I.
DEVELOPMENT FINANCE POLICY STATEMENT.
The Arkansas Development Finance Authority was created by Act 1062 of
1985 (Ark. Code Ann. '
15-5-101, et
seq.) . A D F A =s mission is to provide access to capital for
qualified activities that enhance the quality of life for Arkansans. In
creating ADFA, the General Assembly found that there was severe economic
instability in Arkansas resulting in an increasing number of business
failures and bankruptcies and extraordinarily
high levels of unemployment in agricultural business and
industrial enterprises. Furthermore, the General Assembly found that the
continued existence of these conditions to be detrimental to the citizens of
the state, and that the economic well-being of the citizens of the State of
Arkansas will be enhanced by the creation of ADFA to provide the means and
methods for providing financing:
(1)
to restore and revitalize existing agricultural business and industrial
enterprises for the purpose of retaining existing employment within the
state;
(2) to promote and develop
the expansion and establishment of new and existing agricultural business and
industrial enterprises for the purpose of further alleviating unemployment
within the state and for providing additional employment;
(3) to promote and target resources of the
state to further the development of export trade of Arkansas products for the
purpose of economic development in the state and for providing additional
employment therefrom;
(4) to assure
the development of reliable, affordable, efficient and environmentally
compatible sources of energy for all types of public and private
consumption;
(5) to provide health
care facilities for the citizens and inhabitants of the state;
(6) to provide capital improvement facilities
for the benefit of the citizens and inhabitants of the state;
(7) to provide educational facilities for
educational institutions within the state and to enhance the Public School
Fund;
(8) to provide financial
assistance to political subdivisions of the state;
(9) to assist minority businesses in
obtaining loan or other means of financial assistance; and
(10) to complement Arkansas= private
financial institutions to better serve their customers in ways which contribute
to a strengthened and diversified Arkansas economy and which do not compete
with Arkansas= private financial institutions.
ADFA is the primary bond issuing authority in the State of Arkansas
which can use its own financial resources to further its mission. ADFA has a
proactive, professional Board of Directors and professional management team
which run ADFA as a business, and although similar, not identical, to the
lending practices of a bank. ADFA is a development finance agency where
economic development and related development finance activities are stated as
principal program goals.
II.
STANDARD CREDIT
POLICY. For the category of
highest risk in
ADFA lending programs, the ADFA loan officers and Board of Directors shall be
guided by the following standard credit policies for evaluating applications
and for portfolio management. The Credit Policy shall apply to all new and
existing loans.
A.
QUALIFICATIONS.
Applications must comply with (1) State of Arkansas legislative and
constitutional law and (2) federal tax law, its requirements and restrictions
that are imposed on the issuance of tax exempt bonds.
An applicant must demonstrate and document that the project will have a
positive impact on employment or otherwise actively assist in the economic
development of Arkansas.
An applicant must demonstrate reasonable assurance of the ability to
repay the projected debt from debt service.
An applicant must agree to comply with all rules and regulations of the
Authority.
B.
STATUTORY RESTRICTIONS.
ADFA=s enabling legislation, as amended, contains certain restrictions
and limitations on eligible activities and borrowers (addendum attached). These
are ADFA=s policies, which shall accommodate such legislation and any future
amendments.
C.
ELIGIBILITY.
1.
Borrowers. Individuals, proprietorships, partnerships,
corporations, tax exempt organizations, not-for-profit corporations (as defined
by the Tax Code e.g. 501(c)(3), limited liability companies and
municipalities.
2.
Amounts. ADFA through the Bond Guaranty Program and
through any direct lending activity has no statutorily-imposed loan limit.
$6,000,000 is adopted as an ADFA in-house loan limit per borrower.
3.
Loan to
Value/Cost. Loan to value/cost shall be 90% of cost or 90% of
appraised market value, whichever is less for existing businesses and 70% for
start-up businesses.
4.
Cash Flow Coverage. For all projected and outstanding
debt, the cash flow coverage should be at least a 1 to 1 coverage. Evaluation
and analysis should be performed on the existing financial statements and
projections using comparable industry ratio analysis.
5.
Appraisals. An
appraisal must be obtained for an application where ADFA is financing the
acquisition of existing real estate or used equipment and appraisals must be
obtained when existing real estate or used equipment is being pledged as
additional security. MAI or comparable appraisals are required for real estate.
Appraisals of used equipment must be performed by an independent, outside
source who has proven knowledge of equipment values. Loan officers should
obtain a cover letter from the appraiser addressed to ADFA if the report has
been prepared for the borrower. Exceptions to the appraisal policy will be
evaluated on a case by case basis using common sense.
6.
Insurance.
Borrowers are required to maintain insurance coverage on collateral securing
loans. Upon receipt of a notice of cancellation or non-renewal of the existing
insurance coverage and in the absence of a replacement binder, collateral
insurance protection will be put into effect. The borrower will then be billed
for the cost of the insurance protection. Once ADFA receives proof of insurance
coverage indicating no lapse in coverage, the cost of the collateral insurance
protection will be credited back to the borrower.
7.
Collateral. On
tax exempt bond issues, ADFA must be granted a pari passu first mortgage on
real estate and a pari passu first security interest on equipment financed with
bond proceeds. Otherwise ADFA will obtain collateral that is sufficient to
secure any other loans. Additional collateral may be pledged pursuant to
prudent lending practices.
8.
Personal Guaranties. Joint and several or pro rata
personal guaranties of owners/shareholders of ten percent (10%) or more of the
company are required. A level of recommended guaranty is determined when
applications are underwritten. Annual updates of personal financial statements
may not be required unless specifically requested by the staff.
9.
Corporate
Guaranties. As needed pursuant to prudent lending practice, ADFA
will obtain the corporate guaranties of related parent or sister
companies.
10.
Term
(Maturity). The term (maturity) should not exceed the economic
useful life of the assets being financed. The final maturity of any transaction
should be determined after consultation with the applicant and review of
projected cash flow.
11.
Key Person Life Insurance. Life insurance may be
required pursuant to prudent lending practices.
12.
Phase One Environmental
Assessment. Phase one environmental assessments on real estate
should be conducted and addressed to ADFA. If any indication of problems
exists, the report and its recommendations should be discussed with legal
counsel. Loans which do not have real estate as collateral will not be required
to have a Phase One Environmental Assessment.
13.
Job Creation And Job
Retention. ADFA will evaluate the impact on current and projected
employment levels, wage rates, skill levels and local economic conditions.
Preference may be given to applications that create or retain large numbers of
high wage, high skill jobs in areas of high unemployment.
14.
Concentration.
Loan concentration in any one industry should be limited to twenty percent
(20%) of the loan portfolio.
15.
Company Financial Statements. Borrowers who are
indebted to ADFA for amounts exceeding $1,000,000 shall be required to submit
annual audited financial statements. Borrowers who owe ADFA less than
$1,000,000 shall be required to submit independent CPA reviewed financial
statements. At a minimum, borrowers will be required to submit semi-annual
financial statements which can be internally prepared, within 45 days of the
end of the second quarter of the fiscal year. The staff may require more
frequent reporting on a case-by-case basis. ADFA staff will obtain Dunn &
Bradstreet reports on all applications. The staff will also obtain on Dunn
& Bradstreet credit reports on all participating companies on an annual
basis.
16.
Personal
Financial Statements. Personal financial statements are required
at the time of application and may be required at the request of ADFA during
the term of any outstanding debt which is personally guaranteed to ADFA. ADFA
staff will obtain credit reports for personal guarantors on an annual
basis.
17.
Borrower
=
s
Financial Institution. Credit checks will be made by the ADFA loan
officer(s) with the Borrower=s financial institution to determine project
feasibility and to discuss possible financial participation. A report on this
contact will be noted in the credit write-up for any credit presented by the
ADFA staff to the Board or loan committee, as the case may be.
D.
CREDIT RATING
CATEGORIES.
1.
Class I (Highest
Quality). Companies with ample cash flow to cover existing debt. A
history of stable, uninterrupted profits and the backing of local financial
institutions. The company should have strong stable management who take the
necessary steps to see the future outlook of the industry in which it operates
and position the company to take advantage of these trends. The company has
enough liquidity to survive short-term troughs and the ability to get financing
to help them through long-term troughs. The loan is secured by excellent
collateral and the owners have a substantial equity position. All of the key
financial ratios should fall within the upper quartile of the RMA Annual
Statement Studies.
2.
Class
II (Good Quality). Companies with similar qualities of those in Class I
except some characteristics are not as strong. They could have less liquidity,
lower debt service coverage, or more cyclical earnings. Alternative sources of
funding in slow periods are available. The companies operate efficiently now
but may require capital outlays to help meet the future industry demands. There
is good collateral coverage and the owners have an acceptable equity position
in the company.
3.
Class III
(Satisfactory Quality). Companies with average financial statements when
compared to RMA Annual Statement Studies. Profits and cash flow may be erratic
but as yet the company will not have been over 30 days delinquent with any
scheduled debt service payments. Alternative sources of finance are possible to
help in slow periods. Collateral coverage shows at least a 100% coverage on the
balance sheet but conversion to cash will be slow and prices received would be
uncertain.
4.
Class IV (Below
Average Quality). Companies with poor liquidity and erratic earnings or
losses. The primary source of repayment is uncertain and collateral conversion
may be necessary. Collateral coverage is questionable and below market prices
are assured. Industry trends are down and technological advances may make the
company product obsolete.
No additional sources of finance are available. Close monitoring and
continuous communication with management is required.
5.
Class V (Poor Quality). All
characteristics, collateral, net worth, cash flow are substandard. Constant and
intense supervision is required. The possibility of a partial or full loss is
expected. Additional collateral or equity injection will be required to keep
company operating.
6.
Class
VI (Poorest Quality). Loan is a loss. Debt Service payments have
stopped. No chance of recapitalization exists. A full or partial loss is
assured.
E.
LOAN
REVIEW.
1. Objectives.
a. Initially to provide a current appraisal
of the quality of the loan portfolio by identifying problems of each individual
loan.
b. Early detection of
potential problems by analyzing each individual loan on a regular
schedule.
c. Keeping the Loan
Review Committee updated on loans which have been identified as potential
problems and action being taken to minimize ADFA=s potential loss or
liability.
2. Beginning
Procedures.
a. Update each loan file.
(1) Verify that current financial statements
are in file, put them on a spreadsheet and analyze
(2) Based upon this analysis, assign a credit
rating according to the AADFA Credit Rating@
(3) Prepare a memorandum for the file
discussing this analysis and credit rating
(4) Prepare an AADFA Problem Loan Update@ (on
all loans rated 3.50 or higher, have a recommendation
for future action ready for the Loan Review Committee)
b. Site Inspection.
(1) Each staff person in the Development
Finance Section shall set aside at least 1 day per month for site inspections
until all sites in present portfolio have been inspected
(2) After the site visit the inspector shall
prepare an AADFA Site Inspection Report@ for the file
3.
Normal
Procedures.
a. Financial
Statement Annual Review.
(1) Upon receipt of
each company=s year-end financial statement, add the report to the existing
spreadsheet.
(2) Analyze the
spreadsheet, looking for positive or negative trends in the company itself and
in comparison to the latest RMA Industry Averages.
(3) Based upon the analysis, assign a credit
rating according to the AADFA Credit Rating@
(4) Prepare an AADFA Loan Status Report@ (for
loans rated 3.50 or higher, have a recommendation
ready for the Loan Review Committee
(5) Report to the Loan Review Committee
annually on each loan to include: an updated spreadsheet, an ADFA Credit
Rating, an ADFA Loan Status Report and a memorandum discussing analysis and
credit rating. Loans rated below 3.5 that are current and are scheduled to pay
off in the next twelve (12) months are exempted from a complete annual review.
Staff will report a brief status on the loan and site the reporting
exemption.
b.
Interim Loan Review.
(1) All loans rated 3.50 or higher (Section
A-4-a) shall be reviewed monthly with the Loan Review Committee to (i) inform
members of any improvements or declines in the quality of the loan, (ii) inform
the members of steps being taken to rectify the situation and (iii) receive
guidance from the members on other possible solutions or actions that could or
should be taken.
(2) All other
loans shall have their credit rating assessed on a semi-annual basis. Interim
statements shall be collected from the company and staff should load the
statements into the existing spreadsheet, look for any major negative trends
and adjust the credit rating if it is deemed necessary. This procedure shall be
conducted on a semi-annual basis.
c.
Site Inspection
(1) Each site should be visited annually by
the staff. The inspection should be scheduled as close to 180 days after
receipt of the annual financial statement as possible. After the visit the
inspector shall prepare an AADFA Site Inspection Report@ for the
file.
(2) Each project should be
visited at least once during the construction phase and the inspector shall
prepare an AADFA Construction Inspection Report. Loans rated below 3.5 that are
current and are scheduled to pay off in the next twelve (12) months are
exempted from an annual site visit.
F.
REPORTING.
On a monthly basis, the staff shall provide monthly
reporting of the loan status to the Board of Directors of all problem loans and
loans classified with a credit rating score of 4, 5 or 6 and on any loan ninety
days past due.
On a quarterly basis, the staff will provide to the Board
of Directors the following reports:
Remaining Term. A report of the years to final
maturity by industry standard industrial code for the bonds outstanding.
Credit Quality. A report of credit scores for
the portfolio by industry standard industrial code.
Portfolio Industry Concentration. A report
organized by industry standard industrial code reporting outstanding balances
which will be aggregated and calculated as a percentage of the total portfolio
balance. Information will be presented in numeric order and in highest
concentration order.
Bond Guaranty Capacity Remaining. ADFA
legislation applies two tests in determining the maximum amount of bonds to be
guaranteed. The two calculations will be made and the remaining capacity to
guarantee new bonds will be reported.
Pre-Approval Lending Exceptions. Any
exception to the credit policies occurring when underwriting and presenting
lending requests must be identified an approved by the staff credit committee
and the ADFA Board of Directors.
Adopted by the Board of Directors of the Arkansas Development Finance
Authority this 13th day of August , 2003.
By: __________________________________
Its: Freddie Mobley , Chair
ATTEST:
By: ______________________________
Mac Dodson, President/ Secretary
