Recession Recovery and Beyond
Study Committee Meeting
Duval County February 2, 2011
Clanzenetta “Mickee” Brown JCCI Study Planner mickee@jcci.org
In attendance: Meeting Attendees: Elaine Brown (Chair), Guy Anderson, Sarah Boren, Lee Brown, Cathy Chambers, Jeane Chappell, Ashley Collins, Jim Crooks, Logan Cross, Mick Cuthbertson, Lad Daniels, Janice Donaldson, Jeff Evans, Marilyn Feldstein, Bruce Ferguson, Bill Gassett, Andre Higgins, David Johnson, Kellie Jo Kilberg, Les Krieger, Bill Larson, Conrad Markle, Alex McCoy, Colleen McFarlane, Julie McNeil, Frank Pearce, Noelle Perry, Mary Randall,Granville Reed, Clive Ricketts, Kathy Sandusky, Michelle Tappouni, Deborah Thompson, Melvin Usery, and Joe Whitaker, [If your name does not appear, but you were in attendance, please let us know.] Staff Members: Mickee Brown, Skip Cramer, Steve Rankin and Demetrius Jenkins Meeting Time: Noon – 1:30 PM Chair, Elaine Brown welcomed the study committee and thanked everyone for their participation. The committee received the January 26th meeting summary and group process check results. The committee also approved the January 19th meeting summary. The chair introduced the day’s speakers, Adam Hollingsworth, Chief of staff for Mayor John Peyton and Governor Rick Scott Transition Team member, and Peter Kantor, Senior Vice President, SunTrust Bank. Peter Kantor Presentation 1. Describe the lending process for small and large businesses and whether or not this has Speaker changed over the past 3-5 years? Questions 2. This committee has consistently heard about the lack of access to capital for small businesses (start-up and expansion). What is the industry’s response to this issue Are there barriers to accessing capital that can be removed or mitigated by either the lender or the borrower? 3. What are the non-traditional alternatives to uncollateralized bank financing for businesses? Describe the pros and cons. 4. What are your thoughts on how we can best position ourselves as a region for job retention, growth, and economic competitiveness?
Peter Kantor provided written responses to the questions above, please review that document at http://jccirecoverystudy.blogspot.com/p/meeting-handouts.html. There is more optimism today that there was a year ago due to improvements in the economy. It is difficult to use the period from 2005-2007 as a benchmark because it was such an unusual period of growth. The lending process has not changed dramatically in the past 3-5 years, but fewer exceptions are being made. There has also been a return to basic lending practices using more traditional valuations. Banks are exercising more due diligence, not just accepting balance sheets on face value and credit underwriting has returned to pre-2005 criteria for lending. The depth and type of capital available has changed dramatically. Debt capital was readily available in the past due to the new nontraditional sources of debt that became readily available. The securitized lending market exploded (Commercial Mortgage Backed Securities, Collateralized Debt Obligations, etc) as did the oversupply of available debt for residential and commercial lending. The glut of capital pushed down the price of borrowing, finance companies sprung up side-by-side with banks, and private equity became more abundant. The run-up in
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real estate prices pushed valuations up artificially. Then there was the “deleveraging” of the entire market, which wiped out large segments of capital in the collateral securities market (CBS market). In the summer of 2007 the fracture caused a $234 billion market to drop to $11 billion overnight. Last year the value was $16 billion. This year expect only $35 billion. Deleveraging also resulted in fewer lenders and less capital. Community banks with their smaller capital basis, narrower geographic coverage area, and small business focus have been the hardest hit. These smaller, local banks are struggling and are not lending like before the void that community banks and non-traditional lenders left cannot be filled by national banks. Access to capital is a challenge for small businesses with revenues less than $5 million and banks are not financing start-ups. Entrepreneurs traditionally use other sources of capital to start their businesses – credit cards, savings, family, etc. Because of the credit crunch, those entrepreneur sources and bank funding are scarce. o The SBA 7(a) loan program is an excellent program for small businesses. The program bridges the gap between debt and equity. The lending cap was lifted from $2 million to $5 million and the SBA gives 90 percent loan guarantee. Many banks are expanding their internal capacity to handle SBA loans, including Sun Trust. [Staff note: The 7(a) Loan Program includes financial help for businesses with special requirements. For example, funds are available for loans to businesses that handle exports to foreign countries, businesses that operate in rural areas, and for other very specific purposes. More information is available at http://bit.ly/eTyjr5 .] o In the last 18 months SunTrust approved $154 million in 7(a) loans. During the 1st QTR of 2010-2011 beginning October 1st, $113 million in loans have been approved. o The 7(a) loans make up about 25 percent of all new loans at SunTrust (under $5M), but not enough people know about the program. An increased level of activity is also being seen among SunTrust’s higher worth clients. We started seeing better overall bottomline improvement in 2009 and in 2010 we could see top line improvements as well. o SunTrust doubled the number of loans made in the second half of last year over the first half. We are optimistic, but there are still capital access issues, especially for small businesses. Only the strongest companies can qualify for uncollateralized loans, but those with collateral have options like factoring and sale/leaseback funding. The issue is institutional risk – private equity and bank debt are very different. Positioning Northeast Florida for jobs and growth requires the following. o Competitive incentives o Port upgrades to become post-Panama ready which will bring direct and indirect jobs o Improve the education system as it is the foundation of economic prosperity and companies want a qualified workforce
Adam Hollingsworth Presentation
2434 Atlantic Boulevard
Jacksonville, Florida 32207 904-396-3052 Fax: 904-398-1469
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Page 3 of 5 1. What is Governor Rick Scott’s approach to job creation and economic development? Speaker What must happen in Northeast Florida to compete successfully given this new Questions administration’s economic focus? 2. What are the jobs of the future for Floridians? Will Governor Scott and his team take their cues from Enterprise Florida’s targeted industries list or elsewhere? 3. What are our strengths and weaknesses when it comes to making regionally significant economic and political decisions? 4. What are your thoughts on how we can best position ourselves as a region for job retention, growth, and economic competitiveness?
The axis of unemployment is regulation, taxation, and litigation. o Florida has the 41st worse regulatory environment in nation, but it is difficult to find the offending regulations because the problem is failed processes and/or the absence of any process for decision making. For example the Broward natural gas pipeline, which would support cheaper energy costs for state, was approved by all of the appropriate agencies including EPA and DEP. The hold up came because the cabinet would not place the item on the agenda for approval. Thus, four people effectively held up a process that should have been easily approved. This creates uncertainty in the market. Governor Scott is surrounding himself with people who understand that government cannot operate in this manner. o Taxes are fairly low in Florida, but some taxes are burdensome like the Corporate Income Tax. Changing the business taxation climate will draw new companies to the state. On a “business road show” of cities, the number one issue was the tax burden. o Florida is considered a “judicial hellhole”. Companies settle lawsuits because it is easier to anticipate these costs which function like a hidden tax. Governor Scott will take on reform of the civil justice system from the perspective of an executive who ran a $20 billion company. The Governor will also address the structure of the state’s economic development agencies. The existing structure is dysfunctional, noncompetitive, and duplicative. Right now Enterprise Florida (marketing and prospecting) and the Office of Tourism, Trade and Economic Development (incentives, policy, and compliance) compete against each other. Governor Scott wants to create a Department of Commerce, which houses an enhanced Enterprise Florida that takes over OTTED’s economic development function. In his meeting with 15 site selectors in south Florida the Governor heard that such a structural fix would help to attract business prospects. The targeted industries are general enough that they include almost every possible growth business. The Governor would rather let the market decide which businesses will thrive in Florida. If the business is successful and good for Florida, then the Governor will back that industry. Jacksonville is overly focused on job creation: Chasing jobs that pay $46,000 annually does not create wealth in the community. People who earn more can invest in their communities and support philanthropy. Greater emphasis is needed on bringing corporate headquarters to Jacksonville, which draws corporate wealth. Business and philanthropic decisions are made at the corporate level – not operational outposts. The relatively low-paying jobs that we attract also breed an electorate that cannot afford and will not support the extra one-half mil needed to support having a great community. We need to thoroughly stare down this issue. Palm Beach County’s millage rate is twice that of Jacksonville/Duval County and when the economic 2434 Atlantic Boulevard
Jacksonville, Florida 32207 904-396-3052 Fax: 904-398-1469
www.jcci.org
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development team market’s the community they (just like their NE FL counterparts) say that low taxes are an asset. Palm Beaches 17 percent millage rate will seem comparatively low if the goal is attracting jobs that pay $100,000 per year from communities outside Florida that are accustomed to paying a great deal more in taxes. Jacksonville has two priorities – port expansion and promoting its medical/bioscience industry. Jacksonville has more medical wealth than Orlando, but our industry is disaggregated and unbranded. Orlando has placed all of its medical industry in one location and branded it “Medical City.”
Question and answers with speakers Q. What are the asset lending prospects for small businesses? Kantor: The options are not as great as they once were, but options still exist. This area of business is surprisingly aggressive. Lending decisions rely heavily on the company’s management team and available collateral, but the underwriting guidelines are stringent. SunTrust like many other banks has an asset lending department. Q. What is the Governor’s commitment to the green industry? Hollingsworth: This is an area that is being discussed, but it is uncertain how to make the opportunities manifest. The prospect of reducing energy costs in Florida also prompts interest. Q. Is there more money available or is that money just more expensive to borrow? Kantor: More money is available - “the spigot is open” - however regional and national banks can not fill the void left by finance companies and community banks. If something is not done to bolster the local community banks, small businesses will suffer. The 7(a) loan fills a gap, but is not a replacement for bank lending. It is a specialized program with government guarantees. Q. Does the 7(a) program increase the federal debt? Kantor: The federal government guarantees the loans, but the banks lend the money. No money comes from the fed so the deficit is not affected. Q. Is it possible to put together a public, private partnership (P3) to fund port expansion? Hollingsworth: The two options are a major federal commitment or a private source. We are way behind the 8-ball in getting to action on this. The new CEO at JAXPORT, Paul Anderson knows how to make this work. Kantor: The private sector will require a revenue generating plan to recoup the investments made. Q. Who determines the Jacksonville brand? The Mayor? The government? The Health and Bioscience Council? Hollingsworth: We can do multiple things to capitalize on the community’s assets with regard to the port, health and biosciences, and other areas. In a chamber meeting with a brand professional we learned that companies want to locate their businesses in cities where the company brand matches the host city’s brand. Q. Will Governor Scott’s Department of Commerce includes a focus on small business? Hollingsworth: The Department of Commerce will be the job creation and retention engine for all businesses in Florida. Q. Which businesses are applying for and are the most likely to receive loans? Kantor: The majority of borrowers have been in the manufacturing, logistics, healthcare, and transportation industries. The work of the business does not drive the lending process. Right now we are seeing partner buyouts and businesses needing capital to increase inventory due to higher 2434 Atlantic Boulevard
Jacksonville, Florida 32207 904-396-3052 Fax: 904-398-1469
www.jcci.org
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demand. Q. What are the best headquarters for the region? Should we recruit Fortune 100’s or smaller? Hollingsworth: Web.com is an example of a small headquarters company that could have been located anywhere. These companies do not have to be a brand that everyone recognizes as long as it is where the corporate decisions are made. If we could become home to a dozen $50-100 million/per year companies that would be great. Group discussion comments The need for certainty has been a recurring theme since the beginning. The certainty of the government backing helped accelerate the 7(a) lending program. With proposed federal tax cuts, such programs could disappear along with much needed certainty. Government grants do not exist for small business start-up firms. There are a limited number of grants available for business research and technology innovation. Community banks are in trouble; this is not something that we had heard prior to today. Less emphasis today on attracting big companies with a lot of jobs, but smaller headquarters with high dollar jobs. Creating community wealth by attracting very high paying jobs is one way to approach the issues the region faces, but what about jobs for the poor. We heard that the governor may be ranking counties by levels of being pro-business, where on the depth chart will Northeast Florida fall? It is still not clear how much work is being done to retain companies and retain jobs. Is the goal taking jobs from other places (deplete the economy in one place to boost the economy here) or creating completely new jobs? We did not hear enough about the region, the focus was too Jacksonville oriented. There was no discussion on whether or not incentives are in place to stimulate job creation within small businesses. The chair reminded the committee to attend next week’s meeting and asked them to complete their group process check forms. The meeting was adjourned at 1:45 PM. ### Glossary of financial terms BS, MBS, CMBS, CMO, CDO, CBO, and CLO are subset of what are generally characterized as structured products. Below is what the acronyms stand for. MBS = Mortgage-Backed Securities, and the universe of MBS is vast, it is however reserved by market participants to denote the passthrough mortgage bonds (agency pass-through and nonagency pass-through). CMBS = Commercial Mortgage-Backed Securities, which are trust certificates (bonds) backed by a pool of commercial mortgage loans. The certificates are tranched on the basis of prepayment and credit. CMO = Collateralized Mortgage-backed Obligations, which are pool of pass-through mortgage bonds tranched to reflect the degree of sensitivity to prepayment (particularly, agency CMO). ABS = Asset Backed Securities, for example home equity loans (HEL), credit cards, etc. These are securities backed by receivables [payments] that are either secured (HEL) or unsecured (credit card), tranched on the basis of prepayment and default risks. CDO = Collateralized Debt Obligation, for example, ABS CDO which consist of a portfolio of different ABS bonds, and the payments to the holders of these trust certificates are derived from the cash flows of the ABS bonds. CBO = Collateralized Bond Obligation, for example high yield [emerging market] CBO which consist of a portfolio of different high yield [emerging market] bonds. CLO = Collateralized [leveraged] Loan Obligation which consist of a portfolio of different leveraged loans.
2434 Atlantic Boulevard
Jacksonville, Florida 32207 904-396-3052 Fax: 904-398-1469
www.jcci.org