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Interview with Theresa Acosta Lee, Vice President and Chief Lending Officer, Texas Mezzanine Fund Inc.
Fourth Quarter 2010

Dallas Fed: What have been the biggest successes and challenges that your clients have faced since 2009? What successes and challenges do you expect in 2011?

Lee: A business has been considered successful if it survived 2008 and 2009, it is still in business this year and revenue is steady.

The biggest challenge is surviving the downturn. Access to capital has been an issue because banks may find it difficult to hang on with their borrowers that are undergoing negative trends.  They may be asking these clients to leave, or be terming out their lines of credit. For some of our businesses, their greatest challenge is getting a bank to hang on with them. When I say “hang on,” I mean that they maintain their terms even if their clients’ revenue is going down, their debt service coverage ratio is no longer meeting their original standard, etc.

If a business is still in existence in 2011 and a lot of its competitors are not, then that will be considered a success.

In 2011, their main challenge will be operating on a shoestring budget. For example, if they are operating with fewer customer service representatives, that can hurt morale, which can hurt their bottom line.

Dallas Fed: What have been the biggest successes and challenges that the Texas
Mezzanine Fund has faced since 2009? What successes and challenges do you expect for TMF in 2011?

Lee: Until recently we were loaned up, that is, our fund was fully deployed, which is both a success and a challenge.

We work with small businesses that need working capital and perhaps their lines of credit are being canceled or termed out by their banks. These small businesses may need to find a new bank—one that may be willing to look at the bigger picture and willing to extend a line of credit. Where we come in is, as an example, perhaps to loan $250,000 to reduce a $1 million line of credit to the old bank, and then work with the new bank that will extend our joint client a smaller line of credit. We make this deal happen by enabling the bank to carry less risk as we tolerate a junior position on the same collateral and place our loan on a long-term payout. 

Another type of success for us has been with small businesses’ maturing real estate loans. If a bank wants to move that loan, sometimes another bank is willing to take the loan if TMF takes part of it. Or the current bank will lighten its terms if TMF takes some of the risk, again, in a junior lien position and patient terms.

Fortunately, right now we have plenty to lend. We received new loan capital from Communities at Work Fund (, an initiative between Citi, the Calvert Foundation and Opportunity Finance Network. Altogether, these funds will help us ramp up our scale and heavily market our services.

In terms of challenges, right now we are looking for deals and by definition, they entail credit risk. It is harder to find businesses that meet our criteria of growth and credit strength while supporting economic development, such as by buying real estate and hiring people, than before the recession. It is tricky to lend capital to sustain a business, instead of for growth, and it is hard to know if a business can rebound or maintain its turnaround. Since the recession began, we have had to spend a lot more time on portfolio management. We are monitoring our loans and businesses even more closely than before. This process has been successful, as we have been able to hold our charge-off numbers to a market low of less than 2 percent. However, we anticipate portfolio quality to remain a challenge.

Dallas Fed: What impact do you anticipate the Small Business Jobs Act of 2010 to have on you and your clients?

Lee: Waiving SBA fees has had a great impact. The appropriation is going to run out, though, so the impact is not indefinite.

As far as the increase in loan size, this impact is an open question. Bigger loan sizes benefit bigger businesses, not smaller ones.

The 90 percent guarantee has been a huge help, but it will go back to a 75 percent guarantee. When that happens, we do not know if the smaller guarantee will be enough to make deals happen on larger deals.

Last but not least, a big issue is the demand for products and services. As long as demand is down, businesses are holding on to survive and banks are in the business to help businesses grow, not usually to hold on.

Dallas Fed: What have we not yet discussed that you think is important to bring up, particularly to industry analysts, your constituents and/or policymakers?

Lee: Most banks are not doing much ground up construction and the number one reason is appraisals—appraisal values are not coming in to support these projects and their financing.

Also, while a lot of businesses may be making their payments as agreed, they may find that their bank has its own challenges, such as being heavily concentrated in commercial real estate and/or needing to diversify its portfolio. So, a bank may call loans that are maturing or cancel lines of credit. The business may then find itself seeking a new bank to work with it. It is a conundrum for all lenders, especially banks, because they are all in business to grow businesses and not take undue risk.  Lending for survival versus growth is today’s challenge for any lender.


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