Michigan S upplier r Di D vers r ification F und Cap a i p t i a t l a l M ar a k r et e s t D ev e el e o l p o m p en e t n MEDC

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1 Michigan Supplier Diversification Fund Capital Markets Development MEDC

2 Michigan Supplier Diversification Fund Purpose MSDF was designed to assist and stimulate private lending markets in financing diversification projects of viable businesses Design Addresses three impediments to lending programmatically: Cash Flow Shortage: As defined by lender analyses, companies debt service coverage ratios too speculative Collateral Shortfall: Collateral values declining Key Elements: Private lenders lead the deals Relies on bank underwriting and market discipline Non-Bureaucratic: Minimal paperwork and rapid turn around Programs were designed in consultation with private lending institutions to address the impediments to lending and corresponding solutions proposed by those institutions

3 MSDF Programs Michigan Supplier Diversification Fund Current Allocation = $26 million (Also seeking federal funds $70-$100MM) Michigan Loan Participation Program (MLPP=Cash Flow Support) Michigan Collateral Support Program (MCSP=Collateral Support)

4 Michigan Loan Participation Program MLPP Program Description MEDC can purchase a portion of a credit facility (up to 49.9%) from a lender on new diversification projects that exhibit short-term cash flow deficiency according to the lender. MEDC can offer preferred terms on its portion of the credit facility (no interest and/or principal) for up to 36 months, thereby freeing up cash flow to cover debt service on the lender s portion. Advantages to Lender Helps to limit project exposure during economic uncertainty. Ensures debt service coverage on lender s portion. Grace period allows higher risk deals to prove out, providing opportunity for lenders to limit risk during the early stages of a project while gaining access to potentially high reward deals. MEDC anticipates lenders eventual take out once projects prove out.

5 MLPP Process & Structure 1 Lender Analysis Cash Flow Shortage Agreement to participate on Credit Facility; MEDC will purchase up to 49.9% with preferred repayment terms 2 Company *Requests Loan to Diversify 3 Closing MEDC Purchases a portion of the Facility from Bank at Closing 5 Credit Facility 4

6 MLPP Guidelines To be eligible a company must fall under the definition of a firm which may be eligible to receive a MEGA tax credit. The participating lending institution shall be considered the lead bank and shall retain no less than 50.1% of a credit facility. The Program collects and relies on the credit analysis of the lead lending institution. The Program s advance, shall charge interest no later than 36 months after the closing of the loan agreement. After such time the effective rate of interest shall be the lenders rate per the note plus a1% annual fee based on the programs existing balance. MEDC participation shall not exceed $500,000 per project generally. However it can exceed $500,000 up to $2,500,000 if it is determined that the project provides a high level of Economic Development or Job Creation benefits to the State of Michigan. Reductions in principal, partial losses and total losses, if any, will be taken proportionate to the percent of loan participation (pari passu & pro rata). The Program will charge a one time loan closing fee to the borrower that may be deducted from the loan proceeds. The closing fee will be negotiated per deal but is generally between 1% & 3%. A prepayment fee may be charged to borrowers that pay off Program advances within 12 months of interest accrual.

7 Michigan Collateral Support Program MCSP Program Description MEDC can supply cash collateral accounts to lending institutions to enhance the collateral coverage of borrowers attempting to diversify into new growth verticals. These accounts will cover all or a portion of a calculated collateral shortfall as described by the lending institution (up to 49.9% of credit facility. In the event of full default, the lender will have rights to the account less a liquidation fee. (Discuss Waterfall) Advantages to Lender Advantages to Lender Pledged Asset up to 49.9% of credit facility in a very liquid form. Increases deposits of lending institution during loan term.

8 MCSP Process & Structure Bank agrees to fund full Credit Facility contingent upon MEDC cash collateral deposit Lender Analysis 1 2 Collateral Shortfall Company *Requests Loan to Diversify Loan Closing 3 Lien MEDC Makes cash collateral deposit into Bank at closing 5 4 Credit Facility Collateral Account = up to 49.9% of credit facility

9 MCSP Guidelines To be eligible a company must fall under the definition of a firm which may be eligible to receive a MEGA tax credit. (Base Economic Job Creator) The program shall enhance the collateral position of borrowers by depositing cash into accounts at participating lending institutions which will then be pledged as collateral on behalf of the borrower on a transaction by transaction basis. The Program collects and relies on the credit analysis of the lending institution. MEDC participation shall not exceed $500,000 per project generally. However it can exceed $500,000 up to $2,500,000 if it is determined that the project provides a high level of Economic Development or Job Creation benefits to the State of Michigan. The Program s support shall not exceed 49.9% of credit facility. The participating lending institution must execute a Deposit Agreement under which the terms of deposit, interest accrual, and pledge restrictions will be described. The program balance shall be reduced proportionately with the principal reduction of the loan so as to eliminate over-reliance on program deposits as part of the collateral commitment on the loan. Losses resulting in a distribution to the bank of program funds may be paid at a rate less than 100% of the pledged security as negotiated in the Deposit Agreement based on the efficiency of sale of borrowers assets. The program charges a fee at closing of between 1% & 3% as well as a 1% fee annually on the then outstanding program balance.

10 MLPP & MCSP Application Process If your institution has opportunities that fall into either of these programs: 1. Borrower and/or bank should complete a brief company/project description memo to determine program eligibility 2. Complete loan application for the borrower 3. Send your entire credit package to us for review (we do not duplicate your underwriting, we review it for completeness). Please include: all financial analysis, risk rating, statement spreads, cash flows, relationship and historical documentation and collateral analysis which would typically be required to adequately satisfy traditional commercial loan underwriting. 4. Applications for program money under $500k have a rapid signature authority track. Applications over $500k in program money are approved at the MSF Board which meets once a month. Please allow a lead time for preparation. * Please call with questions

11 Questions or Applications or Eric Hanna, PH: Applications to (preferred) Or mail to: Capital Markets Development Michigan Economic Development Corporation 300 N. Washington Sq. Lansing, MI 48913