L.A. Economy Project: Financial Innovations for Capital Access
DescriptionThis lab brought together business leaders, bankers, community organizers and researchers to act on the capital-access recommendations presented in the Milken Institute's Los Angeles Economy Project report. It was one of several meetings of L.A. leaders prompted by the release of the project's report in December 2005.
"These meetings," said Los Angeles City Council President Eric Garcetti, "act as a bridge between research and legislation and action...with the goal of increased participation in the Los Angeles economy."
Key speakers at this lab included Kirsten Snow Spalding of the California Pollution Control Financing Authority, who talked about the California Capital Access Program (CalCAP); Ian Cudlipp of Four Corners Capital Management, who discussed collateralized loan obligations; and Shari Berenbach of the Calvert Foundation, who presented information on community investment notes.
Several recommendations and action items emerged from the meeting:
Use L.A. partners to increase California Capital Access Program activity in Los Angeles.
This program would operate within CalCAP, and would bolster CalCAP loans to L.A.-based businesses. In the state program, the lender and borrower generally each pay 2 percent of the loan amount into a loan loss reserve, and the state contributes a 4 percent match. This 8 percent reserve mitigates the lender's risk. CalCAP has a provision for an independent contributor to create incentives by helping to cover the borrower's or lender's costs. In an L.A.-focused program, the independent contractor could be the City of Los Angeles or a local foundation. In addition to, or in lieu of, offsetting the borrower's or lender's contribution to the loan loss reserve, the contributor might also help pay the lender's cost of marketing and loan origination, increasing outreach and usage of the program. The program could be sector- or neighborhood-specific, and would make use of existing infrastructure.
Next Steps: Gain mayoral and City Council support; secure an independent contributor.
Develop an L.A. Community Investment Note
The Calvert Community Foundation can help structure an L.A.-targeted Community Investment Note, to be marketed to local institutions and investors. Notes would likely be at least $5,000 (though could be as little as $1,000), with a flexible interest rate to be chosen by the investor (generally between 0 percent and 3 percent) and term between one and 10 years. Funds raised by the notes would be invested in local community development financial institutions. Local foundations and philanthropists could credit-enhance the loan pool to help mitigate the risk as well as help support the cost of marketing and originating loans, and due diligence and placement of proceeds. In addition to small-business lending, funds could be used for affordable housing and community development. Calvert has created similar customized note programs, including a geographically focused effort for the Gulf Coast in the wake of Hurricane Katrina.
Next Steps: Identify lenders, philanthropic organizations, individuals and government agencies who might contribute to the cost and management of the program; explore structuring options with the Calvert Foundation.
Develop an L.A.-focused Small-Business Collateralized Loan Obligation
Collateralized loan obligations (CLOs) can increase lending activity by purchasing loans and offering lenders liquidity. If the loans are packaged and credit-enhanced with a layer of equity (perhaps from a local foundation) or insurance wrap, the resulting security could be rated and prove attractive to institutional investors (e.g. LACERS, CalPERS) or banks seeking CRA credit. Currently some small-business loans are securitized, but an L.A.-focused CLO would pool many more local small-business loans. A diversity of industries and types of loans could be included. The servicing of the loans could be maintained by the original lender or passed to the purchaser. Philanthropic support could help cover the marketing costs.
Next Steps: Identify pools of potential loans to be included; identify potential philanthropic and government partners.
For more information about the Los Angeles Economy Project, visit www.laeconomyproject.com.