In December 2017, a credit union based in Louisiana became the lead lender in a $112.6 million loan supporting the construction of a biorefinery in Storey County, NV. The loan, made by a consortium of credit unions and guaranteed through the Biorefinery, Renewable Chemical, and Biobased Product Manufacturing Assistance Program, was the largest ever made through the highly specialized USDA program.
Traditionally, financing for large projects — like this one headed by Ryze Renewables Reno, LLC, for the construction of a refinery that will convert distillers' corn oil from ethanol plants into renewable diesel — is secured through a bond process that includes both the guaranteed and non-guaranteed portion of the loan. This is an ill-fitting approach for secondary market investors that want to participate in one or the other exclusively.
In a traditional structure for a loan like Ryze’s, borrowers would be asked to pay steep upfront costs that could average $6 million to $10 million over the course of 15 months. Through the consortium of credit unions, however, Ryze paid a modest 1% of the loan amount in lieu of the costly upfront, monthly, and closing fees most large banks charge.
But the new loan structure isn’t just fair for borrowers, it’s equitable for lenders, too. They each take part of the non-guaranteed portion of the loan and split the premium from the guaranteed sale pro-rata.
CU Capital Market Solutions (CU CMS), a CUSO focused on developing services that benefit credit unions with low-income designations, had a key role in bringing together the Ryze loan’s lead lender, Jefferson Financial Federal Credit Union ($890.3M, Metairie, LA), and other credit union participants.
It all started with an article that ran on CreditUnions.com and in Callahan’s Credit Union Strategy & Performance publication three years ago. The article covered the commercial and merchant services offered by Greater Nevada Credit Union via a Q&A with Jeremy Gilpin, who is also the vice president of business services for the credit union.
Jefferson Financial, which is member of CU Capital Market Solutions, credits CU CMS with bringing together the credit union and Greater Commercial Lending. Although the credit union was familiar with USDA lending, taking the role of lead lender on a $112.6 million biorefinery loan was new ground. But thanks to the tutelage provided by Gilpin, the process was new but not overwhelming.
And according to Rosa, the loan provided a nice increase to not only the credit union’s loan portfolio but also its deposit base, as the borrower now also has $80 million spread over several accounts.
“Our credit union is helping rural communities by financing these types of USDA loans,” Rosa says. “But the icing on the cake is the fee income we received, which added generously to our net income and pushed our ROA up to 125 basis points at year-end 2017.”
USDA lending might have been relatively new to Jefferson Financial, but commercial lending was already an area of expertise. When a competing credit union left the commercial arena, Jefferson Financial snapped up its former head of commercial lending.
Only after the new department demonstrated its strength in commercial real estate lending and passed in-depth audits with flying colors did Jefferson Financial’s board of directors feel comfortable expanding into USDA loans.
We removed greed from the picture when credit unions got involved. - Jeremy Gilpin, EVP, Greater Commercial Lending
“Beginning eight months out, we started having weekly phone calls with the USDA, the borrower, our CUSO, and anyone else pertinent,” Gilpin says. “Three to four months out, we started weekly calls with all of the lending groups to keep them up to speed.”
The process, especially for a loan the size of the Ryze loan, can be intense. Before a credit union lender or CUSO even sees the loan, it must be independently credit rated, underwritten by a state-level USDA loan committee (and separately on a national level if it is more than $7.5 million), and independently underwritten by third-party packaging teams led by former USDA employees.
“By the time CU CMS presents it to a credit union, it’s already been underwritten a minimum of four times, and then our CUSO and each credit union underwrites it again,” Gilpin says. “This is why the average default rate on these is a low 3.2%, and our own default rate is zero.”
“Credit unions are leading the way here,” Gilpin says. “They are going back to the cooperative roots of why the industry was formed. Every piece of this is a collaboration, and we have a true public/private partnership that is creating jobs for our rural communities.”
Greater Commercial Lending is the largest lender in the nation in bioenergy and biochemical USDA lending as well as business and industry lending. With CU CMS, it has put together a strong consortium of credit unions to fund approximately 25 loans in six states.
Know the players. Visit lending partners, look at their operations and servicing, and interview their underwriters, advises Jeremy Gilpin, EVP of Greater Commercial Lending, the nation’s largest bioenergy and biochemical USDA lender. Ask for files and information so the credit union can complete its own underwriting. Don’t take anyone’s else’s word for it.
Use outside experts but understand the loan. Gilpin also suggests, generally, sticking with areas in which the credit union has in-depth education and experience. Collaborate with others when it isn’t cost effective to have a certain specialized expertise in-house.
Be cautious about staffing expectations. One person can’t bring in deals, underwrite the loans, and handle servicing, says Mark Rosa, CEO of Jefferson Financial FCU, the lead lender in a $112.6 million biorefinery loan. Jefferson Financial devotes five employees to its commercial lending and also relies on partner CUSOs.
Augment internal efforts through collaboration. Organic growth might be ideal for a credit union with an internal commercial department, but it can take time to build that, says Bill Mullally, senior managing director of CU CMS. An experienced commercial lender can analyze potential participations quickly and supplement internal efforts until internal growth gets the program to a sustainable level. Make sense of deposit data for individual branches, institutions, and entire markets. With BranchAnalyzer, the ability to make smart tweaks to your branching strategy is just a click away.