SBIC Funds – Mastering the Leverage Draw Process

Mary Brown Sands: Welcome everyone. I'm Mary Brown Sands, head of marketing and Communications for the Small Business Investor Alliance, the leading Association for small Private Equity and credit funds and investors. SBIA works on behalf of its members as an advocate for public policies that promote competitive markets and robust domestic investment for growing small businesses. SBIA not only delivers a valuable policy voice in Washington for our members. It also offers connection to an exclusive program of partner level, networking deal, sourcing and market update opportunities through highly curated regional events and private equity conferences critical policy and regulatory updates access for general partners and limited partners to fundraising, deal-making and investing that's focused on small business investors and access to the policymakers whose decisions impact how you manage your fund and your investing strategies.

SBIA is pleased to continue our 2024, lunch and learn Webinar series with today's session on mastering the leverage, draw process. Operational best practices where experienced professionals from CSC. Will take us through a primer on the leverage draw process for SBIC funds. Whether you're new to the leverage process or just want a refresher. This session will provide step-by-step guidance to give you the practical knowledge you need before we get started. I'll mention a few housekeeping items in your Zoom Menu bar at the bottom of your screen. Please find the Q&A feature. If you have questions during the webinar, please submit them here also. Please use this feature to let us know if you're having any technical issues. Today's technical director, Taylor Thornton will reply with suggestions please note that this session is off the record comments, statements, and materials are not to be published or recorded without approval by SBIA and the professionals at CSC.

Since 2020 SBIA has produced 28 educational webinars providing valuable content for our members and industry colleagues. However, we could not provide these high level and cost-free opportunities without the collaboration of our exceptional sponsors. Today's session is made possible by the support of longtime SBIA. Sponsored CSC. CSC is a leading global provider of fund administration and compliance solutions with over 20 years of experience serving Svic funds, an industry-leading technology platform and a high touch service approach CSC empowers firms to confidently meet complex reporting requirements.

It's my pleasure today to welcome Delphine Jones, David Garcia, and John Foster from CSC. To lead today's discussion. Delphine is the managing director of Fund solutions at CSC. She is a CPA. With over 25 years of experience working on registered and private funds with a focus on SBICs for the past 10 years.

David is a director of client solutions for CSC. He is a CPA. With over 25 years of experience working on registered and private funds, and he has focused on SBICs for the last 7 years. Also a CPA and a director of client solutions for CSC. John has over 30 years of experience working on registered and private funds, and he has focused on SBICs for the last 2 years.

Delphine, it's my pleasure to turn the program over to you to get us started.

Delphine Jones: Thank you so much. And good afternoon, everyone, and welcome to this afternoon's web webinar, where we're gonna focus on mastering the leverage draw process.

What we're going to discuss this afternoon is going to be focused on an overview of the leverage draw process. Then we're going to go into what we consider to be the starting point for the process, which is the commitment application. Then we'll speak to the leverage. Draw, and last, but not least, we'll discuss how leverage is repaid at the very end of the webinar. We'll open up some time for questions and answers with that. Why don't we jump right into the program. And, John, why don't you please walk us through an overview of the leverage draw process.

John Foster: Oh, thank you, Delphine. With the SBA. There's usually one more step in the process than you think. There's going to be. So. Step one is in getting licensed and receiving a licensing letter which will tell you the maximum amount of leverage that you will eventually be able to take. This is not, however, a commitment by the SBA to loan you that amount of money. For that you need to go to step 2. So step 2 is formally requesting a commitment from the SBA by submitting a commitment request package. The SBA will respond with a letter telling you how much they will commit to lending to the SBIC over the next 4 plus years.

Getting this letter is great, but it still isn't enough for the SBA to start providing leverage proceeds. Step 3 is that the SBIC now must request approval for a specific dollar amount, that it will be drawing from the SBA. There is a leverage. Draw package, which is completely separate from the commitment package that has to be prepared and submitted. The SBA will then respond with a letter telling you what has been approved for you to draw down.

Now you finally get to step 4 and step 4 is submitting a request to actually get the cash dispersed to you. So today we'll focus on steps 2, 3, and 4, that is, after getting a license. What's involved with requesting a commitment and what is involved with a leverage, draw package. And then how do you actually get the cash disbursement? And at the end we'll also talk about considerations when it comes time to pay back the debentures.

Delphine Jones: Thank you, John. And one of the things I also wanted to mention was that the discussion today is going to be focused on the traditional debenture program and not on the accrual or the reinvestor program. So big. Debenture.

Alright, David, why don't you walk us through the start of the process with the commitment process.

David Garcia: Thanks, Delphine.

So now you're at the commitment process. You're starting to prepare the commitment package in the commitment package. One of the initial requests is how much of a commitment you're going to request? I'm gonna get into regulatory capital. But I'll discuss that later on this presentation.

Let's say you're requesting 1 1 times your regulatory capital. which, if it's a 50 million dollar fund, it's 50 million dollars initially on the commitment package. With this you have, in addition to that, the attachments are 13 to 14 different types of certifications. For example. any, do you have any material adverse change to the financial condition of the license since the filing.

Have you filed the most recent capital certificate? And you're saying you're testing that it's accurate and so forth. Now not every certification might be applicable to when you're applying for the commitment package. So I I've seen alterations to the certifications.

In addition to that, you have other forms that you're filling out here like form 25 form 6, 52. That's also attached to the commitment package. In addition to that. We you have to provide debit authorization and bank identification for the bank identification.

What this allows them to have is in bank information when you're ready to draw down into the ventures the proceeds of those debentures come into the bank account when you have to pay interest of which is semi-annually, and they could do an Ach! Off your bank account.

And like I said earlier, the capital certificate is also one of these attachments, but you have to attach it to the SBIC web. Not necessarily in the package. The last 2 bullet points are no longer applicable, since they were, there were changes to the standard operating procedures in August of 2023.

Delphine Jones: And one other thing I wanted to mention is that you're going to get your initial license. And in your license letter your license approval letter. The SBA will tell you what their intended leverage commitment amount is that is an amount based on your application with the SBA. So based on that information they will tell you that you're going to get up to maybe 2 times your regulatory capital with a maximum of 175 million, and that they will finalize that amount when you do your last close, your final close 12 months down the road. But that is the start also. Of this process is having the SBA tell you what the intended total commitment is. Amount is. And as David mentioned, then you actually have to submit your commitment package.

John Foster: Okay.

Delphine Jones: When time is there any other expirations that we have to keep in mind.

John Foster: Sorry when you request a commitment. There's a 1% upfront commitment fee. And it's important that you understand what that means for the SBIC's cash flow.

After submitting a commitment request package to the SBA, the SBA will respond with a commitment letter telling you the amount of the commitment, and also telling you that you have 30 days to pay the SBA 1% of that commitment amount. This 1% has to be paid before you can move on to the next step and request a leverage draw amount. So managers want to take this into account when deciding how much commitment to ask for. for example, if you ask for a 50 million dollar commitment. that means that the fund has to pay $500,000 out of its bank account before it can borrow from the SBA.

If the fund doesn't have $500,000 sitting idle, then the fund needs to do a capital call just for that purpose. So because of this, managers don't necessarily rush into requesting as high a commitment amount as they can upfront you can submit up to 2 commitment requests in a calendar year, so some managers prefer to request the commitments in smaller but more frequent amounts.

The commitments themselves will expire on the 1st September 30th occurring 4 years after the commitment is approved so that means that the commitment is always good for at least 4 years, but less than 5 years, depending on how, long before September 30th you applied for and got the commitment.

Delphine Jones: And the SBA is very timely, and sending out the notices to you to let you know your commitment amount. That notice would also give you information about the expiration of the commitment. It will tell you how much the commitment fees are, so we'll get something from the SBA that spells this all out for you. David. Why don't we now turn to the actual leverage, draw process and talk about leverage? Draw timing.

David Garcia: Correct. Now, now you're at the Leverage draw stage. You've got a commitment package. You've got an approval for commitment package. Now you're ready to draw down some leverage.

Leverage can be drawn down at pretty much at any time, but for the SBA they accept them. The 1st and 3rd Wednesday of every month. The cutoff is at 1030 in the morning. On a Wednesday the dates might change, so consult the SBA calendar for changes, for holidays and whatnot the SBA wants.

Once they receive your leverage, draw request, they usually approve it within the following week, which is the following Wednesday. The approval notices. Now you have approval notices. They they're the notices are valid for only 58 days. Now. Keep in mind. If they expire, there are no penalties or extra charges from the SBA for unused and expired approval notices.

Delphine Jones: John. So what are the next steps that we have to go through as far as the application for drawing down leverage.

John Foster: So the leverage draw application process has a few components. There are a few things that happen need to be put into the leverage. Draw package.

The 1st is the leverage security instruments. This is form 444 c. And it's essentially a standard template of the borrowing agreement. Next, there'll be a statement saying that there's been no material change in the fund since the last form. 468 was filed. If the SBIC is newly licensed, and it is, you know, rushing to draw down leverage as quickly as it can. The SBIC might even need to file an interim 468 before the leverage draw. There'll be a statement of compliance which basically says that the SBIC, you know, has been and is complying with all of the SBA's rules and regulations.

Then there's a statement of need. This is the most involved part, and we'll talk about that in more detail in just a minute.

There's an opinion of counsel from the SBIC's law firm and a certification that at least 25% of the SBIC's investments will be in what the SBA defines as smaller enterprises.

An up-to-date capital certificate won't necessarily be filed with the leverage draw, but needs to be on file with the SBA supporting the amount of the leverage. Draw that you're requesting, and David will talk about that in a few minutes.

As part of the request package. You also have to detail the amount being requested in the debenture funding request, and it's usually broken out into 5 different debentures. So, for instance, if you wanted, if you want to be able to draw down 10 million dollars, you would submit a leverage package which states that you want to get 5 different debentures, each giving you 2 million dollars of leverage.

Now, you don't have to break your borrowing amount into 5 pieces. but managers almost always request it this way in order to provide maximum flexibility in the future when it comes time to repaying them. And David will talk more about repayments later on and the to ventures. The requests have to be in increments of $5,000.

We go to the next slide in the in the statement of need. Okay. the statement of need. It's part of the leverage. Draw application, and it can take a while to prepare. Now, before the SBA will give you the leverage. The SBA wants to know in very granular detail how much cash you have and how much you're requesting, and what, specifically, are you going to do with that cash.

So the statement of need is essentially a cash forecast. The SBA asks you to take the cash balance from your last 468 filing. and roll it forward to a relatively current date, say within the last week. Then the SBA wants you to estimate all of your expected cash flows, inflows, and outflows for the next roughly 2 months, including the requested borrowing and investment purchases.

So this is going to include again all of the expected inflows and outflows. You know what coupon payments are coming in, what expenses are being paid, what securities are you purchasing? You know, if there's a separate line of credit you have in place what is going on with that as well.

So at the end of this 60 day forecast, the SBA wants to see that your expected cash amount 2 months from now is gonna be either less than a million dollars or less than one quarter's worth of management fees so that the SBA doesn't see you as over borrowing.

Delphine Jones: You know, this sounds like a very involved process. So we're basically saying that to get the leverage, you have to submit a commitment application. Have that approved? Then you have to request a commitment amount. Have that approved, and then you have to go in and specifically request an amount that you want to draw down on.

And what you're advising us to do is to basically think about the pipeline that you have to make sure that you're not drawing down too much with this. Go around because the SBA requires that you pay a fee. I think you mentioned that maybe it's 1% fee that you have to pay that fee upfront, and that could be a drain on the cash flows for the fund. Did I summarize that correctly?

John Foster: Well, yes, the 1% that's on the commitment package and that's the 1% which you know does not come out of borrowings that has to get paid upfront there. So after the commitment package is the leverage draw package which David and I have just been talking about there and that's where in the leverage draw package. That's where we have to have this statement of need. And that's where you know the SBA wants you to have less than a million dollars or less than one quarter's worth of management fees at the end of that. So it's kind of 2 different considerations. One consideration with the commitment package. You know how much of a commitment you want to request, and then separate from that. When you go to you know, to submit a leverage package. You know. How much are you going to ask for in that leverage package?

Delphine Jones: All right, David. Then let's what slip to the next area, which is talking about the impact of a capital certificate on how much we can draw down and leverage.

David Garcia: So now we talked about the commitment package. You get an approval for a commitment package, then you or have the ability to drill down from that commitment package. But you can't speak for those 2 items without talking about a capital certificate. So the capital certificate kind of ties everything in in my head. So what happens here is what is a capital certificate. A capital certificate gets submitted to the SBA for various events.

When a fund calls money from its investors. It requires a capital certificate. After the money's been received. All of it's been received 30 days thereafter. When you make a distribution, and you consider it for SBA purposes. Return of capital when there are transfers, name changes when there are investor status changes that affects a capital certificate, and they have to be filed.

So why do I mention a capital certificate? Because when you draw down leverage, they look towards the capital certificate. What are they looking at specifically. They're looking at leverageable capital and regulatory capital leverageable capital leverageable capital is cash paid in from your investors.

Not a receivable that you're gonna get in the future actual cash receipt and put into the bank. And I and I say that and I and I say that specifically because we should not put any receivable that you have any cash you have not received in leverageable capital.

So when you look at leverageable capital, and a fund contributes from its investors calls 10 million dollars, and it's received 10 million dollars. I'm expecting to see leverageable capital of 10. So when you draw, when you do a drawdown package a leverage, draw request.

How much can you draw down? So if you've been approved for 2 times regulatory let's say you can borrow 20 million dollars and because you're 2 tiers, so if it's 10 million leverageable, and you you've got approved for 2 tiers you can borrow to 2 times leverageable. Capital!

That's a 2 to one ratio, and that's important. To distinguish from leverageable versus regulatory. Regulatory is to put it in a in a simple fashion, is somewhat of the total committed in the fund.

There are exceptions to that. There are exceptions when you're not an institutional, when you don't have backing towards your unfunded, the regulatory number might differ from your commitment amount. Okay? So you're, for example, if you're a 50 million dollar fund and total commitments, let's keep it simple. Your regulatory could be 50.

You got 2 time, 2 tiers that you've been approved for leverage. That's 100 million dollars. You can. You can most likely Borrow, but you're capped at the leverageable.

So if your leverage leverageable is 10 million dollars, and you're approved for 2 times regulatory, you can only borrow 20 million dollars. If you need more than 20 million, you're going to have to call more money from your investors and then and then do another leverage. Draw request.

Delphine Jones: Then, David, let's go on to drawdown limitations on. You've hit on a couple of these prompts, and maybe we can clarify this a bit for everyone.

David Garcia: Correct. So as an SBIC some of the greatest benefits is that you have all this ability to borrow this leverage and at a reasonable rate. Typically for an emergency manager. What we have seen is one time to 2 times that regulatory capital number. They say 3 times historically, we have not seen. I have not seen 3 times of regulatory.

As I mentioned earlier, my previous slide. The draw is based on leverageable capital so if you've been approved for 2 times.

Regulatory capital, which is somewhat, without with exception, somewhat similar to your committed capital, and your committed is 50 million dollars, and your regulatory ties in perfectly 50 million, and you've been approved for 2 times. That's a hundred 1 million dollars. However, if you haven't called a hundred percent of that, you've only called 10 and 20% of that which is 20 million dollars, 10 million dollars. Then you can only borrow 2 times that. So it it's a trigger. The capital certificate is intertwined from to the commitment package, and the leverage draw request.

Maximum per fund is a hundred 75. So if your regulatory is 90 million, let's say and you've been approved for 2 times regulatory. And your regulatory is 90 million. You're capped at 1 75.

The maximum per phone family. What does that mean? If you have more than one license, let's say you have 2 phones that are that are licensed. You're capped at 350 per phone family. That's how they consider it.

Delphine Jones: And David, at what point are we specifying and asking? The SBA, you know, for the different tiers of leverage that we can get is that something that is included in the application process.

David Garcia: You could start it off at you could do it during the application process. You could do it during the commitment process at a later stage. So there's multiple times that you could. Really, you could really work on this.

Delphine Jones: Alright. So again, considering that you know, we're all focused on making sure we can get gain access to this leverage, there seems to be a lot of things we have to take into consideration and based on this slide. The key takeaway here is you really need to focus on how much you have, and leverageable capital, because that's going to dictate the ultimate amount of your draw amount.

Alright, John, let's talk, then, about the fees that are involved. We everyone's saying that this is a chance to get you know, lower interest borrowing from the government. But there's our fees and interest involved. So why don't you walk us through the leverage fees and then we'll go through the interest component.

John Foster: Sure the fees that you see on this slide. That that we're calling leverage fees the unifying piece on these 4 fees here is that they are one time charges. So they are deducted one time right from the leverage proceeds so 2.4 3 5%. When you, you know, request the cash to be dispersed to your bank account. What will hit your bank account is a net amount net of this 2.4 3 5%. So that is what will hit your bank account and back on the statement of need. You know, that's 1 of the items that is on there under inflows and outflows. You know. You might no borrow one amount, but you're only gonna get the net amount so that will be reflected there as well. So these are, you know, in general, just the one time fees. If we go to the next slide.

This is the what most people think of as the interest component and the interest component actually has 2 different pieces. The 1st piece is a minimum annual charge. So these amounts here, these are annual amounts and they are added in with the regular interest rates. So again, the interest that you pay is going to be 2 pieces, the annual charge, plus the interest rate there. So those are combined together, and you'll pay just the one combined interest rate.

Actually, you're going to end up paying 2 rates during the this time period from the time that the pooling takes place. I'm sorry from the time when the distribution takes place. When you take the cash proceeds up until the pooling date there is one interest rate but then, on those pooling dates and pooling happens in March and September.

At those times the debentures are pooled together, and there is a new interest rate, you know, which will be in effect for the duration of the debentures for the 10 years, with interest paid semi annually and that is the interest.

Delphine Jones: So, and the long term rate is going to be the rate that will be applicable until the ventures expire. Let's say 10 years down the road. Correct.

John Foster: That is correct. Yes, so it's a yes.

Delphine Jones: Well, David, let's then move on to the next section, which is, we borrow money throughout the course of the fund flight, and at some points we're thinking about paying some of this back. So what are some of the things that we need to be cognizant of when we think about repayments and prepayments.

David Garcia: Thanks, Delphine. So what you typically see is you're past your commitment period, your investment period 5 years down the road now without me getting too much into it. You have some kind of wind down plan, which that's another topic in itself. And now you're ready to start paying down the ventures the ventures when you repay them there. There are 2 methods of repayment, there is the regular prepayment and there's the advanced prepayment the regular prepayment.

That is, when you're paying during the March 1st or the September 1st cycles with those are the timelines, and when you start, when you pay the interest on these debentures versus the Advanced Prepayment, when you're paying off during the non scheduled times what's the difference? The difference is when you submit a prepayment template to the SBA on a debenture prepayment.

You're. You're basically telling them the debentures that you're paying in an excel schedule and submitting that an advanced prepayment is, you're paying this in advance during non scheduled times, for example, in January versus March and on this schedule you have to give them the list of the ventures, the serial numbers and the interest and the annual charge on these schedules.

Now, when do you submit this? You submit this for regular prepayment 5 days in advance of the payment date for the advanced prepayment is 5 weeks in advance of the next payment date. Okay?

Now, when you send them an email that you're making payments. You attach the proper template on the email for it to be approved. Okay, they review the schedule and they'll send the confirmation that the serial numbers, the debentures are accurate, and they'll send you confirmation with why, instructions to send the money to Bank of New York Melon.

John Foster: Hey, David, do I remember right that the debentures? There's no partial payment of them. They can only be paid in full.

David Garcia: That's correct. The ventures have to be paid in full. Typically what you see in our in our profession is, if you're gonna pay the ventures pay the ones with the highest interest rates right you. You want to reduce your costs on your, on your on your fund. So you pick the ones with the highest interest rates, and you prepay those in advance. Now, what I always recommend to clients is when you prepay, try to prepay during the cycles right? Why do I say that?

Because if you prepaid debenture, let's say in December for the September for the March 1st cycle you have to prepay all the interest through March. So, even though you've got the money, and you want to prepay the debenture, you're still going to have to pay all that interest, so be mindful when it comes time to prepay and of course there's no prepayment charge, because these are 10 years of ventures, but you could pay them at any time. However, just keep in mind when you're making an advanced prepayment that the interest has to be paid in those specific cycles upfront.

Delphine Jones: Well, that's interesting. So no prepayment penalty. But they're going to make you pay the interest as if you took it all the way through to the next standard payment period.

David Garcia: Exactly.

John Foster: And because the debentures have to be, you cannot partially pay a debenture. They have to be paid in full.

That's why we say that you should break them out into as many pieces as possible. My example of 10 million dollar draw. You would want 5, 2 million dollars tranches there debentures, so that if you only want to repay 4 million, you just pay off 2 of those you know, 2 million dollar debentures, whereas if you had one debenture for the full 10 million.

John Foster: you wouldn't be able to partially pay. So, having as many you know, debentures as you can gives you the flexibility to plan your cash, forecasting.

David Garcia: Right, and I always tell our clients is think of the SBA as the largest investor in your fund.

Treat them that way, and try to prepay as much as you can and as fast as you possibly can.

Delphine Jones: All right. So it's the process. It's kind of interesting, because in order to get money, you have to again file a lot of documents. So if you needed to find all of these documents and do more research on your own, you know what's the best way to do research for commitments. Capital, certificates, Leverage, draw packages. What's the source for us to use here?

David Garcia: Well, the sba.gov has all these forms, all these guides, all these instructions. It's very simple. You can. You could look into the forms and guides, and sba.gov, and they give leverage commitment instructions, the bench, or pay down instructions.

It's pretty thorough, and you just go step by step all these forms that I mentioned on the commitment package. They're all there. You could download them. I believe you can actually download them in word and Pdf. In some cases.

Delphine Jones: And just a caveat. There are some documents that are specific depending on when you got your license. So the SBA has on their website should have a tag on each document to tell you if that document should be used. If you're pre, I'll call it 20 August 2023, or if you're post August 2023, which is the date in which the new regulations were issued.

So make sure that when you're looking at the document you're looking at the one that is specific to the timing of when you got your license, and that way you'll be sure to pull together the right documentation that the SBA is looking for. I would also say that, you know, reach out to your analyst when you have the questions on any of this. They are your best source of information, and if you're trying to figure out anything that's maybe a little bit odd, they'll be able to give you guidance as to the best way to proceed.

Okay, so, David and John, any other tidbits of information or tips that you would like to share with the with the group before we move on to the Q and A session.

David Garcia: No, I do want to reiterate what you just said. Make the analyst your best friend because if you can grab their attention, they've read. The resource is valuable. and you want to know how they think right, because it's going to matter the later stage of the life of the fund. How you want to distribute money?

How you want to pay down these debentures because you want to have a balance somewhere between the pay down and distributions to your investors.

John Foster: As far as resources, you know. David mentioned sba.gov certainly. The SBIC, you know, will have legal counsel and law firms, you know, can often help to interpret what you see and find on sba.gov as well as a bit self serving, but an administrator, such as CSC. we've also found that the SBIC community. It's not that large. And we have seen a lot of our SBIC clients interacting with each other directly, and there seems to be a kind of a healthy forum of information sharing by investment managers who are running SBICs.

Delphine Jones: I do remember that there's a CFO type of group that's specific for SBIC. So if there are any CFOs on the call, you might want to look into being part of that group, because, as John mentioned, they're a wealth of information, and they're willing to share it is small community. And the more we all know the better we'll all be. And making sure that we can operate the funds efficiently alright. With that we can move into the official Q&A session. If you have any questions that you would like us to address.

If you can share those with us, we'll try to get through those. If we can't get through your question during the remaining time that we have, you can send your questions directly to me, and the address will be posted as Delphine jones@cscglobal.com, and I'll be able to coordinate answers for you options. So if an SBIC opts to reduce regulatory capital, but board cost excess. Does that also reduce in leverageable capital? Okay? So.

John Foster: I'm sorry. Read that again.

Delphine Jones: It's that or cost. The excess org cost reduces management fees. It doesn't necessarily. So the fee that's being paid to the manager. It should not be reducing your regulatory or leverageable capital.

John Foster: Yeah, agreed.

Delphine Jones: My second question stand of the ventures. Okay? So there's a question asking if we can outline or highlight the major differences between the standard debenture program and the approved adventure program. If any.

John Foster: If I can take that one.

Delphine Jones: But what we've seen in general is that the differences between the 2 is that the accrual program is going to match you out at one and a quarter leverage as opposed to up to 2 times leverage, and that leverage is going to be calculated over the sorry the interest on the leverage is going to be calculated over the life of the debentures. But you are not paying current interest. So you're not paying interest semi-annually, that is going to be added to the principal, if you will, so that all of that will be paid at maturity date.

However, when you're looking at the total amount of leverage that's available to you. They're going to be looking at both the principal and the interest that's outstanding to determine where you are within that, Max, whereas with the standard debenture program, interest is not a component of the total amount.

David Garcia: So the feedback you're saying is, if you can borrow 50 million dollars right? That's your cap of one and a half one and a quarter times you you've got to factor all the interests.

So you really can't borrow 50 million. You gotta borrow something. I don't 30 plus right. And I'm without not doing the math correctly, but it's gotta be a lot less than the 50.

Delphine Jones: To be less because you right, because the interest on that is going to be.

David Garcia: It's back right. Part of that 50, so the principal has to be, as you put it, much less than the 50.

John Foster: Just one clarification there, Delphine, the with the accrual debentures. It's true there are not periodic interest payments, however, as the fund makes distributions back to the lps. The SBA will expect that a certain portion of the debentures and the related interest be paid at that time. So it's not the case that you know you.

You can liquidate the portfolio and pay the lps first, and then the SBA, you know, gets paid at the end. That's not the way the SBA set up the program. So the and the SBIC certainly has rules around that which you can read as far as how much needs to be repaid when you do a distribution to the lps on the accrual debentures.

Delphine Jones: Thanks, Jeff. Next question that we have is, do we have a schedule for fees as they relate to the new approved adventure offering? So there are. I think, in the schedule that slide that we have in parentheses. We said that it only applies to the standard adventure, so there are certain fees that don't apply to the program. So you can take a look at that schedule when you get our slide deck. Or again, as we've been mentioning.

You can go to the sba.gov. Web, and they have for you and some of their guidance. That's there. They have a section that will show you exactly what the fee structures are or is, I should say, for the approval program is the annual charge tied to each commitment meaning, I'm sorry, meaning that it will increase.

Sorry I apologize. The text box jumped from. Your questions were added, so I did pull back up meaning it won't increase for a commitment that was received in 2024. So the annual fee is tied, so the annual fee is tied to when you actually draw down the leverage.

So that fee is what we have on the screen, was the fee that the SBA intends to charge going out to about 2029, but that is tied to the drawdown of the leverage.

John Foster: Right. The actual drawdowns, not the commitments.

Delphine Jones: Okay? Another question does the SBA allow you to pay any debenture that you choose? It's, you know, for example, you don't have to do 1st in, 1st out.

David Garcia: That's correct. We mentioned that if you paid down, if you drill down at the venture 3 years ago, and that's the one with the highest interest rate. I'd rather go with the highest interest rate.

Right? You. You want to reduce the expenses from the fund, so it doesn't matter which one you pick, but generally we pick the ones with the highest interest. Rates.

Delphine Jones: We'll have to come back to you on, for example, what's the name or contact for the CFO SBIA group? I'll try to get that and send that information out. So, David, you mentioned that we should pay back leverage as soon as possible. Why, thank you.

David Garcia: It's ugh it? Well, okay. So you have a fund you're going through. You're past your investment period. 5 years later, and then you develop a wind down plan, and I and I know I may have spoken too much.

You develop a wind down plan. It gets approved by the SBA. This wind down plan as to your methodology of paying down the debentures there's a balance here as to what you pay your investors, which, as you if you're an emerging manager. In this space. for the 1st time the words read and rock are going to become very common to you, meaning profits that are available for distribution versus return of capital.

And when I say profits available for distribution, there's such a thing as what they call as non cash. I would caution people caution in in emerging managers to not always distribute to your investors without making sure you pay back the SBA for one you always have to. If you've been approved for 2 tiers of regulatory capital, you always got to make sure you have the 2 to one ratio. You could be better than that. But that's the min, the minimum.

2 2 times of leverageable capital. And also you. Honestly, you want to get the SBA out of the way, simply because it reduced costs in the funds. And there's such a thing as surrendering a license and just becoming a regular PE fund.

So if you've got the ability to pay the SBA and just do away, do away with it. It's not a bad thing simply because there's a lot of regulatory filings that are involved. You file for financing, you file for changes on the capital certificate. You file for distributions, you file for quarterly 468. You got examinations. You've got audits so it's a lot. It's an expense that the funds could do without. I don't know if I ever spoke too much. That's a lot. But yeah.

Delphine Jones: Well, you know something. And again, I have to say that you know that's our opinion, based on, you know, operating SBIC funds and seeing how they've been operated, I should say, for the last 20 plus years, and it costs. And you know our life cycle for CSC. Over 100 SBIC clients. But you also need to pay attention to your operating plan. And really kind of work with what you submitted to the SBA. As to how you were going to approach the borrowing of leverage and the payback of leverage. So with everything that we're saying, make sure that you are working within the plan that you have shared with, and has been approved by the SBA.

David Garcia: Right, and you can amend the wind down. Plan, Delphine, but it's got to be approved.

Delphine Jones: What do you see as some of the biggest challenges sorry emerging managers, face or unaware of as part of this whole leverage, draw and repayment process.

David Garcia: John, you want to take it, or you want.

John Foster: The well. We mentioned one with the commitment fees. The process is the process meaning the with the commitment package and the leverage package, and actually requesting the draw amount, getting the cash. It's you know it can be you know, a lot of work, but it's also relatively straightforward. There's really nothing hidden in there.

The, I think, kind of a bigger question or the question. I think I would want to answer is, you know, once you have taken, you know, Leverage, you know. What are the restrictions that come with the fund? And David alluded to it earlier, that how much you can distribute to your limited partners the SBA, while you have outstanding leverage, wants to make sure that you're not paying too much back to the lps before you have paid back the debentures. So he mentioned the concept of read, retained earnings available for distribution, which you know we should mention is not the same as retained earnings under GAAP.

The SBA has, you know, rules about what can be distributed, and I think an example of that would be pick bonds, payment, and kind bonds where you might be earning, you know, 12% interest on a pick bond, and you would show that, as income, you know, for GAAP.

But for SBA purposes they would not include that pick income in retained earnings available for distribution. The SBA. It really wants to see cash before it will let you distribute you know, retained earnings there.

So that is an example. And you know, we could get into more detail, although I'm not sure that we don't want to do that right now. But it. It's more kind of what the limitations there are on you after you have. After you have taken leverage.

Delphine Jones: And from, you know, my experience for especially for emerging managers, often because I'm focused under the business development side for CSC emerging managers will say, Well, doesn't the leverage draw process pretty much work like a line of credit where I can go in at any time? And, you know, draw down from the line, and that is not how leverage works.

You know, as we were discussing during today's webinar is a is a process that you have to go through, you can only draw down leverage twice a month is typically the 1st and 3rd Wednesday of the month. You have to submit packages to get it approved. Once you get it approved, you have to submit your debenture notices to the Bank of New York by certain timeframe, and then Bank of New York has to fund that money. So it's not as quick as a as drawing down from a line of credit, and I think you know, that's the most frequently asked question that I get is, doesn't it work along the same lines as a line of credit?

So no, it's a drawn out process. And unfortunately words matter. So you really do need to understand the difference between your leverageable capital and the regulatory capital, and how all the calculations work. I think maybe time for one more. I'm sorry, David, did you have something else.

David Garcia: No, no! And just to add to that what John was saying get very close to your to your analysts. Educate yourself in the space, because there's a lot of jargon. There's a lot of other things that you don't deal with in Gap reporting versus SBA reporting cool.

So attorneys can help. Certain attorneys can help you with the commitment package. In some cases some of the aspects of the leverage draw request.

However, I would say, there are very few administrators out there that can handle this kind of that handle this space.

Delphine Jones: Here's an interesting question. Can you repay the ventures, and subsequently borrow again.

David Garcia: Yes.

Delphine Jones: So that was.

David Garcia: That's not the norm, but I've seen it.

Delphine Jones: Yeah. Okay, we recently submitted a draw request a few days before the 468 was due for 3rd quarter. The statement of needs began with 2Q. 468, ending cash. The analyst asked for the 3rd quarter, 468 to be filed before processing the draw request. Is this a new requirement? And if so, what are the specifics? We're on.

David Garcia: I laugh at this, because, yeah, John, you can go for this one.

John Foster: The 1st time we saw this was last quarter. I don't believe we had seen it. At the end of q. 1, or Q. 2. It used to be that the 468 were due 30 days. we do. 30 days after. Now they're due 45 days after. And it sounds like the SBA wants to see a 468, you know, that was submitted less than 30 days prior.

So during that period, from days 31 to 45, we seem to be in a bit of a gray zone there. And yeah, we had a couple of clients that we saw. Get that message back from the from the SBA you know you need to hurry up and get your Q. 3, 468 in. And use that cash balance in the in the statement of need. So it does seem to be new.

Delphine Jones: Yeah. And I think we've also seen that historically, even with the 30 days that especially when you get to the end of the year, and you're asking for a leverage draw, let's say, in the middle of January. But your 1231, 468 isn't going to be filed until the end of March. The SBA has often asked us to file. That's a I guess you might want to call it an initial form 468 in the system, so that they could get a look at where we think the fund was going to be as of 1231. So we would upload information for that 468. And then, as we got closer to reporting period, finalized all of evaluations, etc. Then we would go in and amend that form. 468. But it's not.

It's not atypical for the SBA to say. We want to understand kind of where you are within the 468 process we want to know in October, you know. Kind of where you are. If you're filing for leverage. Draw in October, and we don't have a September 468 in the system. So they are going to want to kick those tires and get a feel for the fund status.

And with that I do apologize. We will take a look through the other questions. And again, if you email me specific questions, I will try to get you an answer back on those, and I'll coordinate that with my team. And we're at the top of the hour. So thank you all for joining. We do appreciate. You're taking the time to spend this afternoon with us, and everyone enjoy the rest of your day.

David Garcia: Take care, everyone.

Mary Brown Sands: Thank you. A huge thank you to Delphine, David and John, for this helpful discussion. I saw the questions were pouring in, and, as Delphine said, they are very happy, and have graciously agreed to respond any questions that we did not get to after the webinar. I think we have popped, Delphine. We popped your email address into the chat. So you can find Delphine's email address in the chat. If you had another question and we will capture the ones that were submitted, and pass those along to the CSC. Team. Thank you.

As Delphine mentioned, too, there is an active CFO group here at SBIA. Please reach out to my colleague, Alexandra Arnsberger, for more information about the group. Her email address is a Frick, that's a FRIC. k@sbia.org. We also popped her email address into the chat. You can find it there.

And finally, the slide deck has also been shared in the chat as well, and a replay of today's webinar as well as the slide deck, will be available shortly in the Webinar gallery on the SBIA website and also in the SBIA Member info hub.

Just a few last reminders before we close. SBIA's final regional networking event of 2024 is coming up on December 3rd in Boston, and registration is open for our 1st 3 Regional Private Equity Conferences the Northeast Private Equity Conference in New York on January 8th and 9th, the Southern Private Equity Conference in Nashville on February 13th and 14th and the West Coast Capital Summit, also host to our signature. Lpgp fundraising event capital links, and that is March 25th to the 27th in Los Angeles.

Details and registration links for each of these events may be found on our website@sbia.org, and in the SBIA membership Newsletter.

Finally, SBIA is excited to partner with the independent sponsor Forum an initiative designed exclusively by and for independent sponsors and capital providers.

The next events in the Forum's Deal series are on January 30th in Los Angeles, and on March 12th in Nashville. These deal-making forums are invitation only to pre-vetted capital providers and independent sponsors.

You can visit the Independent Sponsor Forum website@www.isponsorforum.org to learn more, and request an invitation to these events.

Thank you again for participating in our webinar today, and we look forward to having you join us again soon.