recommends that
CIWMB raise $50 million in total capital by leveraging $10.5 million in appropriated funds
with $40 million in private EQ2, PRI and market-rate debt financing, the finance team should
determine whether some change in the amount and mix of capital is needed to accommodate
the amount, type and timing of anticipated loan demand.
Establishing an investment structure. Once the program’s financing requirements are
established, the team should negotiate the terms and conditions under which the Board will
investment in the CDFI. This effort is needed to ensure that the investment structure is
properly aligned with the Board’s loan origination and return goals.
Preparing and reviewing financing documents. Transaction documents may be prepared by
CIWMB’s counsel or the CDFI’s counsel.
Closing the transaction. Finally, the finance team would be responsible for managing the
closing process, addressing last-minute issues and oversights that could produce problems in
consummating the transaction.
The following two charts set forth a cost budget and time schedule for carrying out the proposed
financing.
Sample Budget
This sample budget is based upon the following assumptions regarding hourly billing rates for
CIWMB staff and advisors:
CIWMB staff $150
Outside legal counsel $250
Accounting $175
Financial advisory $300
Financial Total
CIWMB Legal Accounting Advisory Hours Cost
Task
1. Organize financing team 30 0 0 0 30 $ 4,500
2. Define financing
requirements 24 0 0 16 40 $ 8,400
3. Develop initial
financing structure 48 24 24 24 120 $ 22,800
4. Prepare financing
documents 16 80 0 16 112 $ 27,200
5. Close transaction 24 40 0 24 88 $ 17,296
Total Hours 142 144 24 80 390 $ 80,196
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Section 6 – Analysis
As a source of financing for the RFP, EQ2 and PRI financing have both advantages and
disadvantages. The analysis bellows considers the proposed leveraging strategy in light of five
criteria.
Simplicity. PRIs and EQ2 financing have been employed to fund a number of CDFI lending
programs. As a result, reasonably standard structures and documents exist and can be
employed to finance the RFP.
Practicality. The total pool of available PRI and EQ2 financing is relatively small and
competition for it correspondingly stiff. Thus, CIWMB may find it difficult to raise as much
as $10 million in such financing for the RFP. However, the fact that the RFP should increase
the participating CDFI’s viability (by increasing its income and enabling it to spread costs
over a larger loan portfolio) as well as aid the growth of recycling companies should increase
its attractiveness to investors.
Sustainability. Low-cost EQ2 and PRI financing, combined with CIWMB’s capital
contribution, should yield a blended cost of financing that is substantially less than the
average interest rate on the RFP’s recycling loans. In addition, the insurance features built
into the RFP’s loans should minimize the need to use interest spread to finance loan losses.
As a result, the Program should be able to finance its operating costs entirely from revenues
without the need for additional infusions from CIWMB.
Affordability. Once again, the Program’s low cost of funds should reduce the amount of
interest income needed to pay interest expense. This would allow borrowers to pay lower
interest rates than if market-rate debt were the principal source of loan financing.
Implementability. Because institutions tend to limit “social investments” to certified CDFIs,
CIWMB’s success in raising below-market capital for the RFP would depend, to a large
degree, on its partner. Recruiting, as program manager—and borrower– a well-regarded and
well-known CDFI would substantially increase the likelihood of success in raising funds for
the program.
Section 7 – Financial Analysis
Following are “best-case” and “base-case” financial forecasts for the RASP Program. Each set of
forecasts includes two types of financial statements:
Proforma Statement of Operations.
Proforma Statement of Financing and Investment Activities.
Each set of pro-forma financial statements illustrates the economic condition and activities of the
RMDZ Loan Program for a five-year period
122
Appendix Four
Mini Business Plan – Equity Equivalent/Program-Related Investment Strategy
Proforma Statement of Financing and Investment Activities
This Statement sets forth sources and applications of funds for all five years of the forecast. The
section of the Statement entitled “Financing Activities” includes the sources of funds used to fund
the RMDZ Loan Program employing. For purposes of simplicity, both EQ2 and PRI investments
are labeled EQ2. “Investment Activities” represents the application of funds described under
Financing Activities to loan origination activities.
Pro-forma Statement of Operations
The Pro-forma Statement of Operations illustrates the sources of program income and
summarizes the operating expenses including loan losses. Loan-loss reserve revenues represent
“insurance” contributions made as part of each new loan transaction.
Assumptions to the Pro-forma Financials
The following assumptions were used to develop the previously described pro-forma financials.
CIWMB contributes $10 million in subordinate capital over a 3-year period according to the
following schedule:
Year 1, $3.5 million
Year 2, $3.5 million
Year 3, $3.0 million
$10 million in EQ2 investments are secured from banks and foundations at 200 basis points
below prime, 2.75 percent.
$30 million in market rate debt is secured from banks at 100 basis points above prime, 5.75
percent
Idle funds are invested at four percent increasing to 4.125 percent in Year Four.
Loan Portfolio Characteristics
% of Average Deferment of
Asset Portfolio Loan Amt Yield Term Payment
Low Interest 50% $200,000 2.75% 5 yrs None
Deferred Payment 20% $80,000 12.25% 10 yrs 3 yrs
Subordinate Debt 30% $120,000 10.50% 5 yrs None
123
Appendix Four
Mini Business Plan – Equity Equivalent/Program-Related Investment Strategy
Loan Losses and Insurance Payments
Insurance Base-case Loan Best-case Loan
Asset Payment Losses Net of Losses Net of
Recoveries Recoveries
Low Interest None 3% 1.5%
Deferred Payment 25% 25% 15%
Subordinate Debt 15% 15% 7.5%
Operating Expenses
The following functions are assumed to be borne by the fund:
Chief Credit Officer @ $120,000
Chief Financial/Operations Officer @ $85,000
Two loan officers @ $80,000 total
One support person @ $25,000
Fringe benefits estimated at 35 percent of salaries.
Administration, Marketing and Overhead – Modest levels are included as managing entity is
envisioned to assume operational responsibility and provide infrastructure.
Attachments G and H set forth a schedule for the completion of these tasks.
The projections should clearly show the Board’s investment, outside investment, the amount of
loan funds available to recycling businesses, and how much and when the Board’s money would
be returned.
124
Appendix Four, Attachment G – Best Case Financials
Mini Business Plan – Equity Equivalent/Program-Related Investment Strategy
CALIFORNIA INTEGRATED WASTE MANAGEMENT BOARD
RMDZ LOAN PROGRAM-EQ2-BEST CASE
Statement of Financing and Investment Activities
Five Years
YEAR ONE Total
Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Month 7 Month 8 Month 9 Month 10 Month 11 Month 12 Year 1
FINANCING ACTIVITIES
Funds Received From:
Sale of Shares
CIWMB Investment 3,500,000 0 0 0 0 0 0 0 0 0 0 0 3,500,000
Private (EQ2) Investors 0 10,000,000 0 0 0 0 0 0 0 0 0 0 10,000,000
Total of Funding From Investors 3,500,000 10,000,000 0 0 0 0 0 0 0 0 0 0 13,500,000
Funding From Issuance of
Debt
Debt Class 1-Short Term 0 0 0 0 0 0 0 0 0 0 0 0 0
Debt Class 2-Long Term Fixed Rate 0 0 30,000,000 0 0 0 0 0 0 0 0 0 30,000,000
Total Funding From Issuance of
Debt 0 0 30,000,000 0 0 0 0 0 0 0 0 0 30,000,000
Total Funding From Financing Activities 3,500,000 10,000,000 30,000,000 0 0 0 0 0 0 0 0 0 43,500,000
Less Funds Applied To:
Redemption of Shares
CIWMB Investment/Start Up Cost Reimb. 0 229,996 0 0 0 0 0 0 0 0 0 0 229,996
Private (EQ2) Investors 0 0 0 0 0 0 0 0 0 0 0 0 0
Total Shares Redeemed 0 229,996 0 0 0 0 0 0 0 0 0 0 229,996
Repayment of Corporate Notes
Debt Class 1-Short Term Notes 0 0 0 0 0 0 0 0 0 0 0 0 0
Debt Class 2-Long Term Fixed Rate 0 0 0 0 0 0 0 0 0 0 0 0 0
Total Payments of Corporate Notes 0 0 0 0 0 0 0 0 0 0 0 0 0
Total Application of Funds 0 229,996 0 0 0 0 0 0 0 0 0 0 229,996
FUNDING FROM FINANCING
ACTIVITIES (NET) 3,500,000 9,770,004 30,000,000 0 0 0 0 0 0 0 0 0 43,270,004
INVESTMENT ACTIVITIES
ADD: Funds Received From Sale of Loans:
Sale of Low Cost Loans 0 0 0 0 0 0 0 0 0 0 0 0 0
Sale of Deferred Payment Loans 0 0 0 0 0 0 0 0 0 0 0 0 0
Sale of Subordinate Debt Loans
Total Funds Received From Sale of Loans 0 0 0 0 0 0 0 0 0 0 0 0 0
LESS: Funds Applied to Lending Activities:
Low Cost Loans 0 150,000 450,000 450,000 450,000 450,000 450,000 450,000 450,000 450,000 450,000 450,000 4,650,000
Deferred Payment Loans 0 60,000 180,000 180,000 180,000 180,000 180,000 180,000 180,000 180,000 180,000 180,000 1,860,000
Subordinate Debt 0 90,000 270,000 270,000 270,000 270,000 270,000 270,000 270,000 270,000 270,000 270,000 2,790,000
Total Lending Activities 0 300,000 900,000 900,000 900,000 900,000 900,000 900,000 900,000 900,000 900,000 900,000 9,299,999
ADD: Principal Collections 0 0 3,504 14,031 24,604 35,224 45,890 56,604 67,364 78,172 89,028 99,931 514,353
PROCEEDS FROM INVESTMENT
ACTIVITIES (NET) 0 (300,000) (896,496) (885,969) (875,396) (864,776) (854,110) (843,396) (832,636) (821,828) (810,972) (800,069) (8,785,646)
NET INCREASE (DECREASE) IN FUNDS FROM
FUNDING AND INVESTMENT ACTIVITIES 3,500,000 9,470,004 29,103,504 (885,969) (875,396) (864,776) (854,110) (843,396) (832,636) (821,828) (810,972) (800,069) 34,484,358
125
Appendix Four, Attachment G – Best Case Financials
Mini Business Plan – Equity Equivalent/Program-Related Investment Strategy
CALIFORNIA INTEGRATED WASTE MANAGEMENT BOARD
RMDZ LOAN PROGRAM-EQ2 BEST CASE
Statement of Financing and Investment Activities
Five Years
YEAR TWO Total YEAR THREE Total
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr Year 2 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr Year 3
FINANCING ACTIVITIES
Funds Received From:
Sale of Shares
CIWMB Investment 3,500,000 0 0 0 3,500,000 3,000,000 0 0 0 3,000,000
Private (EQ2) Investors 0 0 0 0 0 0 0 0 0 0
Total of Funding From Investors 3,500,000 0 0 0 3,500,000 3,000,000 0 0 0 3,000,000
Funding From Issuance of
Debt
Debt Class 1-Short Term 0 0 0 0 0 0 0 0 0 0
Debt Class 2-Long Term Fixed Rate 0 0 0 0 0 0 0 0 0 0
Total Funding From Issuance of
Debt 0 0 0 0 0 0 0 0 0 0
Total Funding From Financing Activities 3,500,000 0 0 0 3,500,000 3,000,000 0 0 0 3,000,000
Less Funds Applied To:
Redemption of Shares
CIWMB Investment/Start Up Cost Reimb. 0 0 0 0 0 0 0 0 0 0
Private (EQ2) Investors 0 0 0 0 0 0 0 0 0 0
Total Shares Redeemed 0 0 0 0 0 0 0 0 0 0
Repayment of Corporate Notes
Debt Class 1-Short Term Notes 0 0 0 0 0 0 0 0 0 0
Debt Class 2-Long Term Fixed Rate 0 0 0 0 0 0 0 0 0 0
Total Payments of Corporate Notes 0 0 0 0 0 0 0 0 0 0
Total Application of Funds 0 0 0 0 0 0 0 0 0 0
FUNDING FROM FINANCING
ACTIVITIES (NET) 3,500,000 0 0 0 3,500,000 3,000,000 0 0 0 3,000,000
INVESTMENT ACTIVITIES
ADD: Funds Received From Sale of Loans:
Sale of Low Cost Loans 0 0 0 0 0 0 0 0 0 0
Sale of Deferred Payment Loans 0 0 0 0 0 0 0 0 0 0
Sale of Subordinate Debt Loans
Total Funds Received From Sale of Loans 0 0 0 0 0 0 0 0 0 0
LESS: Funds Applied to Lending Activities:
Low Cost Loans 750,000 1,050,000 1,200,000 1,500,000 4,500,000 1,200,000 1,200,000 1,200,000 1,200,000 4,800,000
Deferred Payment Loans 480,000 420,000 480,000 600,000 1,980,000 480,000 480,000 480,000 480,000 1,920,000
Subordinate Debt 450,000 630,000 720,000 900,000 2,700,000 720,000 720,000 720,000 720,000 2,880,000
Total Lending Activities 1,680,000 2,100,000 2,400,000 3,000,000 9,180,000 2,400,000 2,400,000 2,400,000 2,400,000 9,600,000
ADD: Principal Collections 224,218 227,664 351,287 486,796 1,289,965 569,379 699,167 826,996 936,438 3,031,980
PROCEEDS FROM INVESTMENT
ACTIVITIES (NET) (1,455,782) (1,872,336) (2,048,713) (2,513,204) (7,890,035) (1,830,621) (1,700,833) (1,573,004) (1,463,562) (6,568,020)
NET INCREASE (DECREASE) IN FUNDS FROM
FUNDING AND INVESTMENT ACTIVITIES 2,044,218 (1,872,336) (2,048,713) (2,513,204) (4,390,035) 1,169,379 (1,700,833) (1,573,004) (1,463,562) (3,568,020)
126
Appendix Four, Attachment G – Best Case Financials
Mini Business Plan – Equity Equivalent/Program-Related Investment Strategy
CALIFORNIA INTEGRATED WASTE MANAGEMENT BOARD
RMDZ LOAN PROGRAM-EQ2 BEST CASE
Statement of Financing and Investment Activities
Five Years
YEAR FOUR Total YEAR FIVE Total
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr Year 4 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr Year 5
FINANCING ACTIVITIES
Funds Received From:
Sale of Shares
CIWMB Investment 0 0 0 0 0 0 0 0 0 0
Private (EQ2) Investors 0 0 0 0 0 0 0 0 0 0
Total of Funding From Investors 0 0 0 0 0 0 0 0 0 0
Funding From Issuance of
Debt
Debt Class 1-Short Term 0 0 0 0 0 0 0 0 0 0
Debt Class 2-Long Term Fixed Rate 0 0 0 0 0 0 0 0 0 0
Total Funding From Issuance of
Debt 0 0 0 0 0 0 0 0 0 0
Total Funding From Financing Activities 0 0 0 0 0 0 0 0 0 0
Less Funds Applied To:
Redemption of Shares
CIWMB Investment/Start Up Cost Reimb. 0 0 0 0 0 0 0 0 0 0
Private (EQ2) Investors 0 0 0 0 0 0 0 0 0 0
Total Shares Redeemed 0 0 0 0 0 0 0 0 0 0
Repayment of Corporate Notes
Debt Class 1-Short Term Notes 0 0 0 0 0 0 0 0 0 0
Debt Class 2-Long Term Fixed Rate 0 0 0 0 0 0 0 0 0 0
Total Payments of Corporate Notes 0 0 0 0 0 0 0 0 0 0
Total Application of Funds 0 0 0 0 0 0 0 0 0 0
FUNDING FROM FINANCING
ACTIVITIES (NET) 0 0 0 0 0 0 0 0 0 0
INVESTMENT ACTIVITIES
ADD: Funds Received From Sale of Loans:
Sale of Low Cost Loans 0 0 0 0 0 0 0 0 0 0
Sale of Deferred Payment Loans 0 0 0 0 0 0 0 0 0 0
Sale of Subordinate Debt Loans
Total Funds Received From Sale of Loans 0 0 0 0 0 0 0 0 0 0
LESS: Funds Applied to Lending Activities:
Low Cost Loans 1,200,000 1,200,000 1,200,000 1,200,000 4,800,000 1,200,000 1,200,000 1,200,000 1,200,000 4,800,000
Deferred Payment Loans 480,000 480,000 480,000 480,000 1,920,000 480,000 480,000 480,000 480,000 1,920,000
Subordinate Debt 720,000 720,000 720,000 720,000 2,880,000 720,000 720,000 720,000 720,000 2,880,000
Total Lending Activities 2,400,000 2,400,000 2,400,000 2,400,000 9,600,000 2,400,000 2,400,000 2,400,000 2,400,000 9,600,000
ADD: Principal Collections 998,357 1,140,514 1,282,132 1,399,045 4,820,049 1,459,247 1,604,967 1,750,778 1,869,409 6,684,401
PROCEEDS FROM INVESTMENT
ACTIVITIES (NET) (1,401,643) (1,259,486) (1,117,868) (1,000,955) (4,779,951) (940,753) (795,033) (649,222) (530,591) (2,915,599)
NET INCREASE (DECREASE) IN FUNDS FROM
FUNDING AND INVESTMENT ACTIVITIES
(1,401,643) (1,259,486) (1,117,868) (1,000,955) (4,779,951) (940,753) (795,033) (649,222) (530,591) (2,915,599)
127
Appendix Four, Attachment G – Best Case Financials
Mini Business Plan – Equity Equivalent/Program-Related Investment Strategy
CALIFORNIA INTEGRATED WASTE MANAGEMENT BOARD
RMDZ LOAN PROGRAM-EQ2-BEST CASE
Proforma Statement of Operations
Five Years
YEAR ONE Total
Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Month 7 Month 8 Month 9 Month 10 Month 11 Month 12 Year 1
Investment Income
Loan Loss Reserves 0 31,800 95,400 95,400 95,400 95,400 95,400 95,400 95,400 95,400 95,400 95,400 985,800
Interest on loans 0 1,738 6,942 12,122 17,278 22,410 27,518 32,600 37,658 42,692 47,700 52,684 301,343
Interest on Idle Funds 10,506 41,955 138,500 135,031 131,699 128,428 125,228 122,080 118,986 115,945 112,957 110,023 1,291,339
TOTAL INCOME 10,506 75,493 240,842 242,554 244,378 246,239 248,145 250,080 252,044 254,037 256,058 258,107 2,578,482
Expenses
Operating Expenses
Administration, marketing and overhead 34,499 31,624 25,555 23,000 20,444 17,889 12,831 12,831 12,831 12,831 12,831 12,830 229,996
Legal, audit and other professional fees
Subtotal fund management 34,499 31,624 25,555 23,000 20,444 17,889 12,831 12,831 12,831 12,831 12,831 12,830 229,996
Cost of financing activities
Interest Cost Incurred
Debt Class 1-Short Term Notes 0 0 0 0 0 0 0 0 0 0 0 0 0
Debt Class 2 - Long Term Fixed Rate Notes 0 22,917 166,667 166,667 166,667 166,667 166,667 166,667 166,667 166,667 166,667 166,667 1,689,583
Gain or Loss on Sale of Notes 0 0 0 0 0 0 0 0 0 0 0 0 0
Provision for Loan Losses 0 18,000 53,947 53,790 53,631 53,472 53,312 53,151 52,990 52,827 52,665 52,501 550,285
Subtotal cost of financing activities 0 40,917 220,614 220,456 220,298 220,138 219,978 219,818 219,656 219,494 219,331 219,168 2,239,868
TOTAL EXPENSES 34,499 72,541 246,169 243,456 240,742 238,027 232,809 232,649 232,487 232,325 232,162 231,998 2,469,864
NET PROGRAM PROFIT (LOSS) (23,993) 2,952 (5,327) (903) 3,636 8,211 15,336 17,432 19,557 21,712 23,895 26,109 108,618
128
Appendix Four, Attachment G – Best Case Financials
Mini Business Plan – Equity Equivalent/Program-Related Investment Strategy
CALIFORNIA INTEGRATED WASTE MANAGEMENT BOARD
RMDZ LOAN PROGRAM-EQ2-BEST CASE
Proforma Statement of Operations
Five Years
YEAR TWO Total YEAR THREE Total
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr Year 2 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr Year 3
Investment Income
Loan Loss Reserves 200,400 222,600 254,400 318,000 995,400 254,400 254,400 254,400 254,400 1,017,600
Interest on loans 186,847 221,770 261,055 309,833 979,504 347,618 384,512 420,526 455,788 1,608,444
Interest on Idle Funds 348,163 327,572 305,754 280,588 1,262,077 291,493 274,571 259,321 245,534 1,070,920
TOTAL INCOME 735,410 771,942 821,208 908,421 3,236,981 893,512 913,483 934,247 955,722 3,696,964
Expenses
Operating Expenses
Administration, marketing and overhead 0 0 0 0 0 0 0 0 0 0
Legal, audit and other professional fees
Subtotal fund management 0 0 0 0 0 0 0 0 0 0
Cost of financing activities
Interest Cost Incurred
Debt Class 1-Short Term Notes 0 0 0 0 0 0 0 0 0 0
Debt Class 2 - Long Term Fixed Rate Notes 500,000 500,000 500,000 500,000 2,000,000 500,000 500,000 500,000 500,000 2,000,000
Gain or Loss on Sale of Notes 0 0 0 0 0 0 0 0 0 0
Provision for Loan Losses 113,637 122,585 138,731 172,698 547,651 135,459 133,513 131,595 129,953 530,520
Subtotal cost of financing activities 613,637 622,585 638,731 672,698 2,547,651 635,459 633,513 631,595 629,953 2,530,520
TOTAL EXPENSES 613,637 622,585 638,731 672,698 2,547,651 635,459 633,513 631,595 629,953 2,530,520
NET PROGRAM PROFIT (LOSS) 121,774 149,357 182,478 235,722 689,331 258,053 279,970 302,652 325,769 1,166,444
129
Appendix Four, Attachment G – Best Case Financials
Mini Business Plan – Equity Equivalent/Program-Related Investment Strategy
CALIFORNIA INTEGRATED WASTE MANAGEMENT BOARD
RMDZ LOAN PROGRAM-EQ2-BEST CASE
Proforma Statement of Operations
Five Years
YEAR FOUR Total YEAR FIVE Total
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr Year 4 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr Year 5
Investment Income
Loan Loss Reserves 254,400 254,400 254,400 254,400 1,017,600 254,400 254,400 254,400 254,400 1,017,600
Interest on loans 490,572 524,260 556,853 588,515 2,160,200 619,603 649,580 678,429 706,307 2,653,918
Interest on Idle Funds 232,729 221,712 212,454 204,724 871,619 197,930 192,908 189,679 187,946 768,463
TOTAL INCOME 977,701 1,000,373 1,023,707 1,047,639 4,049,419 1,071,933 1,096,887 1,122,508 1,148,654 4,439,982
Expenses
Operating Expenses
Administration, marketing and overhead 0 0 0 0 0 0 0 0 0 0
Legal, audit and other professional fees
Subtotal fund management 0 0 0 0 0 0 0 0 0 0
Cost of financing activities
Interest Cost Incurred
Debt Class 1-Short Term Notes 0 0 0 0 0 0 0 0 0 0
Debt Class 2 - Long Term Fixed Rate Notes 500,000 500,000 500,000 500,000 2,000,000 500,000 500,000 500,000 500,000 2,000,000
Gain or Loss on Sale of Notes 0 0 0 0 0 0 0 0 0 0
Provision for Loan Losses 128,608 125,526 122,423 119,661 496,219 117,470 114,414 111,225 108,205 451,315
Subtotal cost of financing activities 628,608 625,526 622,423 619,661 2,496,219 617,470 614,414 611,225 608,205 2,451,315
TOTAL EXPENSES 628,608 625,526 622,423 619,661 2,496,219 617,470 614,414 611,225 608,205 2,451,315
NET PROGRAM PROFIT (LOSS) 349,092 374,846 401,283 427,978 1,553,200 454,462 482,473 511,283 540,449 1,988,667
130
Appendix Four, Attachment H – Base Case Financials
Mini Business Plan – Equity Equivalent/Program-Related Investment Strategy
CALIFORNIA INTEGRATED WASTE MANAGEMENT BOARD
RMDZ LOAN PROGRAM-EQ2-BASE CASE
Statement of Financing and Investment Activities
Five Years
YEAR ONE Total
Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Month 7 Month 8 Month 9 Month 10 Month 11 Month 12 Year 1
FINANCING ACTIVITIES
Funds Received From:
Sale of Shares
CIWMB Investment 3,500,000 0 0 0 0 0 0 0 0 0 0 0 3,500,000
Private (EQ2) Investors 0 10,000,000 0 0 0 0 0 0 0 0 0 0 10,000,000
Total of Funding From Investors 3,500,000 10,000,000 0 0 0 0 0 0 0 0 0 0 13,500,000
Funding From Issuance of
Debt
Debt Class 1-Short Term 0 0 0 0 0 0 0 0 0 0 0 0 0
Debt Class 2-Long Term Fixed Rate 0 0 30,000,000 0 0 0 0 0 0 0 0 0 30,000,000
Total Funding From Issuance of
Debt 0 0 30,000,000 0 0 0 0 0 0 0 0 0 30,000,000
Total Funding From Financing Activities 3,500,000 10,000,000 30,000,000 0 0 0 0 0 0 0 0 0 43,500,000
Less Funds Applied To:
Redemption of Shares
CIWMB Investment/Start Up Cost Reimb. 0 229,996 0 0 0 0 0 0 0 0 0 0 229,996
Private (EQ2) Investors 0 0 0 0 0 0 0 0 0 0 0 0 0
Total Shares Redeemed 0 229,996 0 0 0 0 0 0 0 0 0 0 229,996
Repayment of Corporate Notes
Debt Class 1-Short Term Notes 0 0 0 0 0 0 0 0 0 0 0 0 0
Debt Class 2-Long Term Fixed Rate 0 0 0 0 0 0 0 0 0 0 0 0 0
Total Payments of Corporate Notes 0 0 0 0 0 0 0 0 0 0 0 0 0
Total Application of Funds 0 229,996 0 0 0 0 0 0 0 0 0 0 229,996
FUNDING FROM FINANCING
ACTIVITIES (NET) 3,500,000 9,770,004 30,000,000 0 0 0 0 0 0 0 0 0 43,270,004
INVESTMENT ACTIVITIES
ADD: Funds Received From Sale of Loans:
Sale of Low Cost Loans 0 0 0 0 0 0 0 0 0 0 0 0 0
Sale of Deferred Payment Loans 0 0 0 0 0 0 0 0 0 0 0 0 0
Sale of Subordinate Debt Loans
Total Funds Received From Sale of Loans 0 0 0 0 0 0 0 0 0 0 0 0 0
LESS: Funds Applied to Lending Activities:
Low Cost Loans 0 150,000 450,000 450,000 450,000 450,000 450,000 450,000 450,000 450,000 450,000 450,000 4,650,000
Deferred Payment Loans 0 60,000 180,000 180,000 180,000 180,000 180,000 180,000 180,000 180,000 180,000 180,000 1,860,000
Subordinate Debt 0 90,000 270,000 270,000 270,000 270,000 270,000 270,000 270,000 270,000 270,000 270,000 2,790,000
Total Lending Activities 0 300,000 900,000 900,000 900,000 900,000 900,000 900,000 900,000 900,000 900,000 900,000 9,299,999
ADD: Principal Collections 0 0 3,504 14,031 24,604 35,224 45,890 56,604 67,364 78,172 89,028 99,931 514,353
PROCEEDS FROM INVESTMENT
ACTIVITIES (NET) 0 (300,000) (896,496) (885,969) (875,396) (864,776) (854,110) (843,396) (832,636) (821,828) (810,972) (800,069) (8,785,646)
NET INCREASE (DECREASE) IN FUNDS FROM
FUNDING AND INVESTMENT ACTIVITIES 3,500,000 9,470,004 29,103,504 (885,969) (875,396) (864,776) (854,110) (843,396) (832,636) (821,828) (810,972) (800,069) 34,484,358
131
Appendix Four, Attachment H – Base Case Financials
Mini Business Plan – Equity Equivalent/Program-Related Investment Strategy
CALIFORNIA INTEGRATED WASTE MANAGEMENT BOARD
RMDZ LOAN PROGRAM-EQ2 BASE CASE
Statement of Financing and Investment Activities
Five Years
YEAR TWO Total YEAR THREE Total
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr Year 2 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr Year 3
FINANCING ACTIVITIES
Funds Received From:
Sale of Shares
CIWMB Investment 3,500,000 0 0 0 3,500,000 3,000,000 0 0 0 3,000,000
Private (EQ2) Investors 0 0 0 0 0 0 0 0 0 0
Total of Funding From Investors 3,500,000 0 0 0 3,500,000 3,000,000 0 0 0 3,000,000
Funding From Issuance of
Debt
Debt Class 1-Short Term 0 0 0 0 0 0 0 0 0 0
Debt Class 2-Long Term Fixed Rate 0 0 0 0 0 0 0 0 0 0
Total Funding From Issuance of
Debt 0 0 0 0 0 0 0 0 0 0
Total Funding From Financing Activities 3,500,000 0 0 0 3,500,000 3,000,000 0 0 0 3,000,000
Less Funds Applied To:
Redemption of Shares
CIWMB Investment/Start Up Cost Reimb. 0 0 0 0 0 0 0 0 0 0
Private (EQ2) Investors 0 0 0 0 0 0 0 0 0 0
Total Shares Redeemed 0 0 0 0 0 0 0 0 0 0
Repayment of Corporate Notes
Debt Class 1-Short Term Notes 0 0 0 0 0 0 0 0 0 0
Debt Class 2-Long Term Fixed Rate 0 0 0 0 0 0 0 0 0 0
Total Payments of Corporate Notes 0 0 0 0 0 0 0 0 0 0
Total Application of Funds 0 0 0 0 0 0 0 0 0 0
FUNDING FROM FINANCING
ACTIVITIES (NET) 3,500,000 0 0 0 3,500,000 3,000,000 0 0 0 3,000,000
INVESTMENT ACTIVITIES
ADD: Funds Received From Sale of Loans:
Sale of Low Cost Loans 0 0 0 0 0 0 0 0 0 0
Sale of Deferred Payment Loans 0 0 0 0 0 0 0 0 0 0
Sale of Subordinate Debt Loans
Total Funds Received From Sale of Loans 0 0 0 0 0 0 0 0 0 0
LESS: Funds Applied to Lending Activities:
Low Cost Loans 750,000 1,050,000 1,200,000 1,500,000 4,500,000 1,200,000 1,200,000 1,200,000 1,200,000 4,800,000
Deferred Payment Loans 480,000 420,000 480,000 600,000 1,980,000 480,000 480,000 480,000 480,000 1,920,000
Subordinate Debt 450,000 630,000 720,000 900,000 2,700,000 720,000 720,000 720,000 720,000 2,880,000
Total Lending Activities 1,680,000 2,100,000 2,400,000 3,000,000 9,180,000 2,400,000 2,400,000 2,400,000 2,400,000 9,600,000
ADD: Principal Collections 224,218 227,664 351,287 486,796 1,289,965 569,379 699,167 826,996 936,438 3,031,980
PROCEEDS FROM INVESTMENT
ACTIVITIES (NET) (1,455,782) (1,872,336) (2,048,713) (2,513,204) (7,890,035) (1,830,621) (1,700,833) (1,573,004) (1,463,562) (6,568,020)
NET INCREASE (DECREASE) IN FUNDS FROM
FUNDING AND INVESTMENT ACTIVITIES 2,044,218 (1,872,336) (2,048,713) (2,513,204) (4,390,035) 1,169,379 (1,700,833) (1,573,004) (1,463,562) (3,568,020)
132
Appendix Four, Attachment H – Base Case Financials
Mini Business Plan – Equity Equivalent/Program-Related Investment Strategy
CALIFORNIA INTEGRATED WASTE MANAGEMENT BOARD
RMDZ LOAN PROGRAM-EQ2 BASE CASE
Statement of Financing and Investment Activities
Five Years
YEAR FOUR Total YEAR FIVE Total
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr Year 4 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr Year 5
FINANCING ACTIVITIES
Funds Received From:
Sale of Shares
CIWMB Investment 0 0 0 0 0 0 0 0 0 0
Private (EQ2) Investors 0 0 0 0 0 0 0 0 0 0
Total of Funding From Investors 0 0 0 0 0 0 0 0 0 0
Funding From Issuance of
Debt
Debt Class 1-Short Term 0 0 0 0 0 0 0 0 0 0
Debt Class 2-Long Term Fixed Rate 0 0 0 0 0 0 0 0 0 0
Total Funding From Issuance of
Debt 0 0 0 0 0 0 0 0 0 0
Total Funding From Financing Activities 0 0 0 0 0 0 0 0 0 0
Less Funds Applied To:
Redemption of Shares
CIWMB Investment/Start Up Cost Reimb. 0 0 0 0 0 0 0 0 0 0
Private (EQ2) Investors 0 0 0 0 0 0 0 0 0 0
Total Shares Redeemed 0 0 0 0 0 0 0 0 0 0
Repayment of Corporate Notes
Debt Class 1-Short Term Notes 0 0 0 0 0 0 0 0 0 0
Debt Class 2-Long Term Fixed Rate 0 0 0 0 0 0 0 0 0 0
Total Payments of Corporate Notes 0 0 0 0 0 0 0 0 0 0
Total Application of Funds 0 0 0 0 0 0 0 0 0 0
FUNDING FROM FINANCING
ACTIVITIES (NET) 0 0 0 0 0 0 0 0 0 0
INVESTMENT ACTIVITIES
ADD: Funds Received From Sale of Loans:
Sale of Low Cost Loans 0 0 0 0 0 0 0 0 0 0
Sale of Deferred Payment Loans 0 0 0 0 0 0 0 0 0 0
Sale of Subordinate Debt Loans
Total Funds Received From Sale of Loans 0 0 0 0 0 0 0 0 0 0
LESS: Funds Applied to Lending Activities:
Low Cost Loans 1,200,000 1,200,000 1,200,000 1,200,000 4,800,000 1,200,000 1,200,000 1,200,000 1,200,000 4,800,000
Deferred Payment Loans 480,000 480,000 480,000 480,000 1,920,000 480,000 480,000 480,000 480,000 1,920,000
Subordinate Debt 720,000 720,000 720,000 720,000 2,880,000 720,000 720,000 720,000 720,000 2,880,000
Total Lending Activities 2,400,000 2,400,000 2,400,000 2,400,000 9,600,000 2,400,000 2,400,000 2,400,000 2,400,000 9,600,000
ADD: Principal Collections 998,357 1,140,514 1,282,132 1,399,045 4,820,049 1,459,247 1,604,967 1,750,778 1,869,409 6,684,401
PROCEEDS FROM INVESTMENT
ACTIVITIES (NET) (1,401,643) (1,259,486) (1,117,868) (1,000,955) (4,779,951) (940,753) (795,033) (649,222) (530,591) (2,915,599)
NET INCREASE (DECREASE) IN FUNDS FROM
FUNDING AND INVESTMENT ACTIVITIES (1,401,643) (1,259,486) (1,117,868) (1,000,955) (4,779,951) (940,753) (795,033) (649,222) (530,591) (2,915,599)
133
Appendix Four, Attachment H – Base Case Financials
Mini Business Plan – Equity Equivalent/Program-Related Investment Strategy
CALIFORNIA INTEGRATED WASTE MANAGEMENT BOARD
RMDZ LOAN PROGRAM-EQ2-BASE CASE
Proforma Statement of Operations
Five Years
YEAR TWO Total YEAR THREE Total
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr Year 2 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr Year 3
Investment Income
Loan Loss Reserves 200,400 222,600 254,400 318,000 995,400 254,400 254,400 254,400 254,400 1,017,600
Interest on loans 186,847 221,770 261,055 309,833 979,504 347,618 384,512 420,526 455,788 1,608,444
Interest on Idle Funds 332,672 309,221 284,165 254,969 1,181,026 262,714 242,677 224,356 207,537 937,284
TOTAL INCOME 719,919 753,590 799,619 882,802 3,155,931 864,733 881,588 899,282 917,725 3,563,328
Expenses
Operating Expenses
Administration, marketing and overhead 0 0 0 0 0 0 0 0 0 0
Subtotal fund management 0 0 0 0 0 0 0 0 0 0
Cost of financing activities
Interest Cost Incurred
Debt Class 1-Short Term Notes 0 0 0 0 0 0 0 0 0 0
Debt Class 2 - Long Term Fixed Rate Notes 500,000 500,000 500,000 500,000 2,000,000 500,000 500,000 500,000 500,000 2,000,000
Gain or Loss on Sale of Notes 0 0 0 0 0 0 0 0 0 0
Loan Losses Incurred 378,789 408,617 462,436 575,660 1,825,502 451,531 445,042 438,650 433,178 1,768,401
Subtotal cost of financing activities 878,789 908,617 962,436 1,075,660 3,825,502 951,531 945,042 938,650 933,178 3,768,401
TOTAL EXPENSES 878,789 908,617 962,436 1,075,660 3,825,502 951,531 945,042 938,650 933,178 3,768,401
NET PROGRAM PROFIT (LOSS) (158,870) (155,027) (162,816) (192,858) (669,571) (86,798) (63,453) (39,368) (15,453) (205,073)
134
Appendix Four, Attachment H – Base Case Financials
Mini Business Plan – Equity Equivalent/Program-Related Investment Strategy
CALIFORNIA INTEGRATED WASTE MANAGEMENT BOARD
RMDZ LOAN PROGRAM-EQ2-BASE CASE
Proforma Statement of Operations
Five Years
YEAR ONE Total
Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Month 7 Month 8 Month 9 Month 10 Month 11 Month 12 Year 1
Investment Income
Loan Loss Reserves 0 31,800 95,400 95,400 95,400 95,400 95,400 95,400 95,400 95,400 95,400 95,400 985,800
Interest on loans 0 1,738 6,942 12,122 17,278 22,410 27,518 32,600 37,658 42,692 47,700 52,684 301,343
Interest on Idle Funds 10,506 41,815 137,940 134,053 130,304 126,617 123,002 119,441 115,935 112,483 109,086 105,743 1,266,926
TOTAL INCOME 10,506 75,353 240,282 241,576 242,982 244,428 245,920 247,441 248,993 250,575 252,186 253,827 2,554,069
Expenses
Operating Expenses
Administration, marketing and overhead 34,499 31,624 25,555 23,000 20,444 17,889 12,831 12,831 12,831 12,831 12,831 12,830 229,996
Subtotal fund management 34,499 31,624 25,555 23,000 20,444 17,889 12,831 12,831 12,831 12,831 12,831 12,830 229,996
Cost of financing activities
Interest Cost Incurred
Debt Class 1-Short Term Notes 0 0 0 0 0 0 0 0 0 0 0 0 0
Debt Class 2 - Long Term Fixed Rate Notes 0 22,917 166,667 166,667 166,667 166,667 166,667 166,667 166,667 166,667 166,667 166,667 1,689,583
Gain or Loss on Sale of Notes 0 0 0 0 0 0 0 0 0 0 0 0 0
Loan Losses Incurred 0 60,000 179,825 179,298 178,770 178,239 177,705 177,170 176,632 176,091 175,549 175,003 1,834,282
Subtotal cost of financing activities 0 82,917 346,491 345,965 345,436 344,905 344,372 343,836 343,298 342,758 342,215 341,670 3,523,866
TOTAL EXPENSES 34,499 114,541 372,046 368,965 365,880 362,794 357,203 356,667 356,129 355,589 355,046 354,500 3,753,862
NET PROGRAM PROFIT (LOSS) (23,993) (39,188) (131,764) (127,389) (122,898) (118,367) (111,284) (109,226) (107,136) (105,014) (102,860) (100,673) (1,199,793)
135
Appendix Four, Attachment H – Base Case Financials
Mini Business Plan – Equity Equivalent/Program-Related Investment Strategy
CALIFORNIA INTEGRATED WASTE MANAGEMENT BOARD
RMDZ LOAN PROGRAM-EQ2-BASE CASE
Proforma Statement of Operations
Five Years
YEAR FOUR Total YEAR FIVE Total
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr Year 4 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr Year 5
Investment Income
Loan Loss Reserves 254,400 254,400 254,400 254,400 1,017,600 254,400 254,400 254,400 254,400 1,017,600
Interest on loans 490,572 524,260 556,853 588,515 2,160,200 619,603 649,580 678,429 706,307 2,653,918
Interest on Idle Funds 191,730 177,785 165,670 155,148 690,334 145,613 137,921 132,098 127,840 543,472
TOTAL INCOME 936,703 956,445 976,923 998,064 3,868,135 1,019,616 1,041,901 1,064,927 1,088,547 4,214,991
Expenses
Operating Expenses
Administration, marketing and overhead 0 0 0 0 0 0 0 0 0 0
Subtotal fund management 0 0 0 0 0 0 0 0 0 0
Cost of financing activities
Interest Cost Incurred
Debt Class 1-Short Term Notes 0 0 0 0 0 0 0 0 0 0
Debt Class 2 - Long Term Fixed Rate Notes 500,000 500,000 500,000 500,000 2,000,000 500,000 500,000 500,000 500,000 2,000,000
Gain or Loss on Sale of Notes 0 0 0 0 0 0 0 0 0 0
Loan Losses Incurred 428,694 418,421 408,078 398,870 1,654,064 391,568 381,380 370,751 360,684 1,504,383
Subtotal cost of financing activities 928,694 918,421 908,078 898,870 3,654,064 891,568 881,380 870,751 860,684 3,504,383
TOTAL EXPENSES 928,694 918,421 908,078 898,870 3,654,064 891,568 881,380 870,751 860,684 3,504,383
NET PROGRAM PROFIT (LOSS) 8,008 38,024 68,845 99,193 214,071 128,048 160,521 194,176 227,863 710,608
136
Appendix Five
APPENDIX 5: FINANCIAL TERMS GLOSSARY
Assets Anything that an individual or a corporation owns
that has economic value to its owner. Also a
balance sheet item showing what a firm owns.
They are bought to increase the value of a firm or
benefit the firms operations.
Balance Sheet A company's financial statement that reports its
assets, liabilities, and net worth at a specific time.
Basis Point A measure of a bond's yield, equal to 1/100th of
1% of yield. A bond whose yield increases from
5.0% to 5.5% is said to increase by 50 basis points.
Cash Flow The amount of cash a company generates and uses
during a period, calculated by adding noncash
charges (such as depreciation) to the net income
after taxes. Cash Flow can be used as an indication
of a company's financial strength.
Collateral Property or assets that are offered to secure a loan
or other credit. Collateral becomes subject to
seizure on default.
Credit Risk This is one of the measurements or likelihood that a
party will default on a financial agreement.
Debt An amount of money owed from one person or
firm to another.
Deferred Payment Loans The borrower makes no interest or principal
payments during the life of the loan, but at
maturity, pays the original principal amount plus
accrued interest.
Equity Equity is a term whose meaning depends very
much on the context. In general though, you can
think of equity as ownership. For example, stocks
are equity because they represent ownership of a
company, whereas bonds are classified as debt
because they represent an obligation to pay and not
ownership of assets.
Exit Risk The risk than an investment will not be able to be
sold at a predetermined time.
Liabilities A legal debt or obligation. Recorded on the balance
sheet, current liabilities are debts payable within
one year while long-term liabilities are debts
payable over a longer period.
Prime Rate The interest rate that commercial banks charge
their prime or most credit worthy customers,
generally large corporations.
Principal The amount owed on a loan. Usually the face value
of a debt.
Program Related Investment Debt with an interest rate significantly below-
market supported by charitable organizations.
137
Appendix Five
APPENDIX 5: FINANCIAL TERMS GLOSSARY
Rate Risk
Return on Investment The profit or loss resulting from an investment
transaction, usually expressed as an annual
percentage return.
Senior Debt Debt that must be repaid before other creditors
receive any payment in the event of bankruptcy.
Subordinate Debt A loan (or security) that ranks below other loans
(or securities) with regard to claims on assets or
earnings.
138
