City and bank team to support growth of steel company.

In September 2005, the efforts of the City of Los Angeles, Comerica Bank, and Growth Capital Associates, Inc. culminated with Calko Steel, Inc. receiving an innovative financing package totaling nearly $4 million: $2.35 million in tax-exempt Empowerment Zone Bond (EZB) financing, $1 million from a Comerica line of credit, and $600,000 from the Los Angeles Industrial Development Authority (IDA). While the final transaction was highly responsive to the needs of this growing business, the financing required the focused team approach to overcome numerous challenges.

About Calko Steel

Calko Steel, established in 1997, is located in South Los Angeles, within the city's Empowerment Zone (EZ), which encompasses downtown, South L.A., and parts of Pacoima and Lake View Terrace in the San Fernando Valley. The federal government established EZs in response to the civil unrest of the early '90s to encourage businesses to locate and expand in these low- to moderate-income areas of the city.

Calko Steel manufactures and distributes a variety of metal and related supplies for building and architectural applications. It also manufactures tubing in diameters ranging from 1/2" to 2", gates, fencing, base plates, stairs and custom-built metal components. About 61 percent of Calko Steel's employees live in the EZ and current monthly revenues exceed $1 million.

Facilitating growth was the main reason the company sought financing. Calko wanted to expand its operation by purchasing equipment, a building and adjacent vacant land, and constructing a new building.

Getting Started

A little more than two years ago, Calko Steel learned about tax-exempt bond programs for private businesses at a seminar hosted by the City of Los Angeles Community Development Department and the IDA. Young Kwon, Calko's President and CEO, was a guest of Joanie Jones Kelly, Executive Director of the California Industrial Development Financing Advisory Commission (CIDFAC), who invited Kwon at the request of California State Assembly Member Merv Dymally. The seminar introduced low interest rate bond financing programs that can fund capital improvement projects for expansion, including Industrial Development Bonds (IDBs) and EZBs.

The idea appealed to Kwon, but at the time the business was not in a position to apply for financing. The Community Development Department and May Smith and the IDA took on the challenge of getting Calko to a place where EZB financing would be an option. Its experienced bond financing team, which includes a financial advisor, underwriter and bond counsel, began work with the company. Rick Arcaro, David Song, Brock Mullins, and April Park of Comerica, Dan Bronfman of Santa Monica-based Growth Capital Associates, and Clarence Espinosa of the City of Los Angeles Minority Business Opportunity Committee all played integral roles in steering Calko through the financing process.

Introductions

Growth Capital Associates played the "middle man" in the deal; it helps the city find companies that may benefit from available bond programs, qualifies them, and then identifies potential banks to provide the required letter of credit. Growth Capital also coordinates state approvals and the flow of deal documents.

After reviewing the Calko situation, Bronfman, Growth Capital's President, decided to contact Comerica to have its Middle Market team take a look at the deal. Arcaro, Vice President and Business Development Officer for Comerica's Middle Market Lending, who had previously worked with Bronfman on other bond projects, was contacted for initial study on the Calko transaction.

"In a competitive environment, Comerica tends to put together proposals that are very responsive to the needs of middle-market businesses," Bronfman said. "Statewide, Comerica is also one of the biggest players supporting bond issues."

Overcoming Challenges

For EZBs or IDBs to be viable, a lender must be in the mix to provide a letter of credit that guarantees the funds. The investors who purchase the bonds are not as interested in the company using the proceeds as in the credit of the bank that's providing the underlying support.

At the time that Calko began looking into funding itself through the use of bonds, Comerica was not in a position to provide that support, due to weaknesses in the company's record keeping and other administrative practices. Comerica decided to "walk the talk" with respect to its relationship banking philosophy by helping the company get into a position to be financed. With Kwon being a first-generation Korean-American and not thoroughly fluent in English, Korean native Song was brought into the picture to review the transaction.

"After meeting with Mr. Kwon, we were really impressed with how hard-working he was, and how well he treated his employees, like family," said Song, Vice President and Relationship Manager for Comerica's Middle Market Lending. "He was also very cooperative right from the beginning, which motivated us to work with the company. We decided to split the project into two phases, rather than trying to tackle the whole thing at once."

Getting Calko's books and records in shape, along with its inventory control system, was job one. Comerica suggested bolstering in-house accounting capabilities and recommended a new outside CPA. Calko showed trust in Comerica by acting on both those recommendations, and is now working with a CPA firm that is able to provide a wider spectrum of services.

Moving Forward

After several months of hard work and effort by Calko to comply with the conditions placed on it by Comerica, the bank conducted a full audit, which showed evidence of much-improved systems and reliable reporting, allowing it to issue a commitment letter. Working with the city, it took several more months to finalize the bond documentation and actually close the deal.

"The underwriting standards to issue a letter of credit are the same as any typical lending transaction," said Arcaro. "The process is a bit different, and it usually takes longer with more partners involved. However, in the end with low interest bond financing you can improve your cashflow over conventional financing, while at the same time expand your business."

Kwon is very happy with the outcome. While the bond financing was the initial motive, Kwon says that the process to achieve that has made his company much more efficient and transparent, allowing him to be on top of things; he admits that he really was uncertain of some of the numbers before the process began. Kwon is thankful to Comerica for being patient with him during the process and giving him the guidance necessary to strengthen the company's operations and control system. He is also very pleased with the new CPA firm, C & Y Accountants.

Once the new machinery is up and running next year, Calko's revenues should be nearly double what they were only a year ago. The company plans to hire 14 new employees within the next two years to help make that happen. From Comerica Bank's point of view, whereas Calko presented a challenge at first, it is now considered a solid relationship for the bank with significant growth potential.

Calko is currently looking to start the process for the second phase of the project ($4 million to buy the adjacent vacant land and construct a warehouse/facility). Comerica has already provided a letter of intent for this phase. Based on the current trends and the new capacity that will come on board next year, Comerica expects that Calko will meet the bank's requirements for the second phase.

"While the whole process was time consuming and at times frustrating, it was a very satisfying experience," Kwon said. "I think Comerica showed what relationship banking is all about."

EZB & IDB Information

There's a lot to learn about the EZB and IDB funding programs. Here's a brief primer:

* EZBs can fund a wide variety of projects located in the EZ; IDBs are specifically for manufacturing and processing companies.

* Funds can only be used for land acquisition, building construction or renovation, and/or purchase of new equipment or machinery.

* EZB funding is available up to $30 million; IDBs are limited to $10 million.

The interest rates associated with bond financing are lower than those for "standard" loans. Financing through bonds usually reduces borrowing costs by about 20 to 30 percent annually.

* Bond financing isn't for startups. Due to credit underwriting requirements, the typical qualifying company has been in existence at least three years and has annual sales of at least $5 million, a positive earnings history, and the ability to repay the bonds from existing cash flow.

* Companies must meet certain state and federal requirements to qualify for tax-exempt status. For example, the project must provide tangible benefits to the community.

* The typical financing terms for IDBs are 5 or 7 years (for equipment) and up to 25 years for publicly sold bonds and up to 15 years for privately sold bonds (for real property and facilities).

Information for this article was provided by Comerica Bank. Rick Arcaro of Comerica Bank can be reached at 213-486-6239, or via [e-mail]. Dan Bronfman of Growth Capital Associates can be reached at 310-581-8888, or via [e-mail]. Clarence Espinosa of the Los Angeles Minority Business Opportunity Committee can be reached at 213-978-0786, or via [e-mail].