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

1. TVA Economic Development
Loan Program Overview
February 21, 2014
1

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. 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. TVA Overview
4

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. 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. TVA Economic Development
Loan Program
7

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. 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. Loan Program Measurements
• Jobs created
• Jobs retained
• Capital investment leveraged
• Low loan loss rate
10

11. Loan Options
Economic
Development
Loan Fund
Special
Opportunity
County
Direct
Direct
Participation
Participation
11

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. Loan Process
Application and
Due Diligence
Portfolio
Administration
and Collection
Documentation
and Closing
Process
Loan Review
Loan Approval
13

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. 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. Screening Potential Loan Requests
16

17. Balance
Economic
Benefits
Credit
Risk
17

18. Identify the Players Early
Borrower
Related
Companies
Other
Lenders
Lessor/
Lessee
Guarantors
18

19. Understand the Deal Structure
Other
Lenders
• Terms
• Collateral positions
Grantors
• Terms
• Collateral
Project
Timing
• Construction period
• Fully operational target date
19

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. 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. 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. 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. 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. 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. 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. Company Financial Statements
Balance Sheet
Cash Flow
Statement
Footnotes
Income
Statement
Reconciliation of
Net Worth
27

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. 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. Loan Approval Process
30

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. 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. 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. 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. In Closing
35

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. Questions?
37

38. Contact:
David Parham
dhparham@tva.com
615.232.6159
@TVAed
thevalleyworks.org
38