Wells Fargo makes an innovative social finance loan to Craft3

By: - Sep 22, 2014

Wells Fargo Community Lending and Investment has closed an innovative social finance loan with Craft3, a CDFI serving Oregon and Washington. The $31.5 million loan is structured as a syndication in order to attract other banks and mission-based investors.

The concept for this facility began after Craft3 was awarded $9.2 million by the State of Washington as part of the State Small Business Credit Initiative (SSBCI) with the U.S. Department of Treasury. Craft3 elected to downstream these grant funds to a for-profit subsidiary, Craft3 Capital Corporation, as it offered greater capacity to leverage these important resources. The sole initial activity of the new company is to provide commercial loans to small businesses in Washington affected by the recent recession, to advance economic growth and job creation and retention across the State. Craft3 contributed $2.2 million as additional equity, bringing total equity investment to $11.4 million. Craft3 also provided a $10 million intercompany loan to Craft3 Capital Corporation, bringing total assets to $21.4 million. These assets are fully deployed to loans for small businesses that could not qualify for bank finance, like JP Francis, a mechanical contracting company in Seattle, Wash.

“Small businesses account for about 40 percent of private sector employment, yet credit still remains tight for small business owners years after the financial crisis. This innovative public-private partnership has delivered high private leverage on an initial investment of federal and state funds to help ensure financing is available for qualified businesses to expand and create jobs,” said Washington Department of Commerce Director Brian Bonlender.

“The partnership between Washington State Department of Commerce and Craft3 has used $9.2 million in funds from the U.S. Treasury Department’s State Small Business Credit Initiative to leverage $31.5 million in private lending, which will provide more resources to Washington’s small businesses. SSBCI allows each state to design its own small business support programs to help businesses grow and create jobs, and that is what Washington State has done remarkably well with the $19.7 million in total SSBCI funds that they have received to date,” said Cliff Kellogg, Director of the State Small Business Credit Initiative. “The SSBCI program is spurring new private sector lending and investments in small and new companies by leveraging private capital along with the federal support offered by the program.”

To further leverage SSBCI resources, Craft3 approached Wells Fargo for a syndicated facility of up to $35 million to complete capitalization of Craft3 Capital Corporation. Craft3 stressed the importance of structuring a deal that made strong business sense to Wells Fargo, regardless of its eligibility for credit under the Community Reinvestment Act. Craft3 saw benefit in working with one lead bank, which would allow for one loan agreement and coordinated administration of a multi-lender group. Wells Fargo responded with its interest in underwriting and leading such a facility and anchored the transaction with a $10 million commitment. For its part, Craft3 pledged to subordinate its $10 million intercompany loan to Craft3 to facilitate the proposed relationship.

Lesley Eckstein, EVP of Wells Fargo Community Lending and Investment said “When Craft3 came to Wells Fargo as a community development partner seeking to negotiate a complex, market-rate facility we realized the opportunity not only to provide capital to fund high-impact loans through a long-time trusted client and partner, but to be part of a new model for social finance that could open up additional capital for next generation community development financial institutions.”

Craft3 Capital Corporation and Wells Fargo have executed a $31.5 million loan agreement that includes the following terms:

  • Rate: Floating Daily LIBOR plus 350 basis points (3.75% today).
  • Maturity: 3-year draw down period; 5-year amortization schedule; due in full after 6 years.
  • Collateral: All loans receivable held by Craft3 Capital Corporation along with right of offset on deposits.
  • Major Covenants: In addition to standard requirements on leverage, profitability and liquidity, the facility: 
    • Prohibits loans to start-up enterprises;
    • Limits subordinated loans in the portfolio; and
    • Precludes the exit of Craft3 subordinate debt or payment of dividends.
  • Syndication: Wells Fargo acted as lead administrative agent for the facility that includes the F. B. Heron Foundation, Morgan Stanley, Calvert Foundation, Living Cities and Opportunity Finance Network.

John Berdes, President & CEO of Craft3 stated “This facility is, by far, the largest loan and single source of capital Craft3 has negotiated in its 20 year history. It fulfills on our promise to the State of Washington that we would significantly leverage their SSBCI resources to increase investment in small businesses to support job creation and retention and economic opportunity across the State. It also represents a new model for capitalization within the maturing field of community development finance, now one generation old. This facility was negotiated as a business transaction that is not driven by Community Reinvestment Act requirements or philanthropy. The multi-lender deal also validates that Craft3 has a viable business strategy and is a mature social enterprise built on a foundation of deep commitment to mission and a strong credit and risk management practice.”

The facility includes several innovations which offer a new model for capitalizing community development finance that can be replicated to increase mission outcomes across the country.

  1. Market Rate: The floating interest rate is not subsidized by Wells Fargo or other parties. This is a market rate facility that is attractive in the capital markets and enables mission outcomes.
  2. Loan Loss Reserves: Most similar efforts have been structured with a cash-funded first-loss reserve. The Wells Fargo facility was underwritten to provide for a typical CDFI Allowance for Loan Loss Reserve (minimum 6% ALLR), expensed by Craft3 Capital Corporation and reflected as such on the balance sheet. No cash is set aside to absorb first losses. As a result, capital efficiency is enhanced by putting more available cash to use in funding loans receivable.
  3. Enhancement: In addition to its equity ($11.4 million) and subordinate debt ($10 million), Craft3 committed to additional equity investment not to exceed $2 million in the event of certain covenant defaults. No further access to the assets of the parent Craft3 was required by Wells Fargo.
  4. Collateral: Since Craft3’s $60 million of loans payable are all unsecured it could not satisfy traditional collateralization requirements. Creating an off-balance sheet entity enabled Craft3 Capital Corporation to offer reasonable business terms and collateral that any prudent lender would require.
  5. Hybrid Facility: The business terms attached to the syndication attracted bank, foundation, and other mission-related investors to a shared efficient platform. Particularly notable in a syndicate with diverse membership is the pari passu basis which provides equal seniority for all members. This approach offers the promise of new and powerful combinations of mission-related investment available to grow the volume of community development finance.

As the first syndicate member to make a commitment to the facility after Wells Fargo, Clara Miller, President of the F.B. Heron Foundation said “Heron has partnered with Craft3 for a number of years and continues to be impressed by their leadership, innovation and strong track record for leveraging and deploying capital in ways that maximize mission outcomes in their region. Heron hopes Craft3 will set the new industry standard for a diversified CDFI business model, reaching new, currently underserved, customers and further leveraging capital to create more impact in low-income communities across America.”


Wells Fargo
Jen Hibbard, VP Communications Consultant
(415) 396-4609, jen.hibbard@wellsfargo.com

Jennifer Janda, Marketing Manager
(503) 325-4476, Ext. 105, jjanda@craft3.org 

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