Access to Capital Lending Tools-David Parham TVA-TN Economic Development Finance Course

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TN Economic Development Finance Course Feb. 20-21, 2014
UT Center for Industrial Services & Council of Development Finance Agencies

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Access to Capital Lending Tools-David Parham TVA-TN Economic Development Finance Course

  1. 1. TVA Economic Development Loan Program Overview February 21, 2014 1
  2. 2. Goals for Today: Help everyone understand: • Why TVA makes loans • TVA’s loan approval process and information needed for approval • Necessary components of an economic development loan program 2
  3. 3. TVA's Mission TVA has served our mission well over that last 80 years and we are positioning ourselves to continue supporting that mission to provide: – Reliable & affordable electricity – Environmental stewardship – Economic development We serve the people of the Tennessee Valley with core values, such as honesty and integrity, and we always put safety first in all that we do. 3
  4. 4. TVA Overview 4
  5. 5. TVA Economic Development Recruit New companies and investments to the Valley that are viable now & into the future Retain Existing business & industries to grow in a sustainable manner Assist Communities in being prepared for economic growth through training, capacity-building & technical services 5
  6. 6. TVA Economic Development (TVA ED) Financial Incentives • Performance-based electricity credits • Performance-based grants for new and expanding companies • Competitive grants for industrial park development • Credit insurance for required deposits • Loans 6
  7. 7. TVA Economic Development Loan Program 7
  8. 8. Loan Program Characteristics • Targeted towards job creation projects (i.e., manufacturing, warehousing, data centers, company headquarters, etc.) • TVA is a fixed asset lender • Customers are usually established companies; rarely make loans to start-ups • Loans are also made to communities for speculative (spec) buildings and industrial park development 8
  9. 9. Loan Program Objectives Support job creation/retention and stimulate capital investment by: • Providing an incentive by buying down interest costs • Filling a financing gap • Preparing communities for future growth – Speculative buildings – Industrial sites – Infrastructure development 9
  10. 10. Loan Program Measurements • Jobs created • Jobs retained • Capital investment leveraged • Low loan loss rate 10
  11. 11. Loan Options Economic Development Loan Fund Special Opportunity County Direct Direct Participation Participation 11
  12. 12. Loan Funding Economic Development Loan Fund • Power-funded • Part of annual capital budget • Receives benefit of principal repayments Special Opportunity County (SOC) Loan • True revolving loan fund • Source is appropriations received in 1980s and 1990s • Principal and interest payments go into Economic Development Trust Fund and are re-loaned 12
  13. 13. Loan Process Application and Due Diligence Portfolio Administration and Collection Documentation and Closing Process Loan Review Loan Approval 13
  14. 14. Loan Process Roles • TVA Economic Development Regional Development Specialists: Identify loan projects and serve as primary contact with borrower • TVA Economic Development Loan Staff: Advise Regional Development Specialists, package loan requests, coordinate approval process, manage loan portfolio • TVA Loan Committee: Review loan requests and recommend to senior management • TVA Corporate Credit: Perform credit analysis and present findings to Loan Committee 14
  15. 15. Loan Process Roles • TVA Senior Management: Final approval authority for all new loan requests • Pathway Lending: Prepares documentation needed to close and fund a loan • TVA Office of General Counsel: Advises throughout process, particularly with documentation • TVA Treasury: Provide safekeeping for loan documents; process all payments and provide reporting 15
  16. 16. Screening Potential Loan Requests 16
  17. 17. Balance Economic Benefits Credit Risk 17
  18. 18. Identify the Players Early Borrower Related Companies Other Lenders Lessor/ Lessee Guarantors 18
  19. 19. Understand the Deal Structure Other Lenders • Terms • Collateral positions Grantors • Terms • Collateral Project Timing • Construction period • Fully operational target date 19
  20. 20. Know the Company • Understand the ownership tree (parent company and related companies) • Determine the organizational structure (C corporation, S corporation, LLC) • Know the products produced • Evaluate management • Verify exact legal name • Confirm customer base (receivables aging) 20
  21. 21. Basic Information for Company-Driven Projects • Jobs/average wage • Collateral • Capital investment • Financial statements • Use of TVA funds • Sources of other funds • Repayment source • Funding gap • Approximate timing • Company organizational structure 21
  22. 22. If it's a Start-up Business... Identify: • Clearly defined market • Any contracts or verifiable commitments to do business • Assumptions behind financial projections • Capitalization • Availability of working capital • Willingness of owners to guarantee 22
  23. 23. If it's a Spec Building... • TVA does not provide construction financing • TVA requires a first or shared first mortgage position • TVA has flexibility in establishing loan terms, but a clearly defined repayment plan must be identified • TVA will consider an interest-only period when: – A firm take-out commitment is in place at the end of the interest only period – The borrower agrees to amortize if the building hasn’t sold during the interest-only period 23
  24. 24. If it's a Spec Building... Has community completed TVA training? Who will be the borrower? Who are other lenders and what are their terms? What loan amount and terms are requested from TVA? How will borrower repay if building doesn’t sell or lease? 24
  25. 25. If it's a Spec Building... • What is the borrower’s repayment capacity, i.e., how will the borrower repay if the building does not sell or lease as quickly as projected? • If the borrower does not have the capacity to repay, is a guarantor available? • What is the guarantor’s repayment source? • Who are the other lenders and what are their terms (overall deal structure)? 25
  26. 26. Information Needed for Credit Analysis Historical Financial Data Terms for All Existing and New Debt (3 years plus year-todate); guarantor financial statements (to project ability to service debt) Lease Terms Appraisal of Collateral 26
  27. 27. Company Financial Statements Balance Sheet Cash Flow Statement Footnotes Income Statement Reconciliation of Net Worth 27
  28. 28. Financial Statement Quality • Audit – Substantive testing – Maximum assurance • Review – Performs analytical procedures – Makes inquiries of management • Compilation – Puts information in proper form – No assurance of accuracy • Company prepared – Needs to be supplemented with tax returns 28
  29. 29. Collateral • Identify the collateral early and specifically • Determine collateral value – Invoices or purchase orders for new equipment (minus taxes, shipping, installation and training) – Appraisal for used equipment – Appraisal for real estate • Understand the type of appraisal and credentials of appraiser • Think about marketability 29 29
  30. 30. Loan Approval Process 30
  31. 31. Expediting Loan Review • Provide financial information as early as possible – Three years historical – Year-to-date • Provide a complete loan application – – – – Project description Sources and uses Customer base Attachments • Provide informative collateral information – Specific description – Source of value 31
  32. 32. How are Loan Amounts Determined? • Need – What is the requested amount and proposed use of funds? – Do TVA funds make a difference? • Jobs – Must be within TVA’s guidelines of jobs created/retained • Capital investment • • – Must be within TVA’s guidelines of other capital investment per TVA loan dollar Credit-worthiness – Must identify cash flow to repay loan and have a secondary repayment source Security – Collateral should be within TVA’s loan-to-value guidelines – Guarantors are required in many cases 32
  33. 33. Considerations for Loan Approval • Economic impact (jobs, capital investment) • Collateral • Financial liability • Local power company and community support • Do TVA funds make a difference? 33
  34. 34. Developing a Business Case Economic impact (jobs, average wage, capital investment) Impact on local power company Business Case Other considerations Importance of TVA loan (strong collateral, strong local commitment, etc.) 34
  35. 35. In Closing 35
  36. 36. Results (Program to Date) • Over $240 million in loans funded • Another $11 million committed • Over 60,000 jobs created in projects receiving loan assistance • Over $4.7 billion in capital investment leveraged by projects receiving loan fund assistance 36
  37. 37. Questions? 37
  38. 38. Contact: David Parham dhparham@tva.com 615.232.6159 @TVAed thevalleyworks.org 38

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