New loan program targets governments, nonprofits waiting on federal

New Orleans CityBusiness, Jan 20, 2007 by Thomas Leggett

Cash-strapped governments and nonprofits still awaiting FEMA money can now benefit from a new lending program created by two New Orleans firms.

In December, the Louisiana Public Facilities Authority authorized investment firm Hattier, Sanford & Reynoir LLP to loan up to $500 million to political subdivisions and $250 million for nonprofits with Cypress Capital acting as an advisory firm.

Governmental entities and nonprofits waiting for the Federal Emergency Management Agency to repay 2005 hurricane expenses are eligible for the loans.

"Our program will provide participating municipalities and nonprofit businesses immediate funding for rebuilding projects," said Mark Tessier, executive vice president for Hattier, Sanford & Reynoir.

The Louisiana Bond Commission approved the issue of grant application notes, which are similar to municipal bonds.

"To put it simply, GANs are revenue bonds issued on the likelihood that a federal grant will be repaid," said Bob Phelps, Cypress Capital managing director.

Phelps said each applicant must complete a FEMA-approved project worksheet. Nonprofits are separated from political subdivisions because FEMA has different eligibility rules for each group, he said.

The need for such lending has arisen because of the lengthy FEMA reimbursement process and because some municipalities and nonprofits lack the cash flow to start projects slated for reimbursement.

"This is a way to prime the pump for area municipalities and nonprofits," Tessier said. "If they've qualified for FEMA's reimbursement package, we can provide them with the cash to begin the project and get the ball rolling."

Some area governments and nonprofits drained their emergency funds in the first months following the hurricanes and now lack the cash flow to pay contractors to begin FEMA-approved projects.

"We're waiting on more than $5 million in FEMA reimbursements," said Duke McConnell, Kenner's finance director. "The slow federal process puts pressure on the vendors who are working with us."

According to McConnell, FEMA advanced Kenner $5 million in September 2005, mostly to fund payroll and projects such as cleaning drainage basins. All funding since then has come on a reimbursement basis, he said.

"We've heard of the new GAN program and will consider it if we need it," McConnell said. "It looks like a smart program but we hope to fund our projects without incurring any additional interest if possible."

Tessier said interest on the GANs will follow the A-rated bond market with yields of around 3 percent.

The first GAN could be issued in late February, Tessier said. He and other investment bankers met with New Orleans officials Jan. 10 to discuss the city's potential participation.

"We think New Orleans could really benefit from this program," Tessier said. "We're speaking with city officials and are hoping they will continue to move toward participation."

New Orleans officials stopped short of confirming involvement.

"Our finance department is working on this issue and will not be able to furnish information until after they finish the process," said Terry Davis, spokesman for Mayor C. Ray Nagin.

GANs aren't the only loan opportunity extended to fiscally- challenged New Orleans. In late 2005, Chase Bank offered a $50- million line of credit to the city but Nagin chose not to incur additional debt while the city bond rating is so low.

According to Melissa Flournoy, president and CEO of the Louisiana Association of Nonprofit Organizations, the new program is a positive step in securing funds but interest rates could lower usage.

"This program could definitely help the larger nonprofits who are eligible for FEMA reimbursements," Flournoy said. "We support any program that benefits area nonprofits but we're still hoping for the zero percent loans and grants promised by the Louisiana Recovery Authority program."

Flournoy said the GANs are "the equivalent of an interest- bearing bridge loan." There is no federal program to help smaller nonprofits.

"Most nonprofits have received no FEMA funds at all," Flournoy said. "Virtually all of the area's nonprofits have cash flow problems and a program like this may be helpful to larger ones that are eligible for FEMA reimbursements."

Investment firms involved in the new GAN program want FEMA to cover interest costs for sub-grantees.

"So far, FEMA has said entities are not authorized for interest reimbursement," Tessier said. "We believe FEMA should cover these costs and its refusal to do so is creating some spirited debate."

FEMA has allocated more than $2 billion to political subdivisions affected by hurricanes Katrina and Rita with roughly 20,000 applications pending for reimbursements.

"GANs are not a new idea," Tessier said. "What's new for us is issuing these notes for hurricane recovery projects approved by FEMA."