ADFA, AEDC see 18%-25% of loans in default

story by Steve Brawner and Roby Brock
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[email protected]

The recent closing of Yarnell’s not only was a blow to the state’s economy (and taste buds), but it also called attention to state economic development agencies that help private entities obtain capital.

At its closing, Yarnell’s owed $1.96 million on a $2.5 million loan guaranteed by an Arkansas Development Finance Authority bond, along with $1.45 million on a 2001 $1.5 million community development block grant by the Arkansas Economic Development Commission. The company also owed $123,000 on a $2 million loan guaranteed by an AEDC bond from 1994.

THE MISSION
AEDC’s mission is strategic economic development while ADFA is a financing issuer, but both state entities offer bond guaranty programs where the proceeds from bonds sold to investors are used to guarantee borrowers’ loans made with other investors in case of a default.

“We work together because we do different things, and sometimes in order to make projects happen, we have to combine resources,” said Gene Eagle, ADFA’s vice president of development finance.

While ADFA’s loan policy is sufficiently flexible, state law places restrictions on how extended AEDC and ADFA can get with their bond financing for business investments.

ADFA’s guaranty program is limited to the lesser of $150 million of guaranteed bonds, or an amount equal to 10 times the amount currently on deposit in the ADFA guaranty reserve account, which today has about a $17 million balance.

The amount of bonds guaranteed by the AEDC program is limited to $100 million of guaranteed bonds outstanding.

Financials are audited by an outside independent CPA firm and the ADFA program has actually garnered national attention and accolades for its structure and management among state-supported bond guaranty programs.

SUCCESS & FAILURE
Both agencies have had their successes and failures. According to spokesman Scott Hardin, AEDC has $61.3 million guaranteed on 32 current issues, with six in default. As for ADFA, according to a May 9 report by Standard and Poor’s, as of Dec. 31, 2010, there were 52 issues outstanding totaling $106.4 million in principal and $15 million due for fiscal 2012. Of those, 13 issues are in default, with a total principal amount of $16.8 million and annual debt service of $5.6 million.

Eagle says that like many financing institutions, ADFA has taken its licks since the recession of late 2008, particularly among timber and wood products companies.

“There are varying degrees of default,” said Eagle. “There’s technical default. There are people that are behind, but are still paying. There are companies like Yarnell’s that have just totally thrown in the towel.”

Created in 1985 as a successor to the Arkansas Housing Development Agency, ADFA issues bonds and other debt instruments to finance the construction of public facilities, housing developments, and industrial and agribusiness enterprises. The Bond Guaranty Reserve Program is one of those instruments. ADFA is governed by a board of directors that includes the state treasurer, the director of the Department of Finance and Administration, and 11 others appointed by the governor.

ADFA’s Bond Guaranty Reserve Program is required to keep funds on reserve to cover shortfalls. Like all investors, the fund’s portfolio has endured its share of hits. Standard and Poor’s gives the fund an “A” rating. AEDC’s bond guaranty fund also has an “A” rating.

An "A" rating is an "upper medium grade" — not as strong as "AA" or "AAA," which signal "high grade" and "prime" credit ratings — but far superior to "B," "C" or "D" ratings, which range from "speculative" to "in default."

ADFA has guaranteed close to 200 projects over the years. Clients have included Riverside Furniture in Fort Smith and Arkansas Glass Container in Jonesboro, both of which were provided funds in order to modernize.

“Our philosophy is we want to be involved in good projects creating jobs and extending favorable terms that will help private businesses to grow and prosper,” said Eagle. “We expect to be repaid. We do not give grants.”

Meanwhile, the authority has seen its share of failures, including Arkansas Catfish Growers in Eudora/Lake Village and Burlington Rug in Monticello, along with Yarnell’s.

Eagle said ADFA is still waiting to see what comes of the situation with Yarnell’s, but he expects the authority to recover something.

“You’re always working to try to keep everybody paying, but that’s not going to happen, especially with the mission that we have,” he said. “And when you have defaults, you’re going to try and recoup as much of it as you can, and we have money coming in every year from the ones that we’ve foreclosed on.”