00009199 by niusheng

VIEWS: 5 PAGES: 41

									Overview of the Leveraging
  Concept in Economic
      Development
 Prepared for the California Integrated
      Waste Management Board

            Victor Hoskins
            Vice President
           UrbanAmerica, LP

                                          1
            August 12, 2002
               Overview
 Definition


 Goal


 Problem


 Solution

                          2
    Definition:What is Leveraging?
Merrian-Webster
 The use of credit to enhance one’s speculative capacity
Irving Bonios Co. Real Estate Dictionary
 The use of financing to allow a small amount of cash to
   purchase a large property investment
Economic Development
 The use of capital by a public or non-profit institution to
   stimulate public, non-profit or private investors to finance
   an investment to achieve a public purpose


                                                                  3
      Definition:What is Leveraging?
Economic Development
   The use of capital by a public or non-profit institution to stimulate public, non-
    profit or private investors to finance an investment to achieve a public purpose
Examples
 Transit Rail Financing-Fed, State, Local
 Incentive Investments-Redevelopment, Econ Dev
 CIWMB RMDZ Loan Program
Key Concepts
 Public Return on Investment
 Return on Equity
 Return on Investment



                                                                                     4
       Goal:What is the Challenge?
   Enable CIWMB to leverage annual
    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


   Develop four leveraging strategies



                                             5
     Goal:What is the Challenge?

 Creating a Sustainable Financing Program
 Leveraging existing and anticipated resources
 Blending RMDZ funds with investment
  resources from Private or Public
  organizations to reduce waste by meeting the
  financing requirements of recycling
  businesses



                                             6
                                     Solution

                                             Mechanisms


                                   Equity
New Markets Tax Credit                                    Loan Guaranty                  Loan Sale
                           Equivalent Investments




                                               Products


             Subordinate Loans          Deferred Payment Loans            Below-Market Loans




                                                                                                     7
Discussion of Leveraging Options
  for the RMDZ Loan Program
   Prepared for the California Integrated
        Waste Management Board

       Betsy Zeidman, Milken Institute
      Paul Pryde, Capital Access Group
        Bill Schmidt, Milken Institute

                                            8
              August 12, 2002
                Overview
 Goal


 Methodology


 Market   Research

 Leveraging   Strategies

                            9
                     Goal
   Enable CIWMB to leverage annual
    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




                                             10
                Methodology
   Research
    – Assessed recycling and reuse market in
      California
    – Analyzed current pool of Recycling Market
      Development Zone loans
    – Conducted interviews with past loan recipients
      and current Zone Administrators

   Developed four leveraging strategies


                                                       11
Key Findings from Industry
        Research




                             12
    Key Findings from Market Research:
   Recycling and reuse is a $14 billion industry
    in California

   $55,910,300 have been made in loans through
    RMDZ program
    – Growth stage of companies in loan pool
    – Use of loan proceeds
    – Average interest rate of loan pool



                                               13
    Key Findings from Industry Research:
Barriers to Access and Use of Current Program
   Collateral requirements
   Timing of interest payments
   Replenishment of loan pool
   Financial incentives to increase level of
    participation
   Perceptions of confidentiality




                                                14
 Key Findings from Industry Research:
   Top Current Financing Sources

 Private   Investment

 Private   Lending

 Government    and Charitable

                                        15
Overview and Discussion of
  Leveraging Strategies




                             16
 Criteria Used to Evaluate Leveraging
               Strategies
 Financing   Capacity

 Financial   Stability

 Market   Responsiveness

 Customer    Friendliness

 Affordability
                                    17
              Capital Needs
 Types   of Capital
  – Equity
  – Debt
     » Subordinated
     » Senior
 Dependent on Growth Stage
  – Development-stage and small low-growth
    companies
  – Early-stage growth companies
  – Established, expansion-oriented companies
                                                18
                       Financing Products
                                              Collateral
                                 Adequate                       Inadequate
            Adequate    Example: Established            Example: Established service
                        company representing low        or technology firm with few
Cash Flow




                        credit risk; can secure         hard assets
                        conventional bank financing

            Inadequate Example: Company seeking         Example: Start-up company
                        to acquire real property with   with little operating history
                        good market value but weak
                        income stream




                                                                                19
                       Financing Products
                                              Collateral
                                 Adequate                       Inadequate
            Adequate    Below-Market Rate               Example: Established service
                        Loans                           or technology firm with few
Cash Flow




                                                        hard assets


            Inadequate Example: Company seeking         Example: Start-up company
                        to acquire real property with   with little operating history
                        good market value but weak
                        income stream




                                                                                20
                       Financing Products
                                              Collateral
                                 Adequate                       Inadequate
            Adequate    Below-Market Rate               Subordinate Loans
                        Loans
Cash Flow




            Inadequate Example: Company seeking         Example: Start-up company
                        to acquire real property with   with little operating history
                        good market value but weak
                        income stream




                                                                                21
                       Financing Products
                                          Collateral
                               Adequate                  Inadequate
            Adequate    Below-Market Rate        Subordinate Loans
                        Loans
Cash Flow




            Inadequate Deferred Payment Loans Example: Start-up company
                                                 with little operating history




                                                                          22
                       Financing Products
                                         Collateral
                              Adequate                Inadequate
            Adequate   Below-Market Rate       Subordinate Loans
                       Loans
Cash Flow




            Inadequate Deferred Payment Loans Deferred Payment Loans




                                                                   23
                  Leveraging Strategies

                                             Mechanisms


                                   Equity
New Markets Tax Credit                                    Loan Guaranty                  Loan Sale
                           Equivalent Investments




                                               Products


             Subordinate Loans          Deferred Payment Loans            Below-Market Loans




                                                                                                     24
                   Assumptions
   Borrowers
       Current:               Target:
        – Established 48%       – Established 50%
        – Early-Stage 38%       – Early-Stage 30%
        – Start-Up 14%          – Start-Up 20%
 All strategies use same three products
 All strategies can be done in isolation or
  combined
 All strategies leverage Board’s $3.5 million
  into $10 million of loanable funds on a
                                              25
  sustainable basis
                FINANCE PROGRAM
                   Business Model
                                           Assets
                                    Deferred payment loans

Borrowers                              Mezzanine loans
            Cash is converted         Senior below-market
            into “earning assets”             loans
            by making recycling
            loans and investments
                                                2. Debt and equity represents cash
                                                that can be invested and loaned.



                                             Debt
                                                                                        Capital
                                                                                        Sources
                                             Equity          1 Institutions make debt
                                                             and equity
                                                             investments in exchange
                                    Liabilities/Capital      for interest or shares.

                                                                                          26
        New Markets Tax Credit
   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.


                                              27
         New Markets Tax Credit

                         Investors

                               Invests $30 million in
                               exchange for $11.7
                               Million (39%) NMTC



Lender                       CDE                           Board
         Makes $10 million         Makes $10 million
         market-rate loan          long term loan
                                   (funded over 3 years)

                                                              28
        New Markets Tax Credit
   Sources of Funds
     – Investors that expressed interest in purchasing
       NMTCs such as:
        » Enterprise Social Investment Corporation
        » Bank of America
        » Bear Stearns
   Leverage
    – Base Case: 5 to 1, Best Case: 5 to 1
   Return on Investment
    – Base Case: 32.98%, Best Case: 33.30%
                                                         29
              Loan Guaranty
   A risk-sharing partnership between
    CIWMB and one or more existing small
    business loan guarantors – preferably with a
    California Financial Development
    Corporation (FDC) that provide guaranties
    of up to 80 percent on small business bank
    loans of up to $350,000.


                                               30
                     Loan Guaranty
                                      3. Provides up to
                                        $12 million in
                                        loans
                            Lenders                   Borrowers

                                2. Provides up to
                                  $12 million in
                                  guarantees

        1. Contributes
           $3 million    Small Business
Board
                         Expansion Fund
                                                           31
               Loan Guaranty
 Sources of Funds
   – California FDCs such as:
      »Nor-Cal FDC,
      »Pacific Coast Regional FDC
      »California Southern FDC
 Leverage
    – Base Case: 12 to 1, Best Case: 19 to 1
   Return on Investment
    – Base Case: 10.23%, Best Case: 14.37%
                                               32
                  Loan Sale
   Selling loans to secondary market investors,
    such as the Community Reinvestment Fund,
    and using the cash to make more loans.
    Interest rates on the loans would be
    structured so that loans would be sold at a
    premium.



                                               33
                          Loan Sale
                                    2. Gives Board up to
                                       $3 million in notes

                     RASP           1. Makes up to $3
                                                             Borrowers
                                       million in loans
                                       per quarter
4. Gives up $3
   million in cash
   for relending
                          3. Sells up to $3 million
                             in loans per quarter

                     Investor

                                                                  34
                   Loan Sale
 Sources of Funds
   – Possible purchasers of loans such as:
      »Community Reinvestment Fund
      »Bayview Financial
      »SBA Receivables
 Leverage
    – Base Case: 16 to 1, Best Case: 16 to 1
   Return on Investment
    – Base Case: 0.01%, Best Case: 15.30%
                                               35
    Equivalent Equity Investments
   Forming a financing partnership with an
    established non-profit Certified
    Development Financial Institution (CDFI)
    that would agree to use funds obtained
    through PRIs, low-interest loans that
    foundations provide, or EQ2s, long-term,
    low interest loans made by commercial
    banks to community development
    organizations.

                                               36
   Equivalent Equity Investments
                           Borrower
                                 Makes $50 million
                                 in recycling loans


                                                            EQ2/PRI
Board                          CDFI
        Provides $10 million
        loan or recoverable
                                      Invests $10 million   Investor
        grant

                                 Provides $30 million
                                 credit line


                               Bank
                                                                37
    Equivalent Equity Investments
 Sources of Funds
   – Organizations that have made EQ2 or
     PRI investments such as:
      »Ford Foundation
      »Citibank
      »F.B. Heron Foundation
 Leverage
    – Base Case: 5 to 1, Best Case: 5 to 1
   Return on Investment
    – Base Case: 0.06%, Best Case: 12.50%
                                             38
       Comparison of Four Strategies
                   New Markets    Loan       Loan Sale   EQ2/
                    Tax Credit   Guaranty                PRI
Simplicity             (-)         (+)          (+)      (0)
Practicality           (-)         (0)          (+)      (-)
Sustainability         (+)         (+)          (+)      (0)
Affordability          (+)         (0)          (+)      (+)
Implementability       (0)         (-)          (+)      (0)

(+) Above Average, (0) Average, (-) Below Average         39
       Performance Against Criteria
   Financing capacity: Leveraging ratio ranges from 5:1
    to 19:1.
   Financial stability: Loan-loss reserves, blend of
    below-market rate and market interest rates produce
    adequate cash flows to finance losses and to sell loans
    at no less than “par”.
   Market responsiveness: Proposed loan products
    respond to needs of different recycling companies
   Customer friendliness: Use of intermediaries can
    reduce loan approval and processing times.
   Affordability: Below-market rates, extended loan
    terms and deferral of interest and principal payments
    will reduce loan repayment burdens.
                                                        40
Discussion of Leveraging Options
  for the RMDZ Loan Program
   Prepared for the California Integrated
        Waste Management Board

       Betsy Zeidman, Milken Institute
      Paul Pryde, Capital Access Group
        Bill Schmidt, Milken Institute

                                            41
              August 12, 2002

								
To top