University of North Texas

College of Business

John Brackett
M.S. Finance and Work Experience Portfolio
Fall 2022
University of North Texas

john.c.brackett2@gmail.com
913-683-4978
Denton, TX 76205
Skills
Inside and Outside Sales
Critical Thinking
Organizational Skills
Customer Service
Unmatched Work Ethic
Interpersonal Skills
Education And Training
Master of Science:
Finance
University of North Texas
Denton, TX
Bachelor of Arts:
Exercise Science
Pittsburg State University
Pittsburg, KS
Certifications
PwC financial audit virtual
experience program participant.
2022 - 12 hours. Participated in
the open access virtual case
experience with Forage. Tasks
include: Strategic planning,
calculating materiality, and
analyzing trade receivables
The Arts and Science of
Relationships: Understanding
Human Needs by the University
of Toronto on Coursera. 2021.
Honors
Army Commendation Medal
(2020)
Distinguished Military Graduate
awardee for the class of 2019.
Ranked in the top 10% of army
cadets in the nation. Military.
2019.
John Brackett
Summary
Motivated professional eager to apply time management and organizational skills
in various environments. Seeking opportunities to expand my personal skills while
facilitating company growth.
Experience
Dogwood State Bank - SBA Sales Assistant
Assisted a Business Development Specialist with originating $11,409,800 in
closed loan volume for SBA 7(a) loans: majority consisting of acquisition
financing.
Analyzed $56,496,700 in potential SBA loan applications.
Typed 24 pre-credit memorandums and generated 24 8-tab excel workbooks
analyzing free cash flow of businesses, borrower financial strength, under-
collateralize exposure, and other key aspects of loan eligibility.
Engage with partner brokers, answered questions, and advised customers
regarding loans and transactions.
Examined, verified, and packaged loan application documents.
Fund-Ex Solutions Group - SBA Loan Assistant
Assisted a Business Development Officer with originating $23,411,600 in closed
loan volume for SBA 7(a) loans including acquisitions, debt
consolidation/refinances, and expansion loans.
Typed pre-underwriting memorandums for credit submission that analyzed
business and borrower financials to determine debt service coverage ratios,
under-collateralize exposure, and other key aspects of loan eligibility.
Engage with partnered brokers and borrowers to intake and prepare
documentation for underwriting.
Engage with partnered brokers, answered question, and advised customers
regarding loans and transactions.
Examined, verified, and packaged loan application documents.
U.S. Army Active Duty - 2nd Lieutenant, Military Police Officer
701st Military Police Battalion, 14th Military Police Brigade
Assistant to a Lieutenant Colonel during the senior officer's command of the
701st Military Police Battalion.
Developed over two hundred memorandums and briefed the executive officer
daily.
Communicated between five companies under the battalion and higher chain of
command to facilitate approval for soldiers to travel under restricted movement
during the coronavirus pandemic.
 The Lemon Market Theory and its Concepts Applied in the SBA Credit Market

George A. Akerlof published his Lemon Market Theory to explain how the value of an
investment, product, or any tradeable asset can become warped because of asymmetric
information. The presence of asymmetric information where sellers know more, and buyers
know less, leads to the quality of goods becoming worse over time. Akerlof recognizes that other
factors such as money markets, insurability, liquidity of products, and brand name goods also
have effects in markets. Eventually, these varying factors can lead to warped markets or even
broader market failure. If his theory is right, then readers can better understand the impacts of the
Lemon Market Theory on other markets or even developing economies.
In this theory, Akerlof also refers to the “cost of dishonesty.” This is the dishonesty of the
sellers to sell worse cars to buyers who may only know general information of the used car
compared to the similar cars in the market. However, the buyer does not truly know if the car is
in bad condition, also known as a “lemon”. This cost can drive away quality used cars within the
market. The benefits sways toward the seller since receiving an average price for selling a
“lemon” is better than what a buyer would pay if the true condition of the car were known. This
theory shows how quality of goods traded in a market can worsen over time. Akerlof stipulates
that his example applies to broader markets as well. According to Akerlof, “there is considerable
evidence that the quality variation is greater in underdeveloped areas.” To summarize, the
increased cost of dishonesty could be a large reason why underdeveloped nations do not see
markets as strong as the capital markets we have in the U.S.
The first idea that stood out to me in Akerlof’s article that is also related to material of the
class is adverse selection which is also known as “pre-contractual asymmetric information.” This
is where asymmetric information occurs before a transaction takes place. An example of this
stated in the course module explains this in the context of credit markets. The example presents
that risky potential borrowers have the greatest incentive to obtain loans, banks are the ignorant
party, and potential borrowers are the informed party. Banks mitigate this by pulling credit
scores on potential borrowers. However, there must also be mitigation of adverse selection when
the roles switch to where risky banks have an incentive to fund loans, borrowers as the ignorant
party, and the bank as the informed party. Adverse selection can happen on both sides within
credit markets.
Adverse selections are significant to me because it impacts average people trying to
obtain a loan. A fitting example of adverse selection would be in the SBA lending industry. For
decades, SBA lenders or banks containing SBA Departments have funded SBA 7(a) acquisition
loans where up to 85% of the loan is government backed. As I learned from our textbook how
secondary markets can work, there are also secondary markets of bank-to-bank products. The
lenders sell the “paper” in the secondary market for a premium, which is instant profit for the
bank. The 7(a) program is important small sized business acquisitions. It allows for average
individuals to secure financing where they otherwise would not be able to by conventional
means. On the other hand, small business owners looking to retire can sell their business
knowing it will stay family-owned instead of having to shut down or sell to large corporations.
Years ago, the SBA realized that SBA lenders and banks were taking on too much risk by
funding 7(a) acquisition loans and using in house or incompetent valuation vendors. However,
the incentives were there to sell the “guarantee” to make quick profit in the secondary market.
In the above adverse selection scenario, the bank is the risky, informed party and the
borrower is the ignorant, uniformed party. The bank has the incentive of minimal loan exposure
due to the government guarantee, 1st lien position on the target business’s assets, and potential
collateral on the new owner’s personal assets. Eventually, the SBA enacted a way to mitigate this
adverse selection problem by requiring SBA acquisition loans to utilize government approved,
third party vendors for conducting business valuations. This way lenders are getting a third-party
review of the valuation of a particular company. This also protects the buyer as he or she can
know a third party valued the business to reach a threshold needed. This example makes me
think how adverse selection can apply to credit markets where banks are the risky, informed
party and are swayed to lend for profit. Although, most prudent SBA lenders would not be too
loose and risk losing a guarantee. Still, the SBA since has created policies to mitigate adverse
selection where applicable. Default rates are now much lower than in previous decades in the late
1900’s. According to Glenin (2005) “found that 390,000 loan-quarter observations, including
more than four thousand loans that migrate into default status” (p.13).
A second idea from our class that stood out to me in the context of class material and
reading the Lemon Market Theory is moral hazard. This is also known as “post contractual
asymmetric information.” In the context of the used car market, according to Waldman (2009)
“one interesting aspect of this moral hazard problem is that it applies to both newly leased and
newly purchased cars. The logic is that because asymmetric information means that the
secondhand-market price an individual receives for used car is not directly a function of its
quality, an individual who purchases a new car and anticipates selling it in the subsequent period
underinvests in maintenance” (p. 315). A moral hazard can be mitigated by using restrictive
covenants that specify how borrowed money is to be used and how the borrower should behave.”
Waldman goes on to explain that leased cars experience less moral hazard because the leasing
agencies require routine maintenance on their cars. This is a great mitigation for moral hazard
problem with leased vehicles but has a lesser effect to purchases of new cars for obvious reasons.
The significance of moral hazard is important to me because it also applies to credit
markets in addition to the used car market. To expand on my previous example of SBA 7(a)
acquisition loans; A buyer could be a moral hazard if he or she were to purchase a business with
SBA funds and use a portion of the funds in way that is not in the best interest of the uninformed
party (the bank in this case). A simple example could be the borrower using working capital built
into an acquisition loan for personal pleasure. Or, a more complex example, is if a borrower who
already owns a weak business secures SBA financing to purchase a second business. The
borrower could then use the profits of the acquired business to fund the losses of their first
business. This used to be a real abuse of the program in previous decades. To mitigate this moral
hazard, the SBA now requires any borrower who owns another business at 100% provide that
business as a full corporate guarantor on any SBA loan. As a result, a borrower cannot leverage
the acquired business’s profits to cover losses of their first one to the detriment of the bank. This
is a notable example of how a moral hazard of a borrower can be mitigated by using restrictive
covenants.
I do think that Akerlof’s article increases our understanding of financial markets and
institutions. Asymmetric information can be found throughout all markets, industries, and
economies. Akerlof explained how asymmetric information can warp the used car market. I
believe I have explained Akerlof’s theory and applied its concepts towards another credit market
of SBA acquisition loans. Whether it is disinformation of never truly knowing if a used car is a
“lemon,” a borrower not knowing the risk of a business for sale (and the incentive of a bank to
finance it), or a bank not truly knowing the extent of a moral hazard of a borrower; all these are
examples of how asymmetric information creates warped markets that can be detrimental to all.
 References

George A. Akerlof (Aug., 1970). The Market for "Lemons": Quality Uncertainty and the Market
Mechanism. The Quarterly Journal of Economics, Vol. 84, No. 3. (Aug., 1970), pp. 488
500. https://viterbiweb.usc.edu/~shaddin/cs590fa13/papers/AkerlofMarketforLemons.pdf

Glennon, Dennis, Nigro, Peter (Oct., 2005). An analysis of SBA Loan Defaults by Maturity
Structure.” Journal of Financial Services Research 28(1):77-111. DOI:10.1007/s10693-
005-4357-3. October 2005.

Johnson, Justin P., Waldman, Michael. (July., 2009) “leasing, Lemons, and Moral Hazard.” The
Journal of Law and Economics. pp. 307-325. DOI: 10.1086/648384 · Source: RePEc

Office of Financial Assistance, U.S. Small Business Administration (2020). SBA SOP 50 10 6.
Lender and Development Company Loan Programs. www.sba.gov.
 Evolution of Market Efficiency Over Time
The purpose of this paper was to provide a review of the market efficiency hypothesis
that examines return predictability from past price changes. The present paper focuses on the
weak-form version. This version states that security prices fully reflect all information contained
in the past price history of the market. The authors, Lim and Brooks, further focused on the stock
market as it pertains to the weak form version for the purposes of analyzing how markets are
evolving and traditional theories of decades ago are being challenged.
The first section introduces the EMH theory as formalized by Fama in 1970. the origins
of the EMH can even be further traced back to Paul Samuelson (1965). Studies prior to 1970s
include findings that support weak-form efficient theory. However, Fama expanded his weak-
form findings in the early 1990’s on past returns to include dividend–price ratios P/E ratios,
book-to-market ratios, and the impact of interest rates on prices. Although Fama found large
amounts of evidence related to return predictability from past returns, he still indicated that his
findings could be misleading. The second section of this paper focuses on adaptive market
hypothesis. The last four sections discuss other factors within weak-form EMH literature to
analyze if there is return predictability from past price changes in the stock market. These factors
include examining the absolute weak-form, addressing the effect of major events on the weak-
form, tracking the changing degree of weak-form, and measuring the persistence of deviations
from a random walk over time.
Lim and Brooks concluded that older characteristics of market efficiency within the
traditional EMH are being challenged. They argue that there is an increasing amount of literature
which challenges the traditional, rigid characteristic of market efficiency that most research of
prior decades assumes. The authors seem to be heavily influenced by the findings of Andrew Lo.
Lo argued that stock return predictability can be more rationalized by considering that markets
have evolved since EMH was introduced in academic literature decades ago. Now, markets are
effected by something that aligns more with behavior and evolution.
The first idea that stood out to me was the Adaptive Market Hypothesis, or AMH, and the
emergence of behavioral finance that conflicts with traditional EMH. Andrew W. Lo introduced
AMH prior to the turn of the 21st century (in 1999). Lo formulized his findings in 2004.
According to Lo (2004), AMH “is based on an evolutionary approach to economic interactions,
as well as some recent research in the cognitive neurosciences that has been transforming and
revitalizing the intersection of psychology and economics.” Lo further explains that AMH is a
new version of EMH, although many believe it conflicts with EMH. This theory derives from
evolutionary principles. Lo states “that prices reflect as much information as determined by a
combination of environmental conditions, the number, and nature of species (species described
as market participants behaving in a common manner)”. In my opinion, it is extremely intriguing
that Lo was discussing human behavior impact on market efficiency prior to the mass adoption
of the internet. Now, we see the implications of how market participants behaving together drive
prices in various stocks (such as the GameStop or cryptocurrency phenomenon).
 The second idea that stood out to me was price limit systems. I did not know this was
enacted in the U.S. capital markets as a response to the 1987 crash. After this crash, the circuit
breaker system in the form of price limits has been the norm. Today, many stock exchanges
around the world have some form of price limit systems. There are many studies that explore the
efficiency implication of implementing a price limits system. According to Jian, Zhihong, Zhu,
Zhican, Zhou Jie, Wu, Shuai, “circuit breakers are designed to prevent price movements from
fluctuating excessively. When prices reach pre-specified levels, circuit breakers will halt trading
on individual securities or the whole market. Although circuit breakers are widely used in
financial markets, the effectiveness of this mechanism remains an ongoing debate” These authors
analyzed the Chinese stock market and how halting circuit breakers effects price trends and
volatility. They go on further analyze the “Magnum Effect” which was introduced in the mid-
1990s. It states that circuit breakers may increase price variability and worsen price movements
when a price is very close to the trigger level. This is because investors want to avoid being
constrained, so they rush to sell even if these orders do not represent their best interests in the
long term. In my opinion, I think that broader and quicker access to technology today may be a
contributing factor that can amplify the Magnum Effect.
The third idea that stood out to me was regulatory framework and its impact on prices.
Lim and Brooks reference an article published in 1997 regarding the Istanbul stock market.
According to Antoniou et al. (1997), “An efficient market is brought about by providing a
regulatory framework that encourages participation in the market, removes institutional
restrictions trading, and ensures investors have access to high quality and reliable information.
These authors analyzed the Istanbul stock market from 1991 to 1997 where they found that better
regulatory framework brought about a more efficient market. This reminds me of what I have
learned from our textbook about how financial intermediaries help the flow of funds from savers
(suppliers of funds) to spenders (users of funds). Surely the strong regulatory framework we
have in the U.S. (relative to emerging markets like Istanbul) are a huge factor for market
efficiency.
In my opinion, behavioral finance and AMH is not emerging, these theories are already
here and alongside EMH. I think that EMH is not black or white but operates on a spectrum. All
forms exist, and they vary to different degrees through time. This is due to many factors
including but not limited to AMH, regulatory frameworks, price limit systems, asset bubbles, and
technological changes increasing access to information. EMH, its weak form version, cannot
fully explain markets as we see them today.
I do believe this paper increases our understanding of financial markets and institutions.
Lim and Brooks kept in mind the possibility that market efficiency evolves over time. The true
price of assets, or stocks in this case, may never be known. They seem to agree that prices
behave in line with weak form EMH but are also influenced by AMH in parallel. I agree with
Lim and Brooks who draw heavily from Lo’s views on AMH. EMH’s weak form, and all its
forms, as it emerged in the 1960s can no longer be the only basis for how people view return
predictability, especially in the stock market.
 References

Antoniou, A., Ergul, N. and Holmes, P. (1997) Market efficiency, thin trading and non-linear
behavior: evidence from an emerging market. European Financial Management 3: 175–
190.

Jian, Zhihong, Zhu, Zhican, Zhou Jie, Wu, Shuai (Nov 2020). Intraday price jumps, market
liquidity, and the magnet effect of circuit breakers. International Review of Economics &
Finance. Volume 70, November 2020, Pages 168-186.
https://doi.org/10.1016/j.iref.2020.06.029.

Lim, K. P., & Brooks, R. (2011). The evolution of stock market efficiency over time: a survey of
the empirical literature. Journal of Economic Surveys, 25(1), 69-108.

Lo, A.W. (Aug., 2004) The adaptive markets hypothesis: market efficiency from an evolutionary
perspective. Journal of Portfolio Management 30: 15–29.

Fama, E.F. (1991) Efficient capital markets: II. Journal of Finance 46: 1575–1617.
https://doi.org/10.1111/j.1540-6261.1991.tb04636.x
 Federal Reserve’s role in the Corporate Bond Market during the Covid-19 Pandemic
Maureen O'Hara and Xing Zhou published this paper to describe what happened to the
corporate bond market during the early stages of the covid-19 pandemic in March of 2020 and
how the Federal Reserve reacted to address the liquidity crisis that ensued. The authors further
attempt to explain how the corporate bond market was led to a liquidity crisis and how it was
resolved by the Federal Reserve. To this end, the authors covered how corporate bond trading
works, a timeline of the crisis, The federal Reserve’s actions, analysis of transaction costs of
investment-grade and high-yield bond trading, and how trading shifted across bonds during the
crisis. In the latter part of the paper, the authors further analyze the impact of the Federal
Reserve’s bond liquidity programs and draw their own conclusion on how this will change the
direction of the Federal Reserve moving forward.
Two ideas that stuck out to me were the federal reserve expanding one facility and the
creation of a second facility for supporting the corporate bond market. The first was the Primary
Dealer Credit Facility (PDCF). The first version of the PDCF played a role in the subprime
mortgage crisis of 2008. During that time, it only offered overnight loans to bond dealers. Once
it was expanded in March of 2020, it had more power to offer funding at longer maturities.
According to O’Hara and Zhou, “The PDCF offered overnight and term funding with maturities
up to 90 days to primary dealers at the discount rate offered by the Federal Reserve Bank of New
York. All credit extended by the PDCF must be collateralized by a broad range of investment-
grade debt securities, including investment-grade corporate and municipal bonds and commercial
paper.” This facility’s aim was to improve liquidity by enhancing funding conditions for dealers.
The second facility seemed to have major impact on the corporate bond market and
further implication of the direction of monetary policy. This new facility was the Secondary
Market Corporate Credit Facility (SMCCF) which was announced on March 23 and planned to
be implemented in May. The SMCCF was created to buy investment-grade corporate bonds. To
accomplish this, the Federal Reserve Bank of New York would provide loans to a special
purpose vehicle (SPV) that would then be able to directly buy investment-grade securities at fair
market value. The purchased corporate bonds would be used as collateral for the loan and must
have a remaining maturity of five years or less. According to O’Hara and Zhou, “the Department
of Treasury set aside $10 billion in equity investment, and the SMCCF will leverage Treasury’s
equity at 10 to 1 when acquiring corporate bonds”.
I think the significance of this idea is that the existence of this backstop changes bond
dealers’ behavior. Improving of funding conditions may not be enough to improve liquidity.
With increased selling pressure, dealers would not want to take bonds in if they believed it would
be more challenging to turn them over in the future. O’Hara and Zhao’s sample did not include
the SMCCF buying a single bond but the “presence of the support caused non-primary dealers to
shift from off-loading bonds.” By the time the SMCCF began purchasing bond ETFs on May 14,
there was not a major improvement in liquidity. The SMCFF essentially was a reassurance in the
early days of the pandemic and incentivized dealers to intermediate and continue bond trading.
So, the creation of the SMCCF in the early pandemic still played the role of being a market
maker by the mere existence even though it did not buy any bonds until mid-May.
 The second idea that stood out to me, that was only briefly discussed by the authors, was
how the European Central Bank created a similar arm called the corporate sector purchase
programme (CSPP) which was launched in 2016. The CSPP of the ECB seemed more like an
arm of the central bank to provide quantitative easing. When interest rates were already negative,
this facility of the ECB was directly purchasing corporate bonds (and thereby providing
stimulus). However, I do not think this should be directly compared to the SMCCF of the Federal
Reserve. As O’Hara and Zhou explained, The SMCCF is more of a guarantee of market liquidity
support if needed. The CSPP of the ECB is more committed to holding corporate bonds as an
asset. I agree with O’Hara and and Zhao that this is more akin to quantitative easing as we have
seen with the purchase of mortgage backed securities in the U.S. market. According to De Santis,
Roberto A. & Geis, André & Juskaite, Aiste & Cruz, Lia Vaz, “Since the announcement of the
CSPP on 10 March 2016, financing conditions for euro area non-financial corporations (NFC)
have improved considerably. Indirectly, the CSPP has also had positive knock-on effects on the
wider financing environment for firms in the euro area. Financing conditions outside of corporate
bond markets improved.
The significance of this, in my opinion, is that the corporate bond market in Europe has
been under far more pressure even before the covid-19 pandemic dating back to 2016. It will be
interesting to see how involved the CSPP was in providing direct purchases of corporate bonds
during 2020. In my research, I found that the CSPP was part of the European Central Bank’s
asset purchase program (APP). The broader purpose of the APP is to ease financing conditions
across Europe. There was a caveat that the CSPP could buy investment grade euro-denominated
bonds as a precondition that inflation return close to 2% over the medium term. Its very
fascinating that today, we are now seeing 9.9% inflation in the euro area and up to 10.9% in the
EU.
I do think this article helps us increase our understanding of financial markets. The
decision of the Fed to create a new special purpose vehicle to buy corporate bonds and bonds
ETFs is a new direction for monetary policy. The fed purchasing corporate bonds as collateral
for funding will eventually lead to influencing the pricing of credit in this market. I agree with
O’Hara and Zhao’s conclusion that this new direction could encourage greater risk and leverage
in the corporate bond market. As we have seen before, the Fed will hold massive amounts of
mortgage-backed securities on their balance sheet (like during the global financial crisis) and we
may see more and more holdings of corporate bond securities on their balance sheet in
subsequent financial crisis’s. This new direction makes me wonder if overtime, more and more
corporate bonds will be purchased if deemed necessary to avoid contagion in this credit market.
Will there be limits to the buying of corporate bonds, who gets to decide how much, and which
corporate bonds (or bond ETFs) in each classification are chosen or ignored.
 References

“Annual Inflation up to 9.9% in the Euro Area.” Ec.europa.eu, 30 Sept. 2022. Accessed on 19
October 2022. Retrieved from
https://ec.europa.eu/eurostat/documents/2995521/15131946/2-19102022-AP-
EN.pdf/92861d37-0275-8970-a0c1-89526c25f392.
David H. Small and James A. Clouse (Aug. 2004). The Scope of Monetary Policy Actions
Authorized under the Federal Reserve Act. Topics in Macroeconomics. 5(1), 1-45.
https://www.federalreserve.gov/econres/feds/the-scope-of-monetary-policy-actions-
authorized-under-the-federal-reserve-act.htm

De Santis, Roberto A. & Geis, André & Juskaite, Aiste & Cruz, Lia Vaz. 2018. "The impact of
the corporate sector purchase programme on corporate bond markets and the financing of
euro area non-financial corporations," Economic Bulletin Articles, European Central
Bank, vol. 3. https://www.ecb.europa.eu//pub/pdf/other/ecb.ebart201803_02.en.pdf

O'Hara, M., & Zhou, X. A. (2021). Anatomy of a liquidity crisis: Corporate bonds in the
COVID-19 crisis. Journal of Financial Economics.
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3615155
 Mortgage-Backed Security Market
The purpose of the assigned article was to study the effects that post trade transparency
had on the to-be-announced (TBD) forward market for mortgage-backed securities. Mortgage-
backed securities are issued by 3 large institutions; Fannie Mae, Freddie Mac, and Ginnie Mae.
to Schultz, P, Song, Z explained, “agency backing makes these securities free from default risk,
but their values are affected by changes in interest rates. Each MBS is composed of different
mortgages and has its own unique prepayment characteristics.”
Institutional Investors trade Mortgage-backed securities in OTC dealer markets via two
ways: in specified pools (SPs) where buyers seller exchange MBS whose mortgages within are
known The second way they are traded are within to-be-announced (TBA) markets. The TBA is
slightly different but based around 6 factors. These are the issuer, maturity, coupon rate, par
value, price, and the settlement date. The pricing is based on the cheapest. There is more TBA
trading in the market. Trading costs are lower to due to increased transparency. Although SP
trades are not as clean or transparent, the TBA markets provide a benchmark and act as a
regulating mechanism. Starting in 2012, FINRA started requiring dealers to report TBD
transactions on the TRACE system. This was preceded by the Dodd-Frank act signed into law in
July of 2010. According to Schultz, P, Song, Z.,” The Basel III banking accords were required to
be finished in July, 2013. In April, 2014, the Volcker Rule was scheduled to take effect.”
Additionally, other programs were enacted such as the Home Affordable Refinance Program
(HARP) and Home Affordable Modification Program (HAMP). All of these changes, in addition
to post trade transparency requirements, would shape the marketplace and the way that banks
interact with each other to do business.
The authors explained effects that these requirements had. The post-trade reporting
enforcement had deep impacts on dealers. Before FINRA’s stepped in with regulations in 2012,
dealers were able to make much higher premiums. Specifically, smaller peripheral dealers
charged investors very high prices. The difference in peripheral dealers to core dealers were
eliminated by the reporting standards. Interestingly, this saw a 20% drop in their market share.
However, transparency has also centralized most of the trading to core dealers. Broadly
speaking, asymmetric information was reduced due to the policies set forth in 2012. Investors
would be able to observe recent trade prices and choose not to pay high prices from dealers or
sell at too low of prices.
The first idea that stuck out to me was how the authors mentioned that mortgage-backed
securities were supposed to be so close to risk free that most considered them risk free. Prior to
the Great Recession, this was believed as true. However, history was not favorable to this
assumption. In the past, I always figured that the collapse happened because lenders would
bundle and pass them off to other investors to profit at a premium. There is more to the story. In
my opinion, entities such as Merrill Lynch, Bear Stearns, and Lehman Brothers were partaking
in much riskier (and I would say even unethical) business operations. I found that these
institutions would lend mortgages, create their own MBS markets (instead of external investors),
and underwrite the securities. To accomplish this, they held on to these high-risk securities in
their own portfolios. This was not common prior to the 2000s. However, these financial
institutions realized that they could collect enormous fees by performing each component of the
mortgage process.
The significance of this is very important. If an entity like Merrill Lynch can enter the
market to lend to homeowners, service the loans, create their own MBS market, and be involved
in every step of the process, then they can profit every step of the way. To summarize the
findings of Fligstein and Brundage, (2017), “Merrill Lynch held on to $32 billion of high-risk
MBS’s by the summer of 2007”. Subprime production was ramping up and centralizing to large
entities. According to Fligstein and Goldstein (2017), “The four vertical segment categories
included here are origination, MBS issuance, underwriting, and mortgage servicing. In 2002,
only 25% of these firms which had large market share in any nonconventional production
segment participated in three or four vertical segments in that market. But by 2006, this had risen
to 45%”. Clearly, this leaves entities like Merrill Lynch or Bear Sterns highly exposed if the
values of homes were to go down. As we know, the Federal Reserve infamously stepped in and
bailed out Bear Sterns in 2008. Entities such as Merrill Lynch and Bear Sterns were deemed “too
big to fail.” I believe that either of these would have been bailed out, but Bear Sterns just
happened to the one of the first dominos to drop.
The second idea that stuck out to me was the buying of mortgage-backed securities by the
federal reserve. I have known about this for quite some time but wanted to dig in deeper in to
how this effects prices of residential homes in the market. I found that the there were two large
waves of purchases by the FED as part of the Large-Scale Asset Purchase (LASP) program.
Similarly, to recent times, a new program was launched in 2020 to purchase MBS’s. According
to Grochulski (2020), “The original Fed MBS purchase program, announced under similar
market-dysfunction conditions in November 2008, operated at an average pace of about $60
billion per month. In 2020, this was amplified even further. In 2020, the weekly purchases were a
multiple higher with the highest week seeing a purchase of 183.3 billion.
The significance of these programs and purchases by the FED are very worrisome for me.
As somebody who is younger, I wonder if real estate will become unaffordable amongst my peer
group. The increasing scale of intervention to smooth and restore market function has negative
consequences as well. I would argue that the FED has been taking away the influence of private
markets and banks who are supposed to be serving as the intermediary of the flow of credit for
mortgages in our country.
I do believe that this article better helps us understand financial markets. The subprime
mortgage crisis of 2007-2008 era showed regulators how poorly functioning lending practices
were. The poor business models of banks, conflicts of interest, and lack of transparency in the
post trading markets of Mortgage-backed securities warped pricing and worsened risk in the
market. The power of the Federal Reserve has increased over the last 15ish years. Possibly, there
is not an alternative to macroeconomics to base a better model. However, enacting regulations
where dealers of MBS’s must report trading to the TRACE system will at least make it to where
high premiums are not unknowingly bought by institutional investors who would not have
transaction history to look back on. Investors in these OTC markets will know if they are getting
a fair price and, they have seen lower transaction costs as another benefit to these regulations.
 References

Fligstein, N., Brundage, J. S., & Schultz, M. (2014). Why the Federal Reserve failed to see
the financial crisis of 2008: The role of “macroeconomics” as sense-making and cultural
frame. IRLE working paper #111-14. https://irle.berkeley.edu/files/2014/Why-the-
Federal-Reserve-Failed-to-See-the-Financial-Crisis-of-2008.pdf
(Subsequently published as “Seeing like the Fed: Culture, Cognition, and Framing
and the Failure to Anticipate the Financial Crisis of 2008 [with Jonah Stuart
Brundage and Michael Schultz]. American Sociological Review, 82: 879 – 909, 2017.)

Fligstein, N. & Goldstein, A. (2014). The transformation of mortgage finance and the industrial
roots of the mortgage meltdown. IRLE working paper #133-12.
http://www.irle.berkeley.edu/files/2012/The-Transformation-of-Mortgage-Finance-and-
the-Industrial-Roots-of-the-Mortgage-Meltdown.pdf
(Subsequently published as “Financial markets as production markets: the industrial
roots of the mortgage meltdown” (with Adam Goldstein). Socio-Economic Review, 15:
483–510, 2017.)

Grochulski, Borys (July 2020). “Federal Reserve MBS Purchases in Response to the COVID-19
Pandemic.” Federal Reserve Bank of Richmond. No. 20-08. Retrieved from
https://www.richmondfed.org/publications/research/economic_brief/2020/eb_20-08

Schultz, P., & Song, Z. (2019). Transparency and dealer networks: Evidence from the initiation
of post-trade reporting in the mortgage backed security market. Journal of Financial
Economics, 133(1), 113-133.
8-31-2022

Financial markets serve six basic functions. These functions are briefly listed below:

1. Borrowing and Lending: Facilitate the transfer of funds from savers to spenders.
2. Price Determination: Allow discovery of price in both primary and secondary
markets.
3. Information Aggregation: Aggregate relevant information about the financial asset.
4. Risk Sharing: Allow the risk allocation.
5. Liquidity: Allow holders of financial assets to sell assets with little change in price.
6. Efficiency: Reduce transaction costs, which may be related to information
imperfections.

What are the pros and cons of increased transparency through orderly electronic trade
reporting?
Will it benefit or harm investors? If so, how?
Will it benefit or harm issuers (i.e. companies)? If so, how?
Do you think fixed income markets should be more transparent?

The pros of increased transparency could give investors more confidence to know that
information provided on these different platforms are standardized and more accurate. Cons
could include taking away the ability for electronic bond trading platforms to provide buyers and
seller's different options and taking away the need for multiple electronic platform companies.
With increased transparency, this could lead to centralization as seen in the stock exchanges (the
NYSE for example). This would hurt the equity holders of the current companies if any were to
shut down. Also, further creation of new electronic platform companies may not be needed.

I believe this could benefit investors and the increased transparency will be good for
retail who do not have access to as much information as larger financial institutions do. To
compare to the stock exchange world, all orders are ranked. First, by price priority (best price
trades first) and then by time priority (first in at a price trades first). This creates a fairer system
for investors to get the best price possible when trading. Unlike centralized stock exchanges, an
investor utilizing an OTC bond dealer trades at a price agreed between investor and the bank or
broker. This generally means buyers of a bond trades at the price they are offered. Electronic
platforms are the same in that they have dealers that are playing the role of market makers. OTC
bond dealers can offer different bid and ask prices to different customers, and the latest trades
aren’t publicly posted for all bonds immediately after a trade takes place. Currently, investors
have the issue of less visibility of other recent trades to compare with because the electronic
market is not centralized. They also may not know true volume of trading with the current
fragmented model. Therefore, increased transparency laws would be beneficial to the investor.

I do not think increased transparency will harm issuers. As the discussion article states,
increased transparency and investor confidence leads to markets being more efficient. If issuing
companies provide the same information across different electronic bond trading platforms, they
could provide more confidence and accurate data as fintech adoption grows. I learned from our
textbook one of the main purposes of secondary markets is to provide liquidity, or ability to turn
an asset into cash. Increased liquidity makes it more desirable and easier for issuers to sell
securities in markets.
8-31-2022

I believe that fixed income markets should be more transparent. Currently, the Financial
Industry Regulatory Authority (FINRA) has jurisdiction over many OTC bond dealers. FINRA
utilizes a "TRACE system" to post transaction prices with a slight delay. OTC bond dealers are
required to submit trade records. As recent as 2016, TRACE does not show bids and offers from
dealers pre-trade and does not include certain types of bonds like those with less than 1 year
maturity. It would be beneficial for the fixed income markets if electronic bond trading platforms
have more transparency like the stock exchanges currently do. The market freezes during the
initial pandemic showed how inconsistent reporting of electronic trading had potential effects on
liquidity conditions. More transparency could allow regulators to understand how much effect
lack of transparency has on liquidity conditions in the future with commonality across platforms.
It could be a large problem if regulators do not know how much volume is going through
especially during volatile market conditions like we saw in March of 2020. It would make sense
to regulate electronic bond OTC platforms so regulators have more understanding of what is
happening on different electronic platforms instead of being reactive to future liquidity issues
where they may not have accurate data to look back on. Overall, I think as fin-tech becomes
more broadly adopted over time, more transparency needs to be brought to electronic bond
trading platforms.
8-31-2022

References:
Wirz, Matt. "SEC Committee Tackles Disorderly Electronic Bond Trade Reporting," The Wall
Street Journal, Oct. 7, 2020
Hollingsworth, David, Liner, Emily. "The Bond Market: How it Works, or How it Doesn't,"
Third Way. Feb 27, 2015
Surbhi, S. "Difference Between OTC and Exchange," XTB. Sep 9, 2019.
Saunders, Cornett, Erhemjamts. (2022) "Financial Markets and Institutions." 8th ed. McGraw
Hill LLC.
9-6-2022

1. In the context of the principal-agent problem, why do you think issuers/firms seem to
be willing to raise equity capital at lower prices than the market is willing to pay?
2. If there was no principal-agent problem, what are some ways the CEO could mitigate
IPO underpricing?
In a perfect world, it would make sense that IPO pricing would lean toward measuring
quantifiable factors such as a company’s prior financial performance, revenues, expenses, and
projected cash flows post-IPO. Secondly, one could argue that company executives and owners
would want to price shares high as possible to raise the most capital that they can (this is counter
argued by lower prices which could draw more uniformed investors, which I agree with more).
These two are considerable factors that could be in play, however I do not think they are based in
reality and, do not outweigh the benefit of underpricing shares for IPO’s. The market seems to
agree based off historical data as stated in the assigned article.
I think that investment bankers who advise or underwrite these IPO’s may hope to keep
the price low to sell as many shares as possible since higher volume means higher trading fees
for them. However, if they set the price too high, there may not be enough informed investors
who will bid. I think issuers do accept underpricing as more important than overpricing as it
helps underwriters evaluate a higher sale price later.
I think there are pros and cons to why IPOs are underpriced. Overall, I think when it
comes down to raising capital and brand image; underwriters (investment banks), private owners
(pre-IPO), and agents of the company (CEO’s, directors, management) are willing to have initial
public stock underpriced because it looks better if the price climbs to its “true worth” and they
can claim this is due to never truly knowing how the public will receive an IPO on the first day.
The image and brand of a company is also on the line. Conversely, overpricing an IPO where the
company’s stock price falls on the first day could be seen as total failure by the public and the
company’s brand could be tainted as a result.
Principle-agent problem are conflicts between agents and principals that are present in
every organization. Another way I like to characterize this is by the separation between
ownership (principles who are the shareholders) and control (managers, directors, etc. who run
the day-to-day operations of the company that are supposed to prioritize growing shareholder
wealth) Within this context, it does make sense that agents would be incentivized to raise the
most capital as they have their own incentives and not just to the benefit of the shareholders.
If there were no principal-agent problems, a CEO can:

1. mitigate IPO underpricing by providing an underwriter's (investment bank) stake in

the IPO through ownership of the offered shares. As the assigned article states, this
can decrease underpricing.
2. Having information about the issuer more freely available. Therefore, “uninformed
investors are at less of a disadvantage”. I can see why this is a point, but my
subjective opinion is that this is becoming less true overtime. Most investors do not
care about more information and IPO’s are increasingly becoming about selling an
image or brand name rather than investors choosing to buy a share price based off
quantitative factors like the company's previous performance, projected cashflows, or
even a price-to-earnings (P/E) multiple that is comparable to a company’s peers in
9-6-2022

any particular industry. If my personal opinion has any truth, then “uniformed
investors” are taking over more of the market share of investors. However, this then
goes back to the idea that a lower IPO price will help raise more capital when
somebody sees a stock that is priced at “10 dollars” vs “50 dollars" (seems more
“affordable” to the uniformed investor).

3. I think there is always a human element when it comes to relationships in banking

that many people do not consider. This point may be completely muted if the
principle-agent problem was considered but here is my thinking without that in mind:
a CEO can mitigate IPO underpricing by having a stronger relationship with the
investment bank that could potentially be the one to underwrite the IPO later on. A
stronger relationship with the bank may provide better confidential lending terms pre-
IPO. And favorable lending terms may lead to an investment bank being chosen to
underwrite an IPO. In turn, the investment bank may be incentivized to reduce
underpricing of an IPO if they are prioritizing the relationship with a company
(relationship driven by the CEO) and future revenues that said bank may acquire by
continued lending between them and the company. I think of this as, in pre-IPO, the
company choosing to raise capital by issuing debt with the favorable terms. With a
good relationship, that same bank could be chosen (with influence of CEO) to
underwrite the IPO. This may also lead to the investment bank securing the
company’s treasury accounts too (if they have not already). After all, a company
could eventually shift their relationship to another bank (assuming they would not be
breaking any terms of the IPO deal) if an IPO was heavily underpriced, turned into a
bubble, popped, and lead some investors burned. Brand is very important to a
company even though most of retail would not consider the banks role in an IPO.
9-6-2022

References:
Soloman, Steven. “Why I.P.O.’s Get Underpriced” The New York Times. May 27, 2011.
Sorkin, Andrew. “Why LinkedIn’s Price May Have Been Right” May 23, 2011.
Kagan, Julia. “Underpricing” Investopedia. Nov 23, 2020.
9-12-2022

Default risk premiums are interpreted as the probability of a borrower missing an interest
payment or principal repayment. We generally conclude that US Treasury bonds are default risk
free because the US government has never missed an interest or principal payment. Thus, we can
estimate the default risk premium by taking the difference between the yield on a bond from an
issuer that is not the US government, such as a domestic or foreign company, and the yield on a
US Treasury bond with a similar maturity. (Note: Default risk means the same thing as credit
risk, which means default spreads and credit spreads may be used interchangeably).

The article discusses a slowdown in debt issuance by lower rated companies. Low-
ratings are generally referred to as junk. For example, junk-rated bonds mean low-
rated bonds; junk-rated firms is referencing firms with low credit ratings.
Do you think increasing funding costs reflect a deterioration in company
fundamentals, or do you think it is primarily driven by higher inflation and rate
increases by the Fed? Provide reasoning for your answer.
I think that increased funding costs are primarily driven by federal reserve rate increases.
However, I do think both have a role and either could affect the other. On one hand, struggling
companies trying to raise capital (by issuing junk bonds) are having to raise the spread over
treasury yields to attract enough investors because of the higher rate environment. The strain of
making higher interest payments may not be the best option for struggling companies trying to
raise more capital. This is clearly shown in the article as junk rated companies have only raised
74 billion through year to date to July compared to 900 billion that were issued across 2020 to
2021. On the other hand, Wallerstein writes that 64 billion of bonds have upgraded from
speculative status to investment grade. This indicates that some companies and industries are
seeing strong financial performances. As Wallerstein goes on, he cites some industries are seeing
record performances like the energy companies. In my opinion, that may not be an indication of
broader conditions because oil has seen higher prices this year (due the Russia-Ukraine war as
politicians are saying).
Jerome Powell’s latest speech hinted that future rate hikes are coming as they continue
their fight against inflation. A lot of uncertainty and fear has hit the broader markets. Some may
elect to go with US treasury bonds due to the uncertainty. Even if government bonds are not
providing yields as high as corporate junk bonds right now, factors such as higher volatility in
the equity markets, higher risk of defaults for corporate junk bonds, and potential attractiveness
of future higher yields on U.S. treasuries may be good enough for investors. Today, investors can
get about 3.5% yield on the two-year treasury (risk free) and the yields may go higher. In the
general OTC bond market, institutional investors consisting of money managers make up a huge
portion of trades. Those money managers, in light of broad uncertainty, may see the 3.5% risk
free yields as the best course of action until uncertainty of the future calms down.
Liquidity risks in other markets can have huge impact in the corporate bond market. For
example, when the subprime mortgage went delinquent and a massive shock hit the markets in
August of 2007, the entire securitized bond asset class went illiquid. Many institutional investors
had to liquidate portions of their portfolio due to liquidity concerns. Mutual funds sharply
reduced their holdings of corporate junk bonds (also investment grade bonds, to a lesser extent).
Of course, circumstances were very different back then. Today, the federal reserve is trying to
reduce demand since they cannot directly control the supply side. However, as we have seen in
9-12-2022

the past, corporate junk bonds would be one of the first sold if we see contagion. Investors that
know the risks are demanding higher yields on junk bonds. If we don’t see huge volatility,
corporations will likely see increased funding costs as the Fed continues raising rates to fight
inflation.
9-12-2022

References:
Manconi, Alberto (2010, November 24). “The role of institutional investors in propagating
the crisis of 2007–2008.” Journal of Financial Economics. Volume 104, Issue 3, June 2012,
Pages 491-518.
https://reader.elsevier.com/reader/sd/pii/S0304405X11001231?token=FEBB75E
004CF50DAD51EAD251450DA1B1D2A302B88467B3E252C38357165C255C28544
1F1A4E0167F9530E8B17958469&originRegion=us-east
1&originCreation=20220912100243
Wallerstein, E. (2022, July 25). Borrowing Among Junk-Rated Firms Slows to a Trickle. Wall
Street Journal. https://www.wsj.com/articles/borrowing-among-junk- rated firms-slows-to-
a-trickle-11658746980
9-18-2022

Generally speaking, do you think the stock markets are efficient?

o What about the bond market?
If so, what form of efficiency? Provide evidence for your answer.
What market factors/influences might lead to a deviation from your generality?
Provide an example, but it cannot be the Gamestop example. Find another.
I will take the stance that the stock market and bond market is efficient over the very long
term but can go through large periods of times where it is inefficient. I will explain some of my
reasoning below for why there can be prolonged periods of inefficiency.
The weak form portion of EMH, prices reflect all information contained in past trading, is
clearly not a “one size fits all” rule. As mentioned in Jeremy J. Siegel’s article, data collected
from a professor, at Yale University showed that “In the 61 years from 1945 through 2006 the
maximum cumulative decline in the average price of homes was 2.84% in 1991. If this low
volatility of home prices persisted into the future, a mortgage security composed of a nationally
diversified portfolio of loans comprising the first 80% of a home's value would have never come
close to defaulting” The credit agencies were incorrect in labeling all subprime mortgages as
investment grade because the assumption was that the banks collateral could cover the principle
amount if a mortgage were to go into default. I agree with Jeremy Siegel that the subprime
mortgage crisis was a result of complete blind faith in the EMH theory and this asset bubble
shows evidence against EMH that asset prices always accurately reflect the asset's true value
I think bubbles can also reach the stock market as well. I think it strange how most people
do not even align with the fundamental analysts who would disagree with the semi-strong form
of the EMH theory (prices reflect all publicly available information which includes past trading
information from weak form). Supporters of EMH posit that investors benefit from investing in a
passive portfolio. However, investors make decisions about the future assuming what has
happened in the past (often forgetting previous stock market collapses of the past). I think this
culture has led to massive P/E ratios and blind faith irrationality.
According to Clemens, “Actual P/E ratios more than doubled from 1980 to 2014… And
since the end of the financial crisis, the P/E ratio of the S&P 500 Index has risen above long-term
averages (since 1979).”” It is a notable measurement that shows how different the equity market
is today than prior generations. the P/E ratios are not perfect either. High inflation causes large
discrepancies between accounting profits and actual cash flows. Smarter investors will recognize
this and price accounting earnings lower in times of high inflation and higher in times of low
inflation.
According to Robert Shiller, his research “confirms that long-term investors who commit
their money to an investment for ten full years did do well when prices were low relative to
earnings at the beginning of the ten years. Long-term investors would be well advised,
individually, to lower their exposure to the stock market when it is high, as it has been recently,
and get into the market when it is low." This correlation between prices and long-term returns is
not explained by the efficient market hypothesis
There is a discrepancy between EMH and real markets shown during market extremes.
Fundamentalists might consider this as irrational behavior, but it is the norm in the market. For
example, in the late stages of a bull market, the market is driven by buyers who take little notice
of underlying value. Towards the end of a crash, markets sell-off as investors capitulate
9-18-2022

themselves from positions regardless of the long-term value of the investments. This leads to an
alternative/ opposition of EMH, behavioral finance. Behavioral finance explains that when
investing, the market is not driven primarily by whether prices are cheap or expensive, but by
whether they expect them to rise or fall. It is based on human emotion and biased preferences.
Bonds seem more efficient than the stock market in my opinion. US Treasuries are pretty
much set based off the interest rate setting and the yield curve expectation theory. Corporate
bond markets are a little less pre-determined as they need to sell at a premium compared to the
risk-free rates of US Treasuries. There can be differences in OTC bond dealers acting as market
makers and liquidity issues as a lot of these OTC bond dealers do not have standardized
requirements between each other.
Factors that would lead to a deviation of my generality is if the stock market did not have
P/E ratios that seem to be blown up compared to past decades, many of the “zombie companies”
flushed out of the market (I did not discuss this above in consideration of post length), better
regulation and oversight of liquidity in OTC bond dealers and seeing positive real returns on
bonds for consistent/ long periods of time. Overall, I think both markets are efficient in the very
long term.
9-18-2022

References
Blayney, Eleanor (2015, April 16). Efficient or Inefficient Markets? Why I Embrace Both. Wall
Street Journal. https://www.wsj.com/articles/BL-258B-5417.
Various Authors (2009, November). Efficient Market Hypothesis and the Financial Crisis.
WSJ; Wall Street Journal.
https://www.wsj.com/articles/SB1000142405274870357460457450166383200632
Siegel, J. J. (2009, October 28). Efficient Market Theory and the Crisis. Wall Street Journal.
https://www.wsj.com/articles/SB10001424052748703573604574491261905165886
Clemens, Michael, Asset Pricing: Dissecting Trends and Changes in the P/E Ratio of the S&P
500 Index (September 7, 2014). Available at SSRN: https://ssrn.com/abstract=2492989
or http://dx.doi.org/10.2139/ssrn.2492989
Shiller, Robert (2005). Irrational Exuberance (2d ed.). Princeton University Press. ISBN 0-691-
12335-7.
10-4-2022

You are a money manager. Floyd Lawson is your largest client. His fixed income
portfolio allocation is 40% in 10-year Treasury bonds, and 60% in 1-year Treasuries.
For many years, Floyd ran a chain of successful barbershops, but now he is ready to
retire, so he wants to increase his long-term bond allocation to 70%.
How would you advise him given the current economic state? Consider his
investment horizon and any risks associated with your recommendation. You may
find it helpful to review Chapter 2.
Provide solid economic reasoning for your answer.
Prices of long-term bonds are far more effected by changes in interest rates. There are
weaknesses to the unbiased expectation theory states that the client would be neither affected by
rolling over short term bonds or putting 70% of his wealth in a long-term allocation bond. This
theory ignores additional risks (or even an inverted yield curve) and his personal circumstances.
Liquidity premium states that longer term bonds should have a higher spread due to locking in
funds for longer periods of time. This is not the case for what the bond market is showing today.
The yield curve is sideways and more recently inverted. Longer term rates are lower than
shorter term rates. As of time of writing, Bloomberg markets reflect the 10-year treasury at a
3.63% yield and the 2-year treasury at a 4.09% yield. Additionally, the federal reserve is trying
to fight inflation levels that have not been seen in decades. Jerome Powell has indicated that
future rate hikes would be coming. If the market sees even higher yields, this will affect prices of
longer-term duration bonds more than short for their prices.
I am assuming the client is older and is more concerned with wealth preservation instead
of growing wealth. I would ask the client if he truly needs 70% of his capital in the near term or
not. Based off his response, I would recommend the following two scenarios:
If the client truly intends on not needing 70% of his wealth, then he may be fine moving
into the 10 year for 3.63% yield. He may already think he does not need the 70% since he is
ready to move it into longer term duration bonds. He can expect to earn this yield if he holds to
maturity. Although real yields are currently negative, nominal yields are higher in the bond
market than what has been available in over a decade. If the Fed does end up cutting rates inside
the next few years, The client will still be able to earn 3.63% in the 10- year by holding to
maturity. This would be something that most investors would not have guessed would be
available in recent times.
If the client thinks there is a chance he may need the 70% allocation in the near future
due to economic/ personal hardship amidst growing recession concerns, I would advise him
against locking in 70% allocation to longer term. As stated before, long duration bond prices
swing more heavily due to changing rates. Prices would be more effected to the downside with
further rate hikes going into 2023. He would be selling at a loss if he sold under this scenario. I
would recommend he put 70% allocation towards the one-year bond or towards the two-year
bond (that is offering coupon payments he may want to receive as income before maturity) and
reassess in another year or two.
10-4-2022

References
Goldfarb, S and Grossman, M (2022, July 13). Volatility in Bonds Deepens After Inflation
Report. The Wall Street Journal. https://www.wsj.com/articles/higher-than-expected-
inflation-lifts-government-bond-yields-11657722207
Moore, Simon (2022, Sep. 13). “Should you still hold
bonds?” Forbes. https://www.forbes.com/sites/simonmoore/2022/09/20/should-you-still-
hold bonds/?sh=77189c026488
Tidmore, Chris (2022, May 19). "Rising interest rates and how you can help your
clients" Vanguard.
https://advisors.vanguard.com/insights/article/risinginterestratesandhowadvisorscanhelpth
eirclients
10-17-2022

Default risk premiums are interpreted as the probability of a borrower missing an interest
payment or principal repayment. Municipal bonds are not default risk free, despite being issued
by a government entity. (Note: Default risk means the same thing as credit risk, which means
default spreads and credit spreads may be used interchangeably). Default risk increases with the
expectation that the cash flows backing the bond will not be sufficient to make future bond
payments.

This article discusses an information problem in the municipal bond market. Unlike
the stock market, there is little to no publicly disclosed price information available on
a daily basis. As a result, it appears that some (not all) municipal bond dealers are
charging higher prices to investors.
Are markups something that needs to be addressed by regulators? If yes, what
suggestions do you have to mitigate this?
In my further readings of municipal bonds, I found it very interesting that there seems to
be a lack of regulation and major asymmetric information when it comes to municipal bonds.
Most brokers are compensated by the markup over the cost of the bond to the firm. A
commission may be charged as well for this markup. This is an additional risk to consider
alongside other risks such as inflation, credit, interest rate risk, and liquidity risk.
Heather, the author of the assigned article, also co-wrote another article where they wrote
about how a local Californian district issued muni-bonds in order to raise capital for repairing
and upgrading classrooms. The original buyers of municipals bonds flipped 35 million for a
$306,000 profit within a 24-hour period. Over 10 days, the post trading generated another 1.24
million in profits. In this case, the bonds were marketed as long-term investments, but others
were able to trade post offering for much higher prices to secure profits. Although the district
was able to refinance its older debt and fund its classrooms, this was a great example that shows
how dealers can markup muni-bonds for profit can take advantage of retail investors.
Additionally, underpricing of Issuance of bonds can cost the issuer higher interest
payments (in thereby taxpayer money). To further explain the local Californian district example,
Heather wrote how the districts bonds were initially underpriced. That means the district will pay
more in interest over the life of the bonds than it would if the bonds had been priced closer to
what subsequent investors paid. (I found this as a somewhat interesting parallel to how
investment banks will underprice IPO’s to attract more investors as we discussed in a previous
weekly discussion). I assume there must be some balance between attracting investors and but
not trying to burden local government (and thereby taxpayers) too much money with higher
interest payments on lower prices.
In our assigned article, Heather Gillers wrote “a May 2018 rule that generally requires
dealers to estimate for individual investors the difference between the price the investor is paying
for the bond and its cost to the dealer, the researchers found a small decrease in markups.” This
effected bonds that were about 3 months past their issue date. I found this very interesting, and it
seems like initial post trading has not been affected by this rule.
There is still lack of clarity even with regulation. According to Investor.gov, “The SEC
designated EMMA as the official repository for municipal securities disclosures in 2009. The
MSRB is a self-regulatory organization whose mission is to protect investors, state and local
10-17-2022

governments and other municipal entities, and the public interest by promoting a fair and
efficient municipal securities market. Neither the SEC nor the MSRB review the disclosure
documents prior to their posting on EMMA.” EMMA is where issuers publish information to
investors for their municipal bonds. However, the regulatory body, MSRB, are not even
reviewing disclosure documents prior to what is posted on EMMA. I wonder if this may leave
dealers free to take advantage if regulatory bodies are not actively taking steps to protect
investors prior to issuance of muni-bonds.
I would recommend are that the SEC and/or the MSRB review disclosure documents
prior to postings on EMMA to understand how offerings are being brought to market and thereby
be able to educate issuers on how dealers may be able to mark up prices for an offering that a
municipality is getting ready to offer (if this would help at all or at regulators could work to find
solutions for this issue). Also, that there be some way to track daily, weekly, and yearly price
information on muni-bonds like we have for the stock market so investors can at least have
something to look back on aside from what prices are being offered by dealers. I wouldn’t
recommend markup limits by dealer being that I generally don’t believe price controls should be
enacted in secondary markets.
10-17-2022

References:
Gillers, H. (2022, August 4). Muni Market Transaction Costs Remain High, Despite Customer
Protection Rules, Study Says. Wall Street Journal. Retrieved October 17, 2022, from
https://www.wsj.com/articles/muni-market-transaction-costs-remain-high-despite-
customer-protection-rules-study-says-11659603601.
McGinty, Tom, Gillers, H. (2019, September 12). When Wall Street Flips Municipal Bonds,
Towns and Schools Pay the Price. Wall Street Journal. Retrieved October 17, 2022, from
https://www.wsj.com/articles/when-wall-street-flips-municipal-bonds-towns-and-
schools-pay-the-price-11568302887?mod=article_inline
No listed author. Municipal bonds. Investor.gov. Retrieved October 17, 2022, from
https://www.investor.gov/introduction-investing/investing-basics/investment-
products/bonds-or-fixed-income-products-0.
10-26-2022

Credit risk transfer (CRT) activities allow banks to manage their credit risk
exposures. Such activities include, mortgage sales, mortgage securitization and credit
default swaps (CDS). This article discusses how banks are using the first two
aforementioned CRT activities to free up cash on their balance sheets.
Do you think the housing market boom in 2020-2021 combined with the increase in
CRT activities by banks and slow economic activity in 2022 will lead us to another
crisis like the one in 2007-2008? Please explain your answer.

Julia Verlaine explains in her article that Texas Capital Bank sold $275 million of bank
bonds to institutional investors. These securities were backed by short term loans the bank made
to mortgage lenders. The transaction closed on March 9, 2021 and was done to improve the
position of the bank's balance sheet. This marked the first regional bank in the U.S. to engage in
this type of transaction. It seems that the bank was seeking new ways to improve their capital
ratios within regulatory guidelines. Raising of capital would lead them to be in a better position
to lend and serve clients through future market conditions.
The assigned article references that those who are seeking exposure to the housing
market are being fulfilled through purchasing of these credit risk transfer offerings. However, the
article also asserts that the 275 million offering was for institutional investors. This makes me
wonder if funds will become available to the average retail investors to partake in the higher
yields (almost 5% as referenced in the article) If we see a new era where more and more regional
banks are doing this. Upon further digging of what was “backed” by the bank bonds. I found that
that “initial transaction references $2.20 billion of loan exposure via a Credit Linked Note (CLN)
issue of $275 million.” If my understanding is correct, they leveraged a portfolio of loans to issue
these securities to raise needed capital.
I do not believe we have the same scenario as the 2007-2008 era, but the SEC should
proceed with caution. Many people know that lending practices were very loose back then and
have since been cleaned up. The pools of debt the rating agencies gave their highest ratings to
included homebuyers with bad credit and undocumented incomes through 2007. Even worse, the
banks had business models with conflict of interest such as issuers paying agencies to rate their
securities. Many of these bad lending practices have since been cleaned up with regulatory
enforcement. Although, they are not completely clean as shown by report in Dec of 2015. This
2015 report found that “two of the larger companies failed to adhere to their ratings policies and
procedures, methodologies, or criteria, or to properly apply quantitative models. These failures
occurred on numerous occasions.” I think that just because we have regulatory enforcement, that
doesn’t mean the industry is still entirely clean today. We can’t ignore that with higher rate
environment, demand for homebuyers has plummeted. Generally, I do not think this means we
see waves of defaults like we have in the Great Recession if unemployment maintains relatively
low and borrowers can service their existing mortgage payments. The SEC should pay closer
attention if more and more regional banks partake in these credit risk transfers like Texas Capital
Bank has.
10-26-2022

References
Verlaine, J. (2021, July 28). Hot Housing Market Lets Banks Sell Mortgage Risk. WSJ.
https://www.wsj.com/articles/hot-housing-market-lets-banks-sell-mortgage-risk-
11627464600?mod=Searchresults_pos1
Britton, Jamie, Shannon, Wherry. (2021, March 9). TCBI announces steps to enhance the
company's balance sheet. Texas Capital Bank.
https://www.texascapitalbank.com/news/2021/03/09/tcbi-announces-steps-enhance-companys-
balance-sheet
Zauidi, Deena (2016, March 19). The Indisputable Role of Credit Ratings Agencies in the 2008
Collapse, and Why Nothing Has Changed. Truthout. https://truthout.org/articles/the-
indisputable-role-of-credit-ratings-agencies-in-the-2008-collapse-and-why-nothing-has-changed/
Morgenson, Gretchen. (2016, Jan 8). Ratings Agencies Still Coming Up Short, Years After
Crisis. WSJ. https://www.nytimes.com/2016/01/10/business/ratings-agencies-still-coming-up-
short-years-after-crisis.html
 Proponents of CDS contracts argue that the CDS market benefits financial markets in
two basic ways. 1) It makes a relatively illiquid market (the debt market) liquid and
2) it makes a relatively opaque market more transparent. (In other words, CDS
markets reveal information about the credit market).
Some opponents of CDS contracts argue that these contracts are not used to hedge
risk, but rather to speculate. While other opponents argue that when lenders hedge a
borrower's credit risk with a CDS contract, they no longer have an incentive to
monitor the company and no longer care whether the borrower remains solvent
because the contract will pay out if the borrower fails (this is called the empty
creditor hypothesis).
What are your thoughts on Credit Default Swap contracts?

The assigned article gives a very short explanation of what CDS are. To my
understanding, they are a swap between two parties that swap one risk for
another. CDS can be traded in markets such as trading the fluctuations between
currencies. In the case of the Great Recession / housing crisis, CDS were used to
swap the risk of a lot of mortgage securities. Owners of the debt would obtain
insurance on the potentiality of defaults by buying insurance or CDS.
Rubin explains that financial institutions or investors use CDS to “protect
their investments from losses or to make bets on the perceived risk of companies,
countries and mortgage debt.” To my understanding, this is kind of like buying
insurance except you don’t have to prove ownership of what you are insuring
when you buy one. The purchaser can just buy from whoever is willing to sell the
“insurance” (CDS) to you. Issuers of CDS may be betting that the underlying
security (or combination of securities) do not default. Therefore, the issuer can
make premiums and profit off selling these CDS. I know that there was a lot of
these issues around the great recession with Lehman Brothers and other financial
institutions during that era. Regulations were put out in 2010 to reduce the
potentiality for market contagion and since have been trading less due to the
regulatory enforcement. However, according to the U.S. Office of the Comptroller
of the Currency, about 3 trillion were still traded in Q1 of 2022 (globally). CDS
still comes with counterparty risk. I believe there may a link between rising prices
of CDS and the increased probability of defaults. Possibly, this could be an
indicator of broader problems for countries if prices of CDS drastically rise. There
can be inherent risk in these as they can give issuer a misguided sense of security.
Ruben, G. (2018, July 21). Are credit-default swaps a cardinal sin? The Wall Street Journal.
Retrieved November 1, 2022, from https://www.wsj.com/articles/are-credit-default-
swaps-a-cardinal-sin-1532174520
U.S. Office of the Comptroller of the Currency. "Quarterly Report on Bank Trading and
Derivatives Activities. First Quarter 2022," Pages 10-11. Retrieved November 1,
2022, from https://www.occ.gov/publications-and-resources/publications/quarterly-
report-on-bank-trading-and-derivatives-activities/files/q1-2022-derivatives-
quarterly.html
 SBA Pre-Screen/Submission
From John Brackett:
Date 9/23/2022:

BORROWER: Riverstone Construction LLC

LOAN $2,534,000
AMOUNT:

TOTAL Estimated $1,532,000

EXPOSURE:

Purpose: Business acquisition (Stock Purchase) of Riverstone Construction, LLC

504/7A/USDA? 7(a)

TERM 10 year

AMORTIZATI 10 year
ON

RATE: WSJ Prime +2.50%

COLLATERAL: Business assets of target business

2nd Lien position on individual guarantor’s primary residence
Further collateral may be needed
GUARANTORS/ Full Guarantee – Riverstone Construction, LLC
CORPORATE
GUARANTOR: Full Guarantee – Gaynam Rackstraw
Full Guarantee – GRSC, Inc

POLICY
EXCEPTIONS:

OTHER:

REFERRAL 1% to broker – Chris Skully

SOURCE/FEE

Page 1 of 8
 Sources and Uses:

Transaction Summary:

$2,900,000.00 - Purchase Price

o 1.3mm EV
o 750K Equipment
o 450K cash left in checking account for WC
o 400k of purchase to be used towards eliminating 400K/29K a month
$15,000 closing costs
$69,000 – GTY Fee
$450,000.00 – Borrower Injection (15.1% of total project)

Page 2 of 8
 Background History:
Riverstone Construction was incorporated in 2013 and serves the greater Jacksonville, FL and
surrounding areas. It offers a wide variety of services including but not limited to:

Earthwork
Underground Utilities
Demolition
Steel Building Installation

Profit margins are 25-30% of what they bill for their clients. Current owner is predicting upward
trend of future contracts due to large developments in the area. A lot of wealthier clients who are
developing in Jacksonville, FL due to future expected growth. Currently, the owner says there is
more demand than they can meet. Site of the Business is pictured below:

Seller is willing to stay on for a length of time to assist Gaynam as new owner/management. The
current owner will stay on as consultant for 9-12 months for $12,000 a month.
Recent Projects of Riverstone Construction, LLC:

Competition:

Page 3 of 8
Various Construction Companies are
Located in the greater Jacksonville,
Florida area.
Riverstone Construction, LLC has a
Small firm feel and prides themselves
In treating each customer with care
and consideration.

Page 4 of 8
 Cash Flow
Buyer has salary needs covered by other employment.

Borrower Affiliate: GRSC, Inc.

Business was incorporated in 2012 but did not start fully operating until 2020.

Page 5 of 8
 Collateral:

Buyer has residential RE to take 2nd lien position on.

Seller’s Equipment and Vehicles is within the tab and listed below.
GRSC, Inc., 100% owned by the buyer and an affiliate, will be a full guarantor. There
may be more collateral available if needed.

Page 6 of 8
 Guarantor Analysis:
Gaynam Rackstraw obtained his MBA in 1998. For the last 25 years, he has worked in the
construction industry in various management roles including land development, project
management, sales account manager, and most recently; facility / plant manager. See resume on
file for further details.

He currently is employed as the facility/ plant manager for Helena Enterprises in Pierce, Florida.
Gaynam is only an employee and does not have equity. He intends on keeping his job as he
mostly manages and will not deter him from running Riverstone Construction, LLC. Separately,
he owns 100% of GRSC, Inc that is in the construction building industry.

GRSC, Inc.
Affiliate Company of Gaynam
Will be a full guarantor on the SBA loan
GRSC Inc. was incorporated in 2012. It was originally created as means for Gaynam to
help one of his previous employers. In 2020, he decided to hire employees, purchase
equipment, and ramp up business production. The business is a general contractor located
in Stuart, FL. Some of the services they provide are:
o Site development and drainage / Utilities
o Construction services
o Concrete work

Gaynam has managers in place at GRSC to cover all the Florida territories that they work in.
Also, he has a VP of construction and Operations manager in place.

Page 7 of 8
 Key Risks:
Construction industry – mitigated by primarily focusing on municipality work and having strong/
known reputation.

Strengths:

Strong year over year growth

Strong PG with stout resume for scaling business
Municipality work in one of the strongest state economies in the nation (Florida)
Plenty of room to scale (seller is turning away business because he doesn’t want to scale)
Strong business reputation
Seller staying on for 1 year

Weaknesses:

Topline down YoY due to seller not wanting to keep growing (2021 was a big year and
he realized that he didn’t want to keep growing due to his age)

Page 8 of 8
 SBA Pre-Screen/Submission
From: John Brackett
Date: 9-8-2022
BORROWER: ETBF DBA Best Concrete Mix Corp

LOAN $4,908,000
AMOUNT:

TOTAL $3,275,000 (May be higher, see the collateral explanation)

EXPOSURE:

Purpose: Business Acquisition

504/7A/USDA? 7(a)

TERM 120 months

AMORTIZATIO 120 months

N

RATE: WSJ Prime +2.5%

COLLATERAL: 1st lien position on all business assets

400K 1st lien position on guarantor’s residence
1,500,000 available in family members real estate for lien position
GUARANTORS/ Borrowing entity as full corporate guarantor
CORPORATE
GUARANTOR: Anthony Valente as full individual guarantor

POLICY
EXCEPTIONS:

OTHER:

REFERRAL 1% to referral broker

SOURCE/FEE

Page 1 of 8
 Sources and Uses:

Transaction Summary:

$6.25M for asset purchase of Best Concrete Mix Corp (NY S-corp).
Entry multiple of 3.2x 3 year avg EBITDA and 1.67x 3 year avg Adjusted EBITDA.
Seller Note of $625K (10%) seller note, amortized over 10 years with 4% interest rate.
Sellers (~70 years old) have run a successful business for 30 years and would like to
retire, while having the business continue for their customers and employees.
Individual Guarantor, Anthony Valente will take full responsibility post-close.
Owners will support transition for 12 months via consulting agreement ($200K).

Page 2 of 8
 Background History:

Manufacturing and delivery of high-quality ready mixed concrete products across NYC
Diversified revenue streams: manufacture & deliver to commercial & large residential
job sites as well as provide concrete pickup to logistics companies to resell for small
residential & W/M/DBE projects.
Founded in 1992 by Michael and Rose Emanuele.
has a long history of producing quality concrete and great customer service.
Extremely efficient operation with 2 concrete plants on a small plot of land, a small but
effective work force, and a strategic location near major traffic arteries in Flushing,
Queens, NY.

Types of concrete provided

High strength concrete
Light weight concrete
Architectural concrete

Page 3 of 8
 Competition:

Various concrete companies in around the area.

Best Concrete Mix Corp has a 30 year history and 4.2 google star rating.
Best Concrete Mix is approved by the New York City School Construction Authority, the
National Ready Mix Concrete Association, are among the few concrete suppliers who are
legally accredited by the New York State Department of Transportation.

Page 4 of 8
 Cash Flow:

Addbacks that are verifiable are included

o Plant Royalty Expense is an expense the seller paid to another company that he
owns (reducing tax burden obligations).
o Seller owns the trucks and leases them to himself much higher than market rate,
buyer is negotiating terms to lease them at much lower price. This will improve
historical cash flow.
o Explanations for other addbacks will be provided with documentation before
going into underwriting.
New Owner Salary of $150,000 inputted. His salary needs are about $75,000 annually.

Page 5 of 8
 Collateral:

Seller
o Seller’s BS is based off date of 6/30/2022.
o Seller BS has about 5.6 million in A/R but do not know if or how much will be
included in the asset transfer.
Buyer
o Buyer has residence property valued at 400K, we will have 1st lien position.
o Buyer has 1,500,000 in other property (through family) that he can provide for us
to take lien position on. Inputted for now is the full amount, however it is safe to
assume this amount will be lower due to other 1st lien positions. Will need to
verify with further DD.

Page 6 of 8
 Guarantor Analysis:

Anthony grew up in my family’s concrete business (Jenna Concrete) in the Bronx, NY,
learning all facets of the business from my father & uncle, including being acquired by a
larger company.
Attended Northwestern undergrad (economics & business).
Attended Harvard Business School (MBA, deferred after 1 year due to COVID).
Built a tech startup called WheresMyConcrete that built and sold enterprise software to
help owners and their employees more efficiently run their concrete companies. He sold
this business to US Concrete, a publicly-traded market leader.
He knows the concrete industry well, in particular in NYC, and can add technological
improvements to Best that will drive enhanced profitability and growth opportunities.

Page 7 of 8
 Key Risks:

NYC construction market is cyclical and rising interest rates could lead to a reduction in
concrete demand in Best’s service area, although residential real estate is still in demand.
Being very efficient and variabilizing costs will help best maintain profitability and
compete effectively for available work during times of strong & weak demand.
Relies on a limited number of suppliers of cement, sand, stone, and chemicals, each of
which have been affected by supply chain issues to some extent have raised prices, which
will need to be passed through to contractors and developers.
Adding strategic plant locations can increase geographic reach within NYC and higher
profitability by leveraging existing relationships & brand.
Depending on how much collateral shortfall there is, we may need to take lien positions
on individual guarantor’s marketable securities if applicable. Guarantor may not agree
due to already providing up to 1.5 million in lien-able real estate via family members.

Strengths:

Concrete business established for 30 years and is approved by the New York City School
Construction Authority, the National Ready Mix Concrete Association, are among the
few concrete suppliers who are legally accredited by the New York State Department of
Transportation.
Seller will stick around for 1 year in transitionary period.
Buyer has built a enterprise software business for concrete companies. He has experience
and knowledge of the industry.

Weaknesses:
Depending on collateral of buyer, exposure is on the higher side. Mitigated by extremely
strong prior financial performance.
Rising interest rates could lead to a reduction in concrete demand. Mitigated by
expanding servicing area to other NYC Boroughs.

Page 8 of 8
 SBA Pre-Screen/Submission
From: John Brackett
Date: 10-14-2022

BORROWER: Entity To Be Formed DBA Taylor Farmer’s Insurance Agency

LOAN $1,024,500.00
AMOUNT:

TOTAL Estimated $674,022.00

EXPOSURE:

Purpose: Business Acquisition

504/7A/USDA? 7(a)

TERM 10 year

AMORTIZATI 10 year
ON

RATE: WSJ Prime +2.75%, variable rate subject to quarterly adjustments based off
prime rate.

COLLATERAL: 1st Lien Position on Target Business Assets

2nd Lien Position on Individual Guarantor’s Primary Residence
GUARANTORS/ Full Guarantee – Entity to be Formed DBA as Seller
CORPORATE
GUARANTOR: Full Guarantee – Nathan Martin

POLICY Does not meet banks’ 20% injection.

EXCEPTIONS:
Currently have 19% equity with borrower injection and full standby seller note

OTHER: NA

REFERRAL 1% fee to referral broker source.

SOURCE/FEE

Page 1 of 8
 Sources and Uses

Transaction Summary
Acquisition of Taylor Farmers Insurance Agency
$1,200,000 – Purchase price
$1,024,500 – Loan amount
$25,000 – Working capital built into loan
$240,000 – 19% Equity
$100,000 Borrower Injection (7.9% of total project)
$140,000 – Seller Note Full Standby (11.1% of total project)

Background History
Solid performing Farmers Insurance Agency that has real potential to grow considerably
over the next 10-15 years. The insurance book is 100% owned by the Farmers’ agent and sells
Personal Lines (PL), Commercial Lines (CL), and Life & Annuity Products to customers in a
local area. In this case, the business is located in Flowery Branch, GA, and has been growing
since the current owners opened it in May 2015.

Chris Taylor bought this book of business in 2020 from the prior owner, Steve Ring years
ago. Chris has been paying Steve a % of the book over the 3-year period. These fees will not be
moving forward once Nathan buys the business. These fees/addbacks are explained within the

Page 2 of 8
income statement tab. Chris will submit a termination of employment so the policies can transfer
to Nathan Martin for the acquisition. This will need to be done about 45 days prior to closing.

The office is located in a large retail shopping center that sits on the corner of Friendships
Springs BLVD and Spout Springs Rd. There is an Italian restaurant next door, investment firm,
and a high end nail salon.

Products and Services offered:

Personal insurance:
o Auto, Home, Renters, Boat, RV, Recreation, and Umbrella coverages. Farmers
offer a couple of different options through the Farmers products or the Foremost
Signature (formerly MetLife products. Coverage and appetite vary by product and
currently, there is a cap on High Valued homes at $1.5M with Farmers

Commercial insurance:
o Auto. Property, IM, GL, Crime, Umbrella, WC, Professional coverages. Farmers
offer products and services through monoline and package policies. Currently,
Farmers is updating their product filings and appetite to expand coverages,
introduce competitive pricing, and target classes of business. Many of the
commercial customers are being placed outside of the Farmers’ platform through
other brokers, wholesalers, or MGAs

Life, health, and accident coverage:

o Farmers Life Compass products include options for Term, Whole Life, Universal
Life, and Accident Death policies. Some of these products (Variable Whole Life
& Universal Life) require another license to be able to sell and they have to be
registered with the SEC and FINRA.

Page 3 of 8
 Competition
The insurance industry has been growing year over year with one exception in 2020 due
to the impact COVID had on the economy. Today it stands just shy of $1.36 Trillion with 2.86M
employees. Insurance agencies & brokers make up about $320B of the total insurance market
growing around 7.3% annually according to Allied Market Research. Agency and brokers carry
about 1.2M employees. The P&C Market is estimated to be $715.9 billion and the Life Insurance
Market is around $635.billion.

Farmers Insurance's top 15 competitors are State Farm, Allstate, Liberty Mutual,
Progressive, Travelers, USAA, Nationwide, GEICO, AIG, Chubb, RGA, Prudential, Endurance
Specialty Holdings Ltd, and CNA. Together, these companies combine for over $10.6B in
revenue and over 500.000 employees. Farmers Insurance's revenue is ranked 14th among its
peers in terms of revenues

According to the Census Bureau, the City of Flowery Branch is growing rapidly and
draws in growth with families moving to Lake Lanier. The population is just shy of 32000
people with 2.85 people per household and estimated to have over 43000 people living in the
area. The average home value is $241,000. Over 700 businesses are employing over 11,000. The
median age is 36.7 and the income per household is $81,000 per year.

The City of Gainesville is also growing rapidly and is supported by more industry than
service-related businesses. The population is over 41,000 people with 2.74 people per household
and just under 50,000 people living in the area. The average home value is $248,800. Over 590
businesses are employing 3391 workers. The median age is 39.6 and the income per household is
$80,500 per year.

Other Cities in the immediate area include Braselton, Buford, Oakwood, Sugar Hill, Duluth, and
Suwanee. These are located in Hall & Gwinnett Counties. Flowery Branch is within easy driving
distance of the agency’s office.

A google search will list the following agencies in the surrounding area:
413 Insurance Services, LLC – Independent Agency- 5505 Church St, Unit 2
Medicare Insurance Coverage – Independent Agency - 5883 Spout Springs Rd
Bill Martin - State Farm - 5900 Spout Springs Rd
Layna Weldon - State Farm - 4553 Winder Hwy
Mike Edmondson - State Farm - 3737 Winder Hwy
Aplus Financial Services– Independent Agency - 4860 Hog Mountain Rd
Namon Collins, Jr.: Allstate Insurance - 6082 Atlanta Hwy
Jason Burchfield: Allstate Insurance - 4005 Winder Hwy, Unit 140
Silva Nguyen - Farmers Insurance - - 5509 Radford Rd, Unit A
Patrick Klug - State Farm - 5556 Atlanta Hwy, Unit 3G

Page 4 of 8
 Cash Flow

Chris Taylor, the owner of selling business, bought a book of business from Steve Ring
(prior owner) about 36 months ago and has been paying him a % of the book over the 3-year
period. Most of the contract labor in 2020/2021/YTD 2022 went to Steve (details are in the notes
of the broker recast and BDO Workbook). This obligation ends in December 2022 with the total
2022 paid to Steve equaling about $12K. 0 need for contract labor moving forward. The prior
owner from 2020 will receive $12,000 in 2022 and will not be receiving any fees once Nathan
takes over by end of 2022.

Current Employees are:

Vicki – $42,000 a year

Annetta – (started July 2022) – $38,000 a year
Renee – $42,000 a year

Other addback explanations / Notes (not all of addbacks may need to be included to support debt
service coverage ratios.
There is not previous owner salary for addback as it is Schedule C business. Free
cashflow went to the owner.
New owner salary of $78,000 accounted for which covers Nathan Martin’s fixed
expenses.
some of the employees (there are 3 total besides Chris/owner) switched from being 1099
in 2020 and 2021 to being W-2 so prior “Contract Labor” figure with the “Wages” figure
need to be balanced.
2022
o The owner had CPA break out the depreciation on the vehicles since it represents
a large owner benefit.
o Looks like owner sold the personal vehicle back to himself on the 2022 P&L
2021

Page 5 of 8
 o $32,661 (addback) listed within contract labor line item. This expense is what the
owner has paid Steve in commission for terms of the prior purchase in 2020.
o $10,000 office expense addback. “LHI”, may need documentation proof that this
is not reoccurring and was one off expense.
2020
o There were 3 employees this year who were paid via contract labor and/or wages.
The 3rd employee left (Laura) and was not immediately replaced.
o $52,589 contract labor addback. Of the $90,589 contract labor, $33,973 went to
prior owner Steve in commission (addback), $18,616 went to a prior employee,
Laura Harris (addback). Laura was not immediately replaced. The broker inferred
this left remaining $38,000 to cashflow and could later cover Annetta’s salary.
Annetta was hired in July 2022. Need to figure out why the $38,000 leftover was
expensed as contract labor, why it is not reoccurring and thereby is now able to be
used to cover Annetta’s current salary.
o $18,700 Office Expense addback - New HVAC bacteria system ($3,700), New
phone/computers & work stations ($15,000). May need documentation to support
addbacks.
2019 - $13,042 (addback) paid to Steve Ring, prior owner as per terms of prior business
purchase.

Collateral
FF&E listed on business balance sheet dated 9-30-2022
2nd lien position on Nathan Martin’s primary residence

Page 6 of 8
 Guarantor Analysis
Nathan Martin has an extensive background in underwriting and insurance. From 2004 –
2015, He worked at Traveler’s Insurance where he brought on to develop new sources of revenue
for all business units and products across the enterprise, charged with building a new culture
after a merger between Travelers and St. Paul Insurance, managed a team of seven Underwriters
focused on growing Technology & Life Science related risks across 4 states, and grew the book
profitably from $30M to over $64M premium. His last position was regional vice president at
Intact Specialty Insurance (formerly known as OneBeacon Insurance). Nathan is currently not
employed and will be fully managing the business as he takes over.

Nathan is starting the Farmers’ producer training program on October 10th and will do a
deep dive to learn about these products, services, and appetites. It is a 5-week training course that
mixes Webx training, self-paced training videos, and live work. I am expected to quote at least
60 accounts before the end of November. These quotes will be a combination of leads provided
by Farmers and relationships that I can develop

Nathan’s Credit Score:

Score is lower from what is typical due to buying an

engagement ring, taking a trip and having to replace my AC / Heat
pump all at the same time. Trip will be paid off this month. He has
spread the other out over monthly payments until he starts earning $.
Nathan plans on paying off the rest early.

Page 7 of 8
Key Risks

Policies/contracts with Farmers Insurance must be transferred to the new owner. The
prior owner is aware and will be terminating / initiating transfer of policies. This must be
terminated at least 45 days before the asset transfer. Essentially this is the entire business
aside from FF&E

The business offers life, health, and accident coverage insurance. Some of these products
(Variable Whole Life & Universal Life) require another license to be able to sell and they
have to be registered with the SEC and FINRA. Nathan Martin is not currently licensed
to sell those specific products since they involve managing funds within a portfolio
through the financial markets. He will work on getting series 6/63 licenses and in the
meantime, will need to be sold through another broker or relationship. The Term, Whole
Life, and Accidental Death policies can be cross-sold to our current customers, and may
need someone to focus on growing that line specifically.

Strengths:

Nathan brings 30 years of underwriting and managing agency production experience. He

has a strong background in underwriting all types of commercial businesses.

He will be able to assist the Farmers’ underwriters to understand the risk profile for
customers as a result.

Weaknesses:

First challenge will be retaining the existing customer base. Nathan will start with the
current owner and him crafting a letter to introduce him to the agency. Previous owner
will stick around for 3-6 months post-closing. His wife is the office manager and number
one producer. She is planning to stay on as well for that period (maybe part-time for
longer) They have one employee that is currently working on most of the renewal book
and the customers know her well. The current owner will serve as a mentor for me in
both of these functions as well.

The second challenge comes with learning the Farmer’s products, services, and appetites
to target commercial, personal, and life insurance customers. If Farmers does not have an
interest in writing the account, we can place the business through other brokers,
wholesalers, or Managing General Agencies (MGA).

o Nathan is starting the Farmers’ producer training program on October 10th and
will do a deep dive to learn about these products, services, and appetites. It is a 5-
week training course that mixes Webx training, self-paced training videos, and
live work. He is expected to quote at least 60 accounts before the end of
November. These quotes will be a combination of leads provided by Farmers and
relationships that hee can develop. After the completion of the producer training,
he will have a much stronger understanding of all the features and benefits.

Page 8 of 8
 SBA Pre-Screen/Submission
From: John Brackett
Date: 10-19-2022
BORROWER: ETBF DBA as Greg Allens, Inc.
Co-Borrower – ETBF to hold the real estate
Co-Borrower – 1845 Group, LLC
LOAN $1,860,000
AMOUNT:

TOTAL Fully Collateralized

EXPOSURE:

Purpose: Business Acquisition of Greg Allens, Inc

CRE purchase
504/7A/USDA? 7(a)

TERM 25 year

AMORTIZATIO 25 year
N

RATE: WSJ Prime +2.25%. Floating rate subject to quarterly adjustments based off
wall street journal prime.
COLLATERAL: All Assets of target business
CRE located at 7071 Davis Creek Rd., Jacksonville, Florida 32256
2nd Lien position on individual guarantor(s) primary residences
GUARANTORS/ Full Corporate Guarantee – ETBF DBA as operating company
CORPORATE Full Corporate Guarantee – ETBF to hold the Real Estate
GUARANTOR: Full Corporate Guarantee – 1845 Group, LLC
Full Individual Guarantees – Brock & Jennifer Mikosky, Michael & Angela
Manley, Samuel & Mandi Shiver
POLICY Injection 12% (lower than 20% DSB required for acquisition)
EXCEPTIONS: 2019 shows DSC of less than 1.0x

REFERRAL 1% fee to referral broker – John Geiwitz

SOURCE/FEE

Page 1 of 8
 Sources and Uses

Transaction Summary
Business Acquisition (Asset Transfer) and CRE Purchase. The buyer(s) will be creating two
entities. One for the OC and the other for the Real Estate.
$1,725,000 – CRE Purchase
$274,000 – Business Purchase
$214,000 FF&E
$10,000 Inventory
$35,000 Goodwill
$10,000 leasehold
$15,000 restrictive covenants contained in agreements
Per the LOI - no debt, accounts receivable, nor accounts payable will transfer at the time
of closing.
Additional Details:
The OC of target business is 100% owned by Greg Allen Junior.
The target CRE is owned Davis Creek Holdings, LLC, a Florida limited liability. This
EPC company is owned by Gregory Allen, Jr. (owner of the operating business) and
Carolyn Allen.
The seller is going to have a transition period of 1 month but will need to be verified.
The seller is there every day and managing accounts. Two of our borrowers will be there
every day as well doing the same.

Page 2 of 8
 Equity injection is coming from 4 investors who will each own 5%. They have been
identified and are getting finalized as I type. This will leave good post-close liquidity
with our guarantors. Even without additional investors, the 3 guarantors can and will
cover the injection.

Background History

Greg Allen’s, Inc. is a comprehensive and customer-centric commercial printing facility

with a culmination of 30+ years of experience. The company has been providing printing and
promotional solutions in Jacksonville, Florida since 1986. They serve Jacksonville, The Beaches,
Ponte Vadra, Orange Park, and surrounding areas.

The business operates in a facility with over 18,000 square feet which includes
everything from high end offset presses, latest technology in digital presses, state of the art
prepress equipment, and bindery to extensive warehousing for client fulfillment. They also have
company vehicles that make daily deliveries to the Jacksonville Florida metro area.

Business website URL - http://www.gregallens.com/

Products and Services:

Commercial Offset Printing - printing technique where ink is

spread on a metal plate with etched images, then transferred to a
surface such as a rubber blanket. Then finally, the ink is applied
to paper by pressing the paper against the surface.
Digital Printing- methods of printing from a digital-based image
directly to a variety of media. It usually refers to professional
printing where small-run jobs from desktop publishing and other
digital sources are printed using large-format and/or high-volume
laser or inkjet printers
Business Stationary - business cards, letterhead, envelopes to
invoices and statements.
Promotional Products - Yeti Type cups, pens, baseball caps,
etc.
Apparel - Custom shirts for corporate logos, slogans, images,
etc.
Corporate Food Gifts
All Occasion Cards
Holiday Cards
Tax Forms
Onsite pictures of Greg Allens, Inc.:

Page 3 of 8
 Competition
Various printing companies and services are located in
the greater Jacksonville, FL area.
Greg Allen’s, Inc. has almost 25-year history in SE
Jacksonville.

A few other competing companies in the area:

Print Resources Jacksonville: 5 stars google rating with

43 reviews.
Minuteman Press – Downtown Jacksonville: 4.7 Google
rating with 134 reviews.
PIP marketing, Sign, Prints: 4.8 google rating with 40
reviews.

Cash Flow:
The seller / owner has expensed health his health
insurance policies through the business. This will not be
an expense moving forward and the statement documents
are in the file for support.
The guarantors will not be pulling salaries as each of the 3
partners (and their wives) have current employment to
cover their income needs. There is additional income
from the 1845 Group, LLC to support each couple as
well.

Page 4 of 8
 Collateral:
Fully Collateralized
The business comes with the purchase of the CRE. The building purchase price is
$1.725MM but should appraise for north of 2.5MM. A similar building in the same
complex recently sold for 3.2MM
Balance sheet shows $1,336,006 in fixed assets but I am using $384,000 which is the net
book value after accumulated depreciation of $916,950.
Using Net Book Value for vehicles, FF&E, and office equipment

Guarantor Analysis:
Brock Mikosky, Michael Manley, and Samuel Shiver are partners who each own 1/3rd of
1845 Group, LLC. Each of them and their wives will be full guarantors for a total of 6 individual
guarantors. Each couple has current employment and/or combined income to cover their salary
needs.

1845 Group, LLC is a political consulting business that our 3 guarantors operate. As you
can imagine, it is seasonal based on election cycles. With that said, Jacksonville Florida has
annual city council elections and 1845 benefits from that. They all draw salaries from 1845 and
each has a spouse with outside income.

Page 5 of 8
Guarantor 1: Mike Manley – Will be heading Sales & Business Development
Lives in Jacksonville, FL
7th generation Floridian, Mike is a political operative with over 20 years of experience in
Florida politics. A veteran of two legislative cycles with the Republican Party of Florida
House Campaign operation
he has worked directly for two Speakers of the Florida House of Representatives and
served as Deputy Chief of Staff at the Florida Lottery where he oversaw state-wide sales
and product development.
His vast campaign experience ultimately led him to become a member of the Rick Scott
for Governor 2010 Transition Team and, most recently, to national political consulting
firm, Majority Strategies.

Guarantor 2: Brock Mikosky, MBA – Will be heading Operations & Growth Strategy
Lives in Jacksonville, FL
general consultant focused on voter contact and using data and research to inform
campaign strategy. He is well-versed in tried-and-true election methods and eager
to deploy the most bleeding-edge technologies for clients to ensure success.
Brock has been the principal of his own firm, Momentum Strategy Group, for
more than a decade. This entity is no longer operational.
working for national consulting firm Axiom Strategies, the Florida Chamber of
Commerce and Associated Industries of Florida. His experience has led to
victories in races for Congress, State House, countywide constitutional and local
offices.

Page 6 of 8
Sam Shiver – will be heading Operations & Executive Management
Lives in Jacksonville, FL
A familiar figure in the halls of government over the past twenty years, Sam's
professional career provides experience in the legislative, regulatory and political
processes. As Associate Legislative Affairs Director for the Florida Medical
Association, Sam carried an issue portfolio including medical and healthcare policy
at the legislative and executive levels.
Politically, Sam has served as a campaign operative and strategist for the
Republican Party of Florida and has led dozens of local and state campaigns,
guiding these winning efforts to and through election day. He also has a depth of
experience surrounding the creation and management of professional associations
as well as political and independent expenditure committees.
Since 2005, Sam has been the Principal of SOS Governmental Consulting, a
boutique firm specializing in government affairs, regulatory and political
consulting. He has a broad portfolio that includes healthcare, utilities,
telecommunications, gaming and cannabis issues at the local, state and national
level.

Page 7 of 8
Strengths:
30+ years of history in the greater Jacksonville area.
YoY consistent growth.
The building is probably worth (conservatively) $2.5MM (another similar building in the
same area sold for $3.2MM last month).
A lot of expensive commercial equipment with long use-life.
Borrowers work in political consulting and will be bringing their own clients printing
needs to Greg Allen, which will be immediate top line growth and help improve their
margins on the consulting business.
Greg Allen currently doesn’t target political printing needs. Borrowers are friendly with
consultants throughout the state that have printing needs they are already willing to bring
over.
3 borrowers will all retain their consulting income and each of their spouses have six
figure salaried positions in various fields amounting to very strong secondary income
resources.
There are 3-4 minority investors (5% equity ownership each) that are making up injection
leaving our borrowers with strong post close liquidity.

Weaknesses:
Borrowers don’t have direct industry experience – Printing business has a low barrier to
entry from a labor standpoint (high capital barrier). Not difficult to operate and the
current staff is staying on board. Borrowers will be managing the business, financials and
focused on growing revenue through new target markets.
DSCR is on the lower side – mitigated by being fully collateralized with CRE /
equipment and with 3 primary borrowers with strong secondary income.

Page 8 of 8
 SBA Pre-Screen/Submission
From: John Brackett
Date: 7-18-2022

BORROWER: ETBF DBA R Buck Heating and Air Conditioning, Inc.

LOAN $3,378,000.00
AMOUNT:

TOTAL $3,164,000 Estimated

EXPOSURE:

Purpose: Business Acquisition – asset purchase

504/7A/USDA? 7(a)

TERM 10-year term

AMORTIZATI 10 years
ON

RATE: WSJ Prime +2.5%, floating rate subject to quarterly adjustments based off
Wall Street Journal Prime rate.

COLLATERAL: See the Excel Workbook Tab

GUARANTORS/ Full Guarantee of Borrowing business

CORPORATE
GUARANTOR: Full Individual guarantee of Troy Green

POLICY NA
EXCEPTIONS:

OTHER: NA

REFERRAL 1% fee to referral source

SOURCE/FEE

Page 1 of 9
 Sources and Uses

Transaction Summary
$4,000,000 - Purchase Price
$550,000 – Borrower Injection (Source will be gifted from the 90% owner’s
father)
$500,000 – Seller note non standby - $63,639 annual payment accounted for in
spreads
$3,378,000 – SBA Loan
$300,000 built in for WC
$93,000 GTY Fee
$15,000 Closing costs
Sale does not include cash or A/R
New Ownership Breakdown
Troy Green – 90% owner
Partner – 10% owner
Troy’s Father – 10%-15% - Troy may give his father 10-15% ownership from his
ownership stake. Father would not want to provide a limited guarantee. Troy’s
father will be gifting injection money and in turn would like a stake in ownership.

Page 2 of 9
 Background History
R Buck Heating and Air Conditioning is a long-standing HVAC company headquartered
in Pueblo, CO. The company operates at 1721 N Erie Ave, Pueblo, CO 81001. Established in
1994, the company provides complete HVAC repair, maintenance, and installation services.
They service both light commercial and residential systems, and have approximately 900
customers with annual service contracts. The major of their revenue (90%) is generated through
residential services.
The company is fully licensed (Pueblo Regional License #2824) and insured (Liability
and Worker's Compensation). Operations are supported by a well-trained staff of 22, including 4
technicians who are NATE certified.
to further enhance the company’s profits and growth.

Business has the following attributes:

22 employees
Long established service company
Year over year growth in both revenue and cash flow
Well known identification and loyalty
Skilled and experienced employees
Positive recognition and standing with the local community
Highly Rated Online Reviews o Google: 5/5 Stars (1,285 reviews)
Better Business Bureau: 4.95/5 Stars (162 reviews)
Top Rated Local: 4.9/5 Stars (673 reviews)

Page 3 of 9
Competition / Area

Page 4 of 9
 Cash Flow

Troy’s partner, Jeff, will be taking 250K Salary

Troy will not be pulling a salary

Collateral

Page 5 of 9
 Guarantor Analysis
Guarantor - Troy Green (90% owner) (may be 10-15% less as he is considering giving his
father equity)

Page 6 of 9
Green Real Estate Holdings, LLC – 40% owned by Troy Green the individual guarantor
Troy’s 40% ownership represent about $1,680,000 owed to him as of 01-2022.

Currently waiting to see what % ownership he has in the other 4 LLC’s listed on his PFS.
Believe the rest are minority stakes and Green Real Estate Holdings is the largest.

Page 7 of 9
Limited Guarantor - Jeff Fitzsimmons (10% owner)

With more than 30 years of experience in the HVAC industry. A natural expert in the
field. This experience has molded an ability to offer preventative, predictive, and proactive
solutions both in house and in the field. Leading, and driving multiple departments with
enthusiasm. An experienced leader with a demonstrated ability to produce and sustain cross
functional teams. Leading sales transformation procedures and development efforts that
generated revenue exceeding company goals year over year in an extremely competitive market.
A unique ability to connect with teams can be attributed to humble beginnings as a field
technician. Helping cultivate a company culture that produces high morale and top performance
results.

Strengths:

YoY growth of acquiring business

Very strong DSCR
Service-based business (always in need no matter macro economic climate)
Acquiring business has been established for close to 30 years / 1000s of reviews near
perfect
Operating partner with extensive experience in HVAC industry managing large entities /
spent most of his life in the same area as the acquiring business
Colorado is a growth state due to corporate relocations / WFH relocations

Weaknesses:

Guarantor doesn’t have industry experience / lives out of state of operating company –
mitigated by operating partner with decades of industry experience who is from the area
and will be moving to be boots on the ground.
Associated with a family Real Estate Holding Company that is offloading property in
New York – mitigated by not owning any of it 100%

Additional Comments & Questions (received from credit underwriter)

Is the settled on breakdown of the asset allocation for the purchase price: $55,000 for
inventory, $83,000 for equipment, $411,930 for vehicles/trailers and the remaining for
goodwill?
In the asset allocation in the file, there is a value being allocated toward inventory (ie
$55M for inventory), but the business hasn’t typically had near this level of inventory on
the balance sheet? Is inventory part of the allocation? If so, why that amount given the
nature of the historical balance sheet?
Why is the seller looking to sell? The seller will be staying on for 60 days, correct? Or is
the transition period something different?
Why is Troy looking to purchase this HVAC business, given he is a lawyer and RE
investor by trade, with a large RE portfolio amongst many entities? Also considering this
HVAC business is in Pueblo, CO and Troy is rooted in the Syracuse, NY area? Troy is
remaining in NY, correct? Please provide some background.
Why are Troy and Jeff willing to go in on this project together? Nothing was mentioned
of them having any prior relationship of any kind, which would appear to be the case

Page 8 of 9
given it doesn’t sound/look like their backgrounds have crossed given their geographies
and professions. Please provide some background.
Will all other current staff and senior staff will be staying on with the business upon the
transition / acquisition?
Jeff is ready and willing to move from Phoenix to Pueblo? Will this move be easy as a
transition (ie family, kids, property owned in AZ, etc)?
Do we need a backup primary manager in place in the case that Jeff vacates after a year,
etc. Has this backup been identified?
Will there be the necessary licensing in place with the new ownership / management?
Please clarify.
Need to confirm that of the total $530M borrower injection, $470M will be brought in as
a gift from Troy’s father, Tim? Or is the breakdown of the total $530M injection different
than $60M from Troy and $470M from Tim?
Does the business / seller currently have any LOC in place for working capital needs? If
so, how much is that commitment amount? Business may need a $250M LOC would be
appropriate. Thoughts?
What have been the drivers of revenue growth, given there has been growth in every
period, of roughly 20%? Also, when comparing revenues from interim 2022 to interim
2021, the revenues are up nearly 52%, why is this? Will this revenue growth slow as the
year wears on due to seasonality?
Profitability, even excluding PPP / grant income, was up quite a bit in 2020 when
compared to both 2019 and 2021, why is/was this?
Why is profitability so much higher in the interim period compared to full year periods?
There do appear to be pretty regular CAPEX outlays every year, with the increase in
gross fixed assets seen from historical balance sheets. Does the seller / buyer anticipate
any extra CAPEX needs in the next coming years?

Page 9 of 9
 SBA Pre-Screen/Submission
From: John Brackett
Date: 7-20-2022

BORROWER: Pirates Gold Marketing Co.

LOAN AMOUNT: $345,500

TOTAL $244,000
EXPOSURE:

Purpose: Business acquisition – stock purchase

504/7A/USDA? 7(a)

TERM 10 year

AMORTIZATION 10 year

RATE: WSJ Prime + 2.75%

COLLATERAL: All assets of target business

GUARANTORS/C Full Gty – Pirates Gold Marketing Co.

ORPORATE
GUARANTOR: Individual full gty – Dhenin Brock

POLICY Loan is $4,500 under the threshold amount. Requesting exception to policy due to this
EXCEPTIONS: coming from a important referral source & almost meeting the 350K threshold

OTHER:

REFERRAL 1% fee to John Geiwitz

SOURCE/FEE

Page 1 of 5
 Sources and Uses

Transaction Summary
$325,000 - Purchase Price
$345,500 – Loan Amount
$35,000 – WC Built In
$40,000 – Borrower Injection

Background History
Since 1984, this business has searched the world
over to find the best herbs, spices, fruit juices and
flavorings. They combine these quality ingredients
into the world's finest naturally brewed marinade. A
fast acting, all-purpose marinade for Beef, Pork,
Poultry, Wild
Game, Seafood and Vegetables. This amazing
product is available at fine Supermarkets, Meat
Markets, Specialty, and Gourmet shops throughout
the Southeast United States. Harvey's, Publix, and
Winn Dixie are just a few of the fine retailers.
Conveys with turnkey operation including 3,800
sq/ft of commercial real estate

The current business has 3 part time employees.

Page 2 of 5
Pirate's Gold is available in two versions - Pirate's Gold Original Marinade and Pirate's Gold
Inferno Hot Marinade. As the name implies, Inferno is a hotter version of Pirate's Gold, it is hot.
The longer you marinate something the hotter it will be it's great for chicken wings.

Competition
Located at 235 East Washington Street, Starke, FL, 32091. 45 minutes SE from
Jacksonville, FL. Pirates Gold Marinade sauce(s) are sold throughout Supermarkets,
Meat Markets, Specialty, and Gourmet shops throughout the Southeast United States.

Cash Flow
There is historical addback of $12,000
personal vehicle expensed through the
business. Will need documentation to
support if UW requires
The YTD P&L shows net income of
$7,394. However, seller has stated “The
P&L includes all COGS but does not
include in house PO’s for an additional
$5,040 sales to ship to Kehe next week.
So the actual net income is $12,434.94.”
We can request updated P&L if
required
The buyer is keeping his current
consultant/sales job and will not need a
new owner salary. His current job
provides a lot flexibility for him to operate at the business.

Page 3 of 5
 Collateral

Balance sheet dated 7-7-2022

Page 4 of 5
 Guarantor Analysis
Dhenin Brock is a former police officer in Pennsylvania is a natural born leader. His
amenable people skills have benefited him in his current employment within business
development selling pools. Dhenin’s current job is flexible and he will be able to
continue his consultant / sales position while operating and running the Pirates Gold
business.
Dhenin is located about 35 minutes drive from the business site

Strengths:
Current owner will be helping Dhenin in a transitional period
Borrower has outside source of income from consultant/sales that covers his personal
liabilities
Business has been established 38 years with current owner operating for the last 27 years

Weaknesses:
Buyer does not have direct industry experience, mitigated by seller in transitionary
training period

Page 5 of 5
 SBA Pre-Screen/Submission
From: John Brackett
Date: 2-15-2022

BORROWER: Entity to be Formed DBA JC Feed and Ranch Supply, LLC (DBA Ordiorne
Feed & Ranch Supply)

LOAN $2,763,000.00
AMOUNT:

TOTAL Estimated: $1,118,392.00

EXPOSURE:

PURPOSE: Business Acquisition (asset transfer) with CRE purchase

504/7A/USDA? 7(a)

TERM 25 year

AMORTIZATI 25 year
ON

RATE: WSJ Prime + 2.75%

COLLATERAL: Business assets – FF&E

CRE
Can not take position on individual Guarantor’s primary homes due to Texas
Homestead Act

GUARANTORS/ Full GTY of borrowing business

CORPORATE
GUARANTOR: Individual GTY of Eric Schwarte
Individual GTY of Nik York

POLICY N/A
EXCEPTIONS:

OTHER: N/A

REFERRAL N/A
SOURCE/FEE

Page 1 of 6
 Sources and Uses

Transaction Summary
Purchase:
o $1,650,000 - CRE & Land
o $1,400,000 – Business Purchase
Use of Loan Proceeds:
o Total Loan: $2,763,000
$1,650,000 – CRE
$1,400,000 – Business Purchase
$100,000 – WC Single Disbursement
$17,500 – Closing Cost = $15,000 estimated + $2,500 packaging fee
$75,500 – GTY Fee
Borrower Injection: $480,000 (14.8% total project)
Total Project: $3,243,000

Background History

Page 2 of 6
 Ordiorne Feed & Ranch Supply is a locally owned feed and ranch supply business that
has been around since 1982.
Full service farm, ranch, and feed operation that wells direct to consumers and ranches
within a 35 mile area of Johnson City – about one hour west of Austin, TX.

Customers:
Importance of being able to provide feed and nutrition to their animals, is a "must have"
vs. nice to have.
Very affluent customer base with baby boomer generation relocating to large acreage
homes/ranchettes and importance of ag/wildlife exemptions.
Diverse and growing customer base, top customer less than 1.5% of total sales, top 30
customers only account for 59% of revenue.

Location
Growing area, lots of money coming in to cater to new ranchette home owners, expansion
of Vineyards/breweries provides opportunity for expansion into other adjacent categories:
Fredericksburg is a good growth model, plus closer proximity to Austin.
Ranchettes being carved up, 2021 was a record year in ranch sales (large ranches being
carved in to 1/4 plots to avoid major tax triggers).
Existing large HOAs, and large acreage housing development being built, could also
benefit from a wildlife management plan.
Close proximity to Austin, TX.
Market
o Stable and growing market - is a must have for ranchers
Animal feed projected to grow at 5-6% per year through 2026
Growth in deer hunting, nationwide hunters spent $27.1BB in '16, states
saw 15-50% jump in hunting licenses in 2020 vs. 2019
Per a 2018 report, the Texas deer breeding industry has a direct economic
impact of $349.4 million annually; when incorporating the indirect
impacts of the industry – expenditures on feed, veterinary supplies, fuel
and other purchases – the total economic impact of the industry to the state
economy is $786.9 million.
o Feed is critical to maintaining ag and wildlife tax exemptions as part of state
required wildlife management plan (permanent exemption built into state
constitution), need to maintain records on feed purchases to support exemption.
o 2021 was a record year, and gross margins were only average or on low end vs.
prior years, as owners were reluctant to pass on full cost increases to customers,
plus business benefited in timing and ability to process bulk orders. Example:
Deer corn sales, roughly +$2MM in sales historically, operates with a gross
margin of 20 to 40%, in 2021 operated closer to 20%, so record year was
operating at a historically low margin. Historically business has been able to pass
on cost increases to customers, as only game in town for 35 miles plus business
has lower cost structure due to bulk buying and feed is a "must have".

Page 3 of 6
 Competition
Competitive advantage:

Ability to buy feed in bulk and either bag on site or provide bulk pickup/delivery to
customers, have own grain elevators and bulk feed silos (both corn and protein) - was a
big capital investment back in the 2000's that is paying significant dividends now, all
competitors buy and sell by the bag,
Several times a year order raw corn (husk and cob) in semi trucks from south Texas and
process it on site for cost advantage as well as bag and offer private label, big selling
point based on feedback from Ranchers,
Been around since 1982, changed hands 3 times since then and company has continued to
show strong growth, great customer relationships and 5 star reviews,

Cash Flow

DCS’s: 2018: 1.44 2019: 1.13 2020: 1.02 2021: 1.99

Page 4 of 6
 Collateral
Collateral Analysis based off Balance Sheet dated 12-31-2021

Real Estate & Land Based off business listing

Guarantor Analysis
Guarantor: Eric Schwarte – 50% owner

will be coming in to run

and operate the business.
Left his job in second
half of 2021 to search for
a business to purchase.
Lives in Austin, TX.
Graduated with a master's
degree in in business
admin. With emphasis in
finance & Strategy.
Wide range of
management experience
since 2007
Has access to family trust
for fall-back equity .

Page 5 of 6
Guarantor - Nik York – 50%
owner

Will keep his current

employment and help
Eric remotely
Nik brings a wealth of
financial expertise
having worked in
corporate finance &
strategy consulting
firms - See resume for
more details

Strengths

Growing area, lots of money coming in to cater to new ranchette home owners, expansion
of Vineyards/breweries provides opportunity for expansion into other adjacent categories:
Fredericksburg is a good growth model, plus closer proximity to Austin.
Great long-term relationships with Purina, Cargill, other feed vendors plus Stihl.
Great partners - vendor focus on reinvestment and continued vendor/customer education
along with importance of ESG, numerous examples online as well as Odiorne Facebook
page.
Animal feed projected to grow at 5-6% per year through 2026.
Growth in deer hunting, nationwide hunters spent $27.1BB in '16, states saw 15-50%
jump in hunting licenses in 2020 vs. 2019.
Continued reinvestment in capture growing feed industry demand .
Implementation of sales/marketing (direct sales, social media) and operations best
practices from consulting work with retail and distributors to improve efficiency,
scalability and overall profitability.

Weaknesses

This DSC in 2020, mitigated by 2021.

Unknown future COGS expense relative to inflation, mitigated with current low historical
margins (customers have felt pricing increases so there is room to move those upwards to
compensate).

Page 6 of 6