‘CDA at high risk of meeting reserved account requirement’

Based on financial records and standing of the Commonwealth Development Authority, there is a high risk that it could not maintain the reserved loan requirement in the event the U.S. Treasury approves CDA’s loan for the State Small Business Credit Initiative program with the federal government, according to Marianas Public Land Trust officials Friday.

MPLT executive director Bruce MacMillan and legal counsel Robert Torres gave this sobering financial assessment on CDA’s financial capability to fulfill this obligation in their report to the board.

Saipan Tribune learned that CDA initially applied for a $130-million loan for the SBCIP with the U.S. Treasury, but the loan was rejected due some credibility issues. The federal agency, however, indicated that CDA can re-apply with justification that it can fulfill its obligation. MPLT’s engagement in the program is to assure the U.S. Treasury, which administers the program, that if CDA will not be able to see the program through, then MPLT’s standby line of credit will ensure that the project will proceed as scheduled and it will guarantee whatever losses the project will incur during the five-year window.

As of Friday, U.S. Treasury has yet to decide on CDA’s re-application.

According to MPLT chair Alvaro Santos, if CDA’s re-application does not push through, this will render moot the credit line that will be provided by MPLT. However, in the event it gets federal approval, requirements and conditions will be set in place for CDA to ensure the security of the standby line of credit.

MacMillan explained that for every dollar of loan guaranty that CDA makes on a bank loan, CDA is required to set aside 25 percent of that guaranty in a cash reserve account.

For the $8.4 million needed in the reserved account, CDA is projected to meet this requirement through the following sources of funds: asset liquidation ($3.1 million); principal collections ($2.5 million); interest earned ($3.3 million); property leases ($590,000); and other inflows such as dividends ($1.3 million). The projected income totals $10.9 million.

MacMillan, however, noted that if CDA will get its operational budget of $5.2 million from these funds, this will result in projected available funds of only $5.7 million that can be put in the reserve account. This is $2.7 million short of the $8.4 million needed for reserve account.

“This analysis demonstrates the risks of the SSBIC program as it relates to MPLT. It is likely that there will be calls made upon the standby letter of credit, which would likely not be repaid within the terms of our understanding of 160 days,” said MacMillan in his presentation.

He cited that among the high-risk concerns is CDA’s inability to sell foreclosed properties in a timely manner at projected values; its inability to receive from the Commonwealth Utilities Corp. the preferred stock dividends during the projection period; and actual loan losses occurring at an unmanageable rate such as 10 percent or above.

According to Torres, MPLT’s biggest challenge with CDA is collateral and the adequacy of security.