Does the MDC require Loan Credit Default Swaps for all their incentees?
def. Loan Credit Default Swap (from Investopedia.com)
A type of credit derivative in which the credit exposure of an underlying loan is swapped between two parties.
The latest story on Trace Engines in the MRT has lots of good information that has not previously been reported, including a PDF of the contract amendment.
When the "letter of credit" was mentioned in previous news reports, the purpose of this instrument was vague, and confusing, since my experience with "letter of credit" instruments follows the traditional definition:
A letter from a bank guaranteeing that a buyer's payment to a seller will be received on time and for the correct amount. In the event that the buyer is unable to make payment on the purchase, the bank will be required to cover the full or remaining amount of the purchase.
When I read the following quote describing the purpose of the "letter of credit" I was surprised:
"...the company's original $400,000 letter of credit was pared to $325,000 more than a year ago in recognition of the recession. "The letter of credit is like a check to MDC that we can cash at anytime if they fall below the job stipulations," he said."If they meet those through 2016, the letter of credit will disappear."
I guess using the more accurate "development contract default insurance" isn't proper ChamberSpeak (tm).
So, if I'm reading this right, in the beginning, the MDC made Trace purchase a "letter of credit" in the full amount of the forgivable development loan to insure the MDC against Trace defaulting on the development loan contract.
The MDC can call it a "letter of credit" but it is a hedge against the loan the MDC made to Trace Engines. In a parlance we are all to familiar with after the recent financial collapse, it is a credit default swap that is supposed to mitigate a risky borrower.
Which leaves me with these questions:
- if Trace was such a good investment, why did the MDC require default insurance?
- Has the MDC required default insurance on any other incentees?
- If the contract is going to be amended time and time again to prevent default, why go through the trouble of making an incentee buy a default insurance policy?
Here's one for Walsingham: What is the point of a Clawback when you don't even collect when there is "Clawback Insurance"?
0 TrackBacks
Listed below are links to blogs that reference this entry: Does the MDC require Loan Credit Default Swaps for all their incentees?.
TrackBack URL for this entry: http://www.jessicaswell.com/cgi-bin/mt/mt-tb.cgi/3038
11 Comments
From the article:
“Trace’s impact since November 2006 has been $26.5 million with direct and indirect salaries, taxable sales and equipment,” said MDC President Mike Hatley. “That is a sufficient foundation to foster a long standing collaboration between Trace and the city of Midland.”
I would love to see the numbers behind this and how they calculate it.
I hope this is not the start of development corporations using the line "investment in the community" to keep from having to use the clawback provision. We know with the extension of other deals there is more time for them to increase their investment in the community.
I guess if I was with the MDC I would do anything I could to save the deal. By enacting a clawback, it basically says the deal didn't work out. Doing it this way, they can call it a success.
My one question is how the council members are going to appreciate info from executive session being made public. Since they have already signed off on the deal, according to one MDC member, I guess they will not care.
You have to give credit to the local business community which invested in Trace and lobbied the MDC and council hard to be able to keep the money. I'm not sure how in this political climate anyone would stand for something which could be seen by some as corporate welfare, but the MDC and it appears the council will side that way. The local investors pushed hard for this decision and will get their way.
I guess I am not verse well in this kind of investment. But isn't having this insurance bond, whatever they want to call it, a good thing if it protects them from default?
Sure I'd rather they'd not be doing this at all but isn't it better to have this then not?
Confused,
nline
If you believe direct payments to corporations to locate in a community, or expand their opertions in a community, then there was still "error and fault" in the original Trace Engines deal, and the story alludes to that with quotes from previous MDC board members who admit the "expectations were too high."
Obviously, the original investors were snowed by the PR pitch from the previous owners about how close the engine was to manufacturing approval and how many jobs would be created once that approval was obtained. They in turn sold the MDC and the State of Texas on a deal based on an grossly optomistic sales pitch.
Well, the State of Texas has cancelled the 2nd part of the development payment and clawed back part of the original payment to Trace, yet the MDC is working hard to salvage anything of this deal. Based on what the State did, my perception is the MDC is bending over backwards for the incentee and is not working in the interests of the community and taxpayers.
As the story says, this is a balancing act, but I think the MDC should have taken their lumps like the State and pulled out of the rest of their contract with some nominal penalty for Trace. That action would have been principled, in the end it wouldn't cost the taxpayers any more, and it gets the MDC out of Trace's business. All this negotiating looks like a desperate move to have a "success" at any cost.
As for have some kind of interest to protect the taxpayers from the default of an incentee, it isn't that it is not prudent in normal business transactions, but why require it when you have no intention of collecting on the bond in the case of a material default?
Is Trace's business/property even in the city limits, i.e. contributing to the city's tax base?
I hope that the businessmen on the Council can address this question: If Trace is worth the $325,000 the city appears willing to give to it (with no real clawback provision), why don't any of them contribute their own money to the group and get the taxpayers off the hook? Of course we exclude Sparks who is part of the investment group.
There would be nothing more satisfying for many Midlanders than to see Trace succeed without public dollars.
Just what the doctor ordered, thkanity you!
B3PlSY xtxgofpshvhh
oF0SjG ftsmhbgtefck
That's an easy one. A "Clawback Provision" is strictly a talking point to use against Midland Haters, Aginners, and Rubes generally who might have the temerity to ask the question, "What if this risky deal doesn't work out?"
It is offered up as a protection for the taxpayers with a straight face and a most sincere hope that it isn't seen for the total bulls*** answer that it is.