Auto suppliers may get relief, but is it too late

May 26, 2009
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A kind gesture, but perhaps too little too late. Gov. Jennifer Granholm along with the Michigan Economic Development Corp. introduced last week the Michigan Supplier Diversification Fund, a new fund to aid in the diversification of auto suppliers.

There are three programs under the MSDF, the Michigan Loan Participation Program, Michigan Collateral Support Program, and “Mezzanine Financing.”

The Michigan Loan Participation Program is the first of the three programs to launch and the only one currently with any funding. The program includes a $12 million budget for purchasing portions of companies’ loans from lenders. This would allow for a 36-month “grace period” while suppliers initiate diversification programs.

Jim Zawacki, CEO of Grand Rapids Spring and Stamping, fears that many companies won’t be able to last long enough to reap the benefits of the new program.

“‘A’ for effort, but why didn’t we do things like this five years ago? Just reading the announcement, if a company is out of covenant it’s almost too late” he said. “We missed the thing. If we would have provided the tax incentives like we did the movie industry and if we would have been a Right to Work state, we would have had more customers here than I could do business with. Eighty percent of my business was in Michigan 10 years ago. Today it’s 20 percent.”

Zawacki also noted that diversifying into other areas isn’t as easy as it sounds.

“We’ve wanted to get into other markets for years and compared to automotive what are you going to get into? Even medical is down. They’re not looking for new suppliers unless you’ve got something unique. It’s in the four categories of agriculture, energy, medical and life sciences. Other than energy they’re all down — and the (energy) market is so small. It’s not going to save a person.”

In order to diversify, a company would most likely have to hire a person who knows that particular market, which is not an easy task with the current economic condition of suppliers, said Zawacki.

“You just don’t come in and say, ‘Hey I’m the new supplier on the block. I want to quote your business.’ They’re not looking for us,” he said. “There’s not one segment that will replace what we’re missing in automotive. We won’t build another new automotive plant in the next 10 years. Toyota committed to Mississippi, Honda just committed to Indiana, and VW is building a plant in Tennessee — all Right to Work states. They should be here; we’ve got everything they need.”

Not every company is eligible for the Michigan Loan Participation Program. A company must be able to receive a MEGA tax credit. The MEDC specified a company must have a Federal Employer Identification number and participate in “mining, manufacturing, research and development, wholesale and trade, film and digital media production, office operations, or a business that is qualified as a high technology business as described in MCL 207.803(n), as amended.”

The program also will heavily utilize the lenders. The original lender will remain the “lead bank” on the loan by maintaining no less than 50.1 percent of the total loan balance throughout the duration of the loan.

The lender also will be responsible for paperwork such as risk rating justification, credit analysis and whatever else the program needs to determine if the opportunity meets the criteria of the program.

A company that does qualify will be eligible for up to $500,000 in an “advance.” Certain projects deemed to provide an above average level of economic development or job creation will be capable of receiving a larger advance amount as long as it does not exceed 20 percent of the Michigan Loan Participation Program’s total funding allocations.

Repayment of the funds must start no later than 36 months after closing the loan agreement. During that time, no interest will be charged to the MEDC portion of the loan. Interest will be applied, however, after the 36 months. The interest on that portion of the loan will fall between one and four percent higher than the portion held by the lead bank.

The lead bank does have the option of buying the MEDC’s portion of the loan. If the bank chooses to start repaying the MEDC portion of the loan before while still in the grace period it will be charged a prepayment fee that will fluctuate depending on the market.

Paul Brown, manager of the capital markets development group at MEDC and architect of the program, said prepayment fee along with the higher interest rate is put in place to keep the banks active and honest.

“We don’t want people to come into this program that could otherwise get the bank financing. We can’t afford to give money away and we don’t want to (encourage) borrowers to use us instead of the bank,” said Brown about the increased interest rate. “Borrowers will tell the bank, ‘Buy the MEDC out of this. I’m now a safe loan for the full million,’ which is (encouraging) the banks and the borrowers interests to be aligned together to try and work us out as soon as they can.”

As for the prepayment fee, which would be applied if a bank buys out the MEDC portion of the loan, Brown said “the prepayment penalty, we want to encourage them to pay it off quickly, but we don’t want to give (banks) free money for 36 months. We don’t want to see banks abuse it. It’s to keep (banks) honest and the borrowers honest on taking advantage of us.”

The prepayment penalty is not set and will fluctuate depending on when the bank starts paying back the MEDC.

“It may be one percent for the first 12 months. Three percent after 24 and five if you wait the day before your interest comes due. We want to make the market dictate what that will be,” said Brown. “We want to drive the hardest bargain we can on behalf of the state, yet make sure that this program is helping and moving our manufacturers into their diversification lines.”

Bridget Beckman, public information officer for the MEDC, gave a nutshell explanation of how the Loan Program would work.

“Say a company wants to diversify into making components for the wind energy sector and they know they need some retooling. They look at their existing equipment and look at what it would take and let’s just say it’s a million dollars,” said Beckman. “They go to the bank and the bank says, ‘You don’t have enough cash flow to service $1 million, but it looks like you have enough for $500,000.’ The state would come in; put up the other $500,000 and the company would only have to pay interest on the $500,000 they’re getting from the bank.”

While there is only funding for the Michigan Loan Participation Program, the MEDC is trying to garner more funds for the other programs and is looking heavily to federal funding.

“Our hope is to identify some other funding sources for the other programs; possibly, federal funding,” said Beckman. “That’s something we’ll be working on. We wish we had more than the $12 million to put into the loan component.”

The next program under the MSDF is the Michigan Collateral Support Program. This program sets funds aside for lending institution’s cash collateral accounts. These funds will “cover a collateral shortfall in case of default, thereby strengthening borrowers’ collateral position.”

“Mezzanine Financing” will also come into play by reestablishing the Michigan Business Development Corp. Minor changes would be made, however, that would allow other financial institutions to invest. Existing funds would also be identified or new funds created to provide loans and investments to target businesses.

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