|Volume 1, Issue 1, 2001||Federal Reserve Bank of Dallas|
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Two Multibanks Help Medical Diagnostics Firm Take Off
When financing was needed, the Texas Mezzanine Fund (TMF) made a loan to MWI, Inc., enabling the South Dallas-based in-vitro diagnostic firm to become one of only six companies worldwide manufacturing five-part blood analyzers.
At a time when MWI didn't qualify for traditional financing, TMF, a multibank community development corporation (CDC), made a loan of $500,000 for the company to produce the analyzer and venture into new markets. Another multibank CDC—the Southern Dallas Development Fund (SDDF)—entered the picture by purchasing $200,000 of the loan.
TMF and SDDF's faith in the company and its chief executive officer, Jerry West, has paid off. West recently negotiated a contract to supply a major pharmaceutical distributor with his company's five-part analyzer. West projects that MWI's sales will hit $9.5 million this year, an increase of $2.5 million since 1999, when the company received the TMF financing. The company also has retained 56 employees and added 16 more.
West decided to expand on his company's existing knowledge of manufacturing three-part blood analyzers and enter the clinic and small-hospital markets with a new five-part analyzer. The blood analyzers give doctors valuable insights into illness.
MWI invested $4 million over two years to research and develop its version of the analyzer, which resulted in a patent on its laser technology and FDA approval. West was then ready to expand into new markets but hit a snag. The company was out of working capital and, with no orders pending, had an out-of-shape balance sheet.
In the past, MWI had relied on its relationship with Texas Community Bank, which has served the company for years by providing a $500,000 line of credit for working capital. However, MWI needed another $500,000 for expansion.
Unable to get a loan to start production and marketing, West faced selling or even closing MWI. That's when his accountant heard about the Texas Mezzanine Fund's lending program for small businesses that don't qualify for traditional financing.
"When I first heard about the fund, I was skeptical, but I contacted a friend who had worked out a very reasonable business arrangement with TMF," West says. Of his loan from TMF, West says, "It was no different than dealing with a bank, except they could do the deal."
MWI was an ideal candidate for TMF financing, says Theresa Acosta Lee, vice president of the Southern Dallas Development Corp. (SDDC), which serves as the contracted manager of TMF. "They were a very desirable client because they were a fast-growing business located in the Southern Dallas Enterprise Zone and were likely to sell and move without our financing," she says.
TMF loaned West's company $500,000 over five years, which enabled West to start manufacturing and marketing the five-part analyzer. TMF included revenue participation in the loan covenant to cover the risk associated with relying on meeting the pro formas of a business plan for repayment. During the term of the loan, TMF will receive 0.5 percent of the revenues exceeding $8 million, Lee says.
"TMF will accept credit risks that banks aren't in the business of taking," she says. "Revenue participation is a good mechanism to deliver capital in a way that is not cost prohibitive to the business because the fee is tied to future growth."
Realizing early that the U.S. market was dominated by established producers of blood analyzers, West focused on overseas markets. To finance exporting, he turned to Bank of America because of its relationship with the Export-Import Bank of the United States (Ex-Im Bank). Ex-Im is an independent U.S. government agency that helps finance overseas sales of U.S. goods and services, often through working capital loan guarantees.
By securing a 90 percent loan guarantee from Ex-Im, Bank of America offset some additional risk associated with lending to firms with foreign accounts receivable. Bank of America is only one of a few banks that can do this type of deal because of its arrangement with Ex-Im Bank, says Richard Vitale, Bank of America's assistant vice president and commercial client manager.
Ex-Im has granted super delegated authority to Bank of America, which means the bank can loan up to $15 million to U.S. exporters and automatically receive loan guarantees without seeking Ex-Im approval. Vitale attributes their granted authority to Ex-Im's "faith in our underwriting."
Bank of America loaned MWI $2 million for foreign accounts receivable and inventory. Vitale noted that the financing package was not just a result of Ex-Im's guarantee: "Bank of America established this new relationship because of Jerry West and MWI's proven and projected ability to profitably deliver value-added products and services to clients."
SDDC's Lee is also confident of West's project. "We fully expect revenue participation to kick in during 2001," she says.
The Texas Mezzanine Fund was established in 1999 as a statewide multibank community development corporation by Guaranty Federal Bank, Washington Mutual, Inc. and Jefferson Heritage Bank. The fund originates loans to fast-growing small businesses that don't qualify for traditional bank loans.
"The fund is a vehicle to lend money to small businesses located in distressed areas and in turn retain and create jobs for low- and moderate-income people statewide," says Ken Dubuque, TMF board chairman and Guaranty Federal CEO.
The fund is managed by SDDC and leverages funds with community development financial institutions in Austin, Fort Worth, Houston and San Antonio and Tyler Development Corp. To date, the TMF has made 10 loans totaling $3.1 million, which has helped create or retain 107 jobs.
Dubuque points out that although the fund's goal is to meet the banks' commitment to communities they serve, the fund is not charity. "We are looking for businesses with a strong management track record and a history of making their debt payments," he says. "We plan to do more of these deals. Ultimately we want the fund to be self-sustaining."
Crucial to becoming self-sustaining is raising the fund's capitalization from its current $7.5 million to its long-term goal of $25 million. This will require participation of additional banks. "We think this is just the tip of the iceberg," Dubuque says. "That's why we are getting ready to kick off another capital call."
e-Perspectives, Volume 1, Issue 1, 2001