Community Developments Investments (February 2013)
Case Study: Collateral Support Program Helps Idaho Create Jobs
An Idaho small business that makes farm and irrigation equipment received capital assistance through the State Small Business Credit Initiative, allowing the company to expand and create new jobs.
A collateral support program1 (CSP) is used to assist businesses that have suffered significant devaluations of the collateral they used to obtain credit. These businesses are generally healthy, with strong revenues and profit margins. They have sufficient cash flow to service a loan, but because of their collateral’s declining worth, the loan-to-value ratio is less than the lender requires.
A CSP provides to lending institutions pledged collateral accounts that enhance the collateral coverage of borrowers. The accounts cover all or a portion of the collateral shortfall identified by the lending institution. This assistance helps bring the loan to within the lender’s policy guidelines, and it preserves the borrower’s liquidity.
This case study involves Key Bank working with the Idaho Housing and Finance Association (IHFA) to provide a loan to an established manufacturer of irrigation systems and other agricultural equipment. The company had requested a loan of $1.25 million from KeyBank to construct a new, larger facility that would allow the company to increase capacity and create 10 new manufacturing jobs. The loan would be secured by the manufacturer’s property and equipment.
The borrower met KeyBank’s underwriting standards and was considered a strong credit. The appraised value of the property, however, was less than expected, creating a shortfall. The borrower and KeyBank explored various options to address the collateral shortfall and decided that the Idaho Collateral Support Program best met the needs of this transaction.
KeyBank discussed the transaction with the IHFA. After completing its internal underwriting, KeyBank submitted a two-page application to the IHFA, which approved $140,600 in collateral support within 48 hours of receiving the application.
The IHFA deposited the funds into a custodial account with KeyBank. In the event of default, KeyBank has the right to pursue all collateral but only has recourse to the state’s deposit after liquidating the borrower’s collateral. When the loan is repaid or matured, the collateral deposit is returned to the IHFA and the account is closed.
The Idaho Collateral Support Program allowed KeyBank to provide a local manufacturer with the financing necessary to grow and create new jobs. The collateral support brought the loan into line with KeyBank’s lending policies and helped the borrower preserve cash, making both the loan and the borrower stronger and more secure.