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SME Rescue Loans Program (a) (2)

SME Rescue Loans Program (a) (2)

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Published by Erin Griffith
Lynn Tilton of Patriarch Capital's proposed SME Rescue Loan program.
Lynn Tilton of Patriarch Capital's proposed SME Rescue Loan program.

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Published by: Erin Griffith on Aug 19, 2009
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05/11/2014

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SMERescueLoansProgram
 APublic-PrivateProgramtoSustainandCreateEmploymentthroughIncentivesforPrivateRescueLendingtoSmallandMiddle-marketEnterprises
www.smerescueloans.com
Summary
Asfinanciallyimpairedbankshaveretrenchedfromtraditionalsecuredlendingtosmallandmiddle‐marketenterprises(SMEs)topreservecapitalandrepairbalancesheets,agapingholeinourfinancingeconomyhasbeenshaped.Morethaneightypercentofthiscountry’sworkforceishousedincompanieswithfewerthan500employees.Middle‐marketandsmallercompanies,thebackboneoftheAmericaneconomy,havelostaccesstothetraditionalworkingcapitalloansuponwhichtheyhavelongdependedformanagingbusinessesintheordinarycourse.Asaconsequencetothesuddendearthofcapitalavailableinthismarket,companiesthatmightotherwiserationalizeandsurvivethecurrenteconomicdownturnarelayingoffworkers‐‐layoffsthatwillresultinpermanentjoblossesas,withoutaccesstocapital,thesecompanieshavenochoicebuttoliquidate.Thisphenomenonisdrivingnotonlypermanentjoblosses,butalsotheeclipseoftechnologyandthedestructionoftransferableindustrialknowledge,causingirreparabledamagetotheAmericaneconomy.TheRescueLoansProgram(RLP)willexploitunusedTARPfundingintendedforthePublicPrivateInvestmentPartnership(PPIP)toincentivizequalifiedprivateinvestorstoproviderescuefinancingtocompaniesunabletoaccessthebankloanorcreditmarkets,temporarilyfillingthelending/financingvoidleftbybanks,hedgefundsandcollateraldebtobligations(CDOs).Accesstorescuefinancingwillsavemanycompaniesthatmightotherwiseliquidate‐‐withadirectandimmediatelyquantifiablesustainmentofemployment‐‐andwillsimultaneouslyassuagetheurgentandoverwhelmingthreattooureconomy,risingunemployment.TheRescueLoansProgramis
not 
abailout;itisadirectinvestmentinAmericanjobs.
ProgramHighlights
 
TheRLPwillfunctionundertheexistingPPIP.
 
Theprogram’sconfigurationwillbebuiltuponstructuresalreadyannouncedintheexistingPPIPLegacySecuritiesProgram.
 
TheprogramwillrequirenoadditionalfundingfromCongress.
 
TheRLPwillsavejobs,inamannerthatcanbeimmediatelyeffectiveandquantified,throughacombinedprivateandpublicsectorsolution.
 
Theprivatesectorequitywillabsorbtheentirefirstloss,aheadofboththegovernmentloansandthegovernmentequitycontribution,significantlyreducingtaxpayerrisk.
 
Thegovernmentprogramwillbetemporaryandwillbereplacedwithprivatesectorandbankfinancingasthecreditmarketsrecover.
RisingUnemploymentPosestheGreatestThreattoEconomicRecovery
Priortothefinancialcrisisoflastfall,availablecredithadreachedthepinnacleofhistoriclevels.However,withtheimplosionofthisnation’sfinancialsystem,avastovercorrectionhasensued,leavingsmallerandmid‐sizedcompanieswithnowheretoturn.
TheWallStreetJournal 
recentlyreportedthatloanportfoliosatthe15largestbankscontracted2.8percentinthesecondquarterof2009.
1
Thesystematicliquidationofourmiddle‐marketeconomythreatenstofurthershrinkthe

1
“LoansShrinkasFearLingers,”
TheWallStreetJournal,
July27,2009.
http://tinyurl.com/ntvfnc

 
2
U.S.andglobaleconomiesandtodrivepermanentunemploymentratestoheightsnotwitnessedingenerations.TheimplosionofcreditmarketsbeganasaWallStreetcrisisbutrapidlyspreadtoMainStreet,pavingapathofdestructionalongitsway.Creditmarketsseizedandtheglobaleconomyappearedtostandontheprecipiceofcollapse.Governmentsrapidlyintervenedwithmyriadprogramsdesignedtoslowthepaceofdamage.TheTARPbuttressedstrugglingfinancialcompanies.Liquidityprogramswereoriginatedtoresuscitatemoribundcreditmarkets.Andnewprograms,suchastheTALFandPPIP,weredesignedtothawfrozencreditmarketsandtoinspiretheprivatemarketpurchaseofso‐calledtoxicassets,respectively.Theseprogramssucceeded,tovaryingdegrees,intheirrespectiveambitionstoprimethepumpsofspecificfinancialmarkets.Althoughthegraveriskofimpendingfinancialcollapsemaybebehindus,theeconomyremainsfragileundertheweightofsignificantpressure.Thefall‐outfromthecrisisoflastautumnhasgivenwaytothenewanddangerousthreatofextremelyhighunemploymentandpermanentjoblosses,aprospectmorefrighteningthanotherstomostMainStreetAmericans.Absentanimmediaterescuesolution,unemploymentcouldpeakinexcessof12percentwithunderemploymentlevelsapproaching20percent,exacerbatingdemanddestructionandfurthereconomicdeterioration.AccordingtoLarrySummers,DirectoroftheWhiteHouseNationalEconomicCouncil,thecurrentunemploymentrateof9.5percentmaybeonetoone‐and‐a‐halfpercentagepointshigherthaneconomicconditionswouldhistoricallywarrant.
2
Economistsarebeginningtoask“Why?”Theevidencepointsclearlyanddirectlytodeficientsourcesoflendingtomiddle‐marketcompanies.
CreditStarvationtoMiddle-MarketCompaniesDrivesJobLosses
Forlargecompanies,creditconditionshavetightened,butcapitalisclearlyavailable.Improvementsincommercialpaper,equityandhigh‐yieldbondandloanmarketshaveallowedlargecompaniestorationalizeexpensesandoperate,despitedeepdeclinesinrevenues.Forverysmallcompanies,SBAloanscanoftenbeaccessed.However,thevastmiddle‐marketbetweenthetwo–‐“thetweenmarket”whereapproximately40percentofAmericansareemployed‐‐hasfallenthroughthecracksofmyriadprogramsdesignedtoreignitecreditmarkets.
Middle‐marketcompaniesdependonworkingcapitalloansfrombankstooperatetheirbusinessesintheordinarycourse‐‐tofinanceinventorypurchasesandtofundpayrollandotheroperatingexpenses.Ineverybusinesstherearetimingdifferencesbetweenthespendofcapitaltomanufactureanddeliveraproductorserviceandthepaymentforthosegoodsorservicesbycustomers.Formostmiddle‐marketcompanies,accesstocreditrangesfromscarcetonone.Batteredbyaperfectstormofdecliningrevenuesandadearthofcredit,companiesareliquidatingandterminatingtheirworkforcebythehundredsofthousandseachmonth.Theneedsandperformanceoflargecompaniesgarnersignificantattention,buttheirtotallaborcomprisesonlyaverysmallpercentageofournation’stotalemployment.Companieswithinmore

2
“JobCutsOutpaceGDPFall,”
TheWallStreetJournal,
July23,2009.http://tinyurl.com/myjv6m
“Breakingfromhistoricalpatterns,theunemploymentrate--currentlyat9.5%--isoneto1.5percentagepointshigherthanwouldbeexpectedunderoneeconomicruleofthumb,saysLawrenceSummers,PresidentBarackObama'stopeconomicadviser.”
–
TheWallStreet Journal,
July23,2009
 
3
than500workersemployapproximately17percentofAmerica’sworkers.Smallandmid‐sizedcompanies,ontheother‐hand,employmorethan83percent.Middle‐marketcompanies,thosewithmorethan50butfewerthan500workers,employ39percentofworkersyetaccountfor44percentofjoblosses–morethananyothergroup.
3
Inanormalrecession,joblosses,whilepainful,areanticipatedandevennecessary.Recessionsculltheweakestcompanies,creatingroomforthestrongestandmostinnovativetothrive.Theprocessofcreativedestructionisperceivedasintegraltothesuccessfulperformanceoffreemarketeconomies.However,thiseconomiccollapseisbynomeansanormalrecession.Toomanyjoblossesarearesultofchangesinbanklendingstrategiesandnotdirectlylinkedtounderlyingeconomicforces.Companiesthatinpreviousrecessionswouldhaveachievedwork‐outsolutionsandforbearancefrombanks,orrescuefinancingfromalternativelenders,nowalarminglyfindthemselveswithoutcapitalandwithnowheretoturnbuttowardslayoffsandliquidation.Theeconomyisnotintheprocessofcyclicalcreativedestruction,butratherinthedeadlygraspofsecular,irreparableeconomicdevastation.
TheSolution–SMERescueLoans
Themostdirectandrapidsolutiontostemjoblossesistoincentprivateenterprisetooriginateandmonetizerescue‐financingloansforstrugglingsmallerandmiddle‐marketcompanies.
Funding
TheRescueLoanProgram(“RLP”)willaccessunutilizedTARPfundsalreadysetasideforPPIP.Treasuryoriginallyintendedthat$75‐$100billionofTARPfundsbeusedforPPIPprogramstopurchasetoxicloanassetsfrombankbalancesheets.Yet,asoftoday,only$30billionhasbeenallocatedforuseinthePPIPLegacySecuritiesProgram.ThePPIPRescueLoanProgramwillinitiallyuse$30billionforequityanddebtinvestments,leavingavailableanadditional$15‐40billionofthefundsoriginallycontemplatedforPPIP.
Structure
TheRLPwillbestructuredbaseduponsimilarconstructionstothoseannouncedintheexistingPPIPprograms.Pre‐selectedinvestmentmanagerswillraiseaminimumof$150millioninequitycapital,whichwillthenbeusedalongwith$50millionofequitycontributedbytheTreasury.Privatesectorequitycapitalwillserveasthefirstlosslayertoboththeloansandequitycapitalprovidedbythetaxpayer.Whilethetaxpayerwillshareinthereturns,privateinvestors‐‐notthetaxpayers‐‐willbearthemajorityoftherisk.Additionalleverage,ofuptofourtimesequity,willthenbeprovidedbyTARPfunds.Itwillberequiredthatatleast$15million(or10%)ofequityintheRescueLoanInvestmentPartnership(RLIP)originatesfromdirectinvestmentbytheinvestmentmanager’sfirmorpartnership.
LoanEligibility
TheRLPwillbeavailabletocompanieswhohavebeenturneddownbybanks,whoseloansareindefaultwithbanks,whosereservesonloanshaveincreasedover10%inthelast12months,andcompanieswhorequiredebtor‐in‐possessionfinancingduringbankruptcyrestructuring.Allloanswillneedtobeseniorsecuredandfirstinrightofpayment.

3
ADPNationalEmploymentReport,June2009.http://www.adpemploymentreport.com/

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