Memorandum                    

City of Lawrence

City Manager’s Office

 

TO:

David L. Corliss, City Manager

FROM:

Diane Stoddard, Assistant City Manager

Casey Toomay, Assistant City Manager

Toni Wheeler, City Attorney

DATE:

January 15, 2015

RE:

Potential Wicked Fiber Loan Guarantee Considerations

 

As the City Commission takes up the issue of whether to grant the Wicked Fiber loan guarantee, we believe that it is important that the City Commission take into consideration several relevant issues in order to provide the City the greatest protection for its potential financial risk.  When projects such as this are undertaken, everyone’s intention is for them to work out as originally envisioned.  However, it is also important to think about the future worst case scenario and then look back to the present to think about what can be done now to provide the City the greatest security possible in the event things do not work out as planned. 

 

Staff visited with senior commercial lenders in the community to seek advice on these considerations as they regularly are in the business of extending credit and evaluating financial risk. While the following list is not exhaustive, these are the types of issues which may be important to consider:

 

General questions/comments about the need for loan guarantee: 

 

1.          That the company is seeking a loan guarantee from the City may be an indication that they cannot satisfy the loan on a stand-alone basis and that the risk associated with requested loan guarantee is too high for the bank. 

2.          Why isn’t the company seeking an equity capital injection rather than a loan?  The company has a prior strong track record of such equity investment. 

 

If the City wishes to proceed with the guarantee:

 

It would be prudent to have current financial information in order to evaluate the risk associated with the guarantee. A bank would not consider a loan application without current financial information required for analysis.  Additionally, with the complexity associated with the factors a commercial lender would consider when making a loan or negotiating a loan guarantee, it may be prudent for the City to hire someone to advise the City regarding the guarantee transaction, or engage with the City’s banking institution on the matter. Other issues include:

 

1.          The financial information that the City has is limited to the summary provided by the Springsted report, dated October 2013.  This information was collected during the summer and fall of 2013 and is largely based on 2012 information.  There is no analysis of the company’s financial condition since 2012. 

2.          A commercial lender would generally look back at the company’s financials for the same period of time as the loan term.  At this point, the two most recent years, 2013 and 2014 and the current financials are not known.  Without this information, we do not know whether the company’s position has been improving or declining since 2012.  We do not know whether the company is insolvent now.

3.          The City should understand the complete structure of the loan transaction.  Items include:

a.   Who is the primary lender?

b.   What is the term of the loan? The loan term will be key to the risk exposure of the City.

c.   What is the interest rate of the loan?

d.   What are the terms of default on the loan, including the time to cure the default and the default interest rate?

e.   What fees will be paid?

f.    In the event of default, what is the secondary form of repayment on the loan (what assets are pledged as collateral what is the value of those assets)?

g.   Where will the City be in line in the event of a default?

h.   Does the loan include a personal guarantee from Mr. Montgomery and Ms. Adair?  If so, is this personal guarantee ahead of the City’s guarantee?  If not, why have they not pledged a personal guarantee?

i.     The City would want to ensure that the guarantee is limited and the City wouldn’t be assuming additional liabilities of the company.

 

4.          The City’s loan guarantee should be the final backstop.

5.          In the event of a call on the City’s guarantee, the available rights and remedies of the bank should flow to the City.

6.          Various structures of the guarantee could be explored to minimize the City’s risk: 

a.   A pro-rata guarantee would be a guarantee on the percentage of the outstanding loan and would decline over time as principal is paid.

b.   A “burn off” of the City’s guarantee could reduce a portion of the City’s risk in the event that the company’s numbers are improving, resulting in less risk on the loan to the bank.

7.          Does the company have enough capital and enough liquidity to cover the debt in the event projections on income do not come to fruition? 

8.          Are there any current tax liens against the company?

9.          Is there any pending litigation against the company which may affect its future financial position?

10.       A loan guarantee likely would require the City to sufficiently budget the amount of the guarantee for the length of the term in the event the guarantee was called.