Financial Innovations

for Economic Recovery and

Development in Northern Israel

Financial Innovations Lab Report

Map of missile strikes on Northern Israel

Overview

•Description of Lab Sessions

•Northern Israel Recovery and Redevelopment Bond Authority

•Small Business Recovery

•Expansion of KIEDF Revolving Loan Fund

•Development of a Small Business Collateralized Loan Obligation(CLO)

•Chicago Climate Exchange Offset Program

Financial Innovations Labs

•Two Lab sessions in early September 2006

•Practioners from government, banks, rating agencies, legalfirms, philanthropies, and hedge funds attended

•Participants considered the following strategies forredevelopment:

•Regional Economic Development Financing•Small Business Collateralized Loan Obligation (CLO)•IsraCap: Capital Access Program•KIEDF Revolving Loan Fund

Northern Israel Recovery andRedevelopment Bond Authority

Northern Israel Recovery andRedevelopment Bonds

•Public conduit issues bonds, potentially tax-exempt for investorbenefit•Private sector operator contracts for development and operationof infrastructure:

•Transportation (e.g. Hwy 6 expansion, railroad upgrades and newconstruction)•Urban revitalization in Galilee•Water & waste treatment (e.g. Central Galilee water treatment)•Energy & environment (e.g. Recycling plant)

•Credit enhancement can be used to mitigate risk•Can set up a State Revolving Fund to serve as an infrastructurebank

Source: Flanagan and Seltzer, 2000

Tax-Exempt or TaxablePrivate Activity Bonds

Tax-ExemptDebt

Investors

Issuer

Private SectorOperator

Proceeds of Debt

Project Costs

Debt Service

Project

Operating Concession

Commercial Risks,

Incentivized

Compensation

NetOperatingRevenues

Use or Lease

Agreement

ReserveFund

State Revolving Fund Model

Government

Agency

Capitalization

Grant

State Match

Assistance

Recipient

Bond Holders

Iss

ue

Bo

nd

s

Bo

nd

Pro

ce

ed

s

Bo

nd

Rep

aym

en

ts

Contract to

Vendor

Loan Repayments

Disbursements Cash to Pay Invoices

Government

Agency

Capitalization

Grant

State Match

Assistance

Recipient

Bond Holders

Iss

ue

Bo

nd

s

Bo

nd

Pro

ce

ed

s

Bo

nd

Rep

aym

en

ts

Contract to

Vendor

Loan Repayments

Disbursements Cash to Pay Invoices

Source: George Ames, U.S. EPA, 2004

Steps for Implementation:Identify the Issuer

• Israel-based issuer or project sponsor

• Israeli government, Galilee Regional Authority, or other sub-sovereign entity

• Large Israeli bank – financial interest and may provide senior debt

• U.S.-based issuer or conduit

• Municipality

• Existing non-profit organization or new non-profit

• Understand the legal and financial issues around using U.S. conduitto issue the bonds

• Obtain change in domestic law to allow issuance to benefit Israelientities and possible IRS ruling

• Identify ability to create a non-profit to act as the conduit• Identify Israeli sponsor (government, bank, or other)

ACTION ITEMS:

Steps for Implementation:Identify Infrastructure Projects

• Bundle up to 10 promising projects from existing IsraeliFinance Ministry feasibility studies

• Evaluate projects based on:

• Statutory status

• Time to completion

• Feasibility (cost and political)

• Return on investment

•Identify potential projects

•Conduct feasibility studies

•Rank order projects after evaluation of their statutory status,feasibility, cost, return on investment and ease of implementation.

•Determine initial projects

ACTION ITEMS:

Steps for Implementation:Project Assessment & Evaluation

• On-going success requires project oversight

• Detailed reporting:

• Timeline tracking

• Reporting costs and accomplishments to investors

• Document lessons learned for future issuances

•Identify team responsible for on-going project evaluation

•Identify funding for this task force to conduct oversight

•Identify funding for additional R&D as needed

ACTION ITEMS:

Steps for Implementation:Develop Financing Options

•Idea #1: Use tax increment financing (TIF) or Tax Credit Bonds topay start-up expenses of the projects

•Idea #2: Explore Credit Enhancement Alternatives

•Idea #3: Request U.S. government to provide investment creditassistance for financing infrastructure projects, rather than direct aidto Israel

•Idea #4: Create pulled fund to finance social purpose projects

Credit Enhancement Alternative:Leveraged Reserve Fund Loan Program

Source: Bear Stearns, SRF Leveraged Loan Program, 2006

Steps for Implementation:Develop Financing Options

•Assess likelihood of each financing option (Ideas #1-4,plus additional options as discussed by stakeholders)and how they might impact project completion

•Focus on gathering start-up financing for projects thatwill yield revenue

ACTION ITEMS:

Steps for Implementation:Structure Credit Enhancement

• Credit Reserve Fund needed to alleviate risk• Guarantees

• Insurance

• Based on project milestones• Release credit enhancement upon completion; release

investment

• Determine structure of credit enhancements

• Identify potential partners and allocate amounts

• Educate philanthropies that might be active partners

ACTION ITEMS:

Steps for Implementation:Structure Credit Enhancement

Financing PoolFinancing Pool

Credit

Reserve

Fund*

Infrastructure

Projects

Small Business

Loan Program

Banks

Insurance Companies

Pension Funds

Corporations

Foundations/ Federations

Religious Institutions

Foundations/ FederationsExisting Government

GuarantorsPhilanthropic

guarantors

Market Rate Investors

Concessionary Investors

Charitable Contributors

Dollars purchase

asset-backed

bonds that

yield market returns

Dollars contributed

to capitalize Reserve Fund

…that yield

below market

returns

Implementation Timeline

• Phase 1: Month 1 - Month 3• Gather and analyze project feasibility studies

• Project kick-off meeting in Israel

• Phase 2: Month 4 – Month 6• Assess project bundle

• Financial Innovations Lab in Israel

• Phase 3: Month 7 – Month 9• Assess and identify structures for bond authority

• Phase 4: Month 10 – Month 12• Project Launch in New York

• Determine issuance structure and issue bonds

Small Business Recovery

Expansion of KIEDF RevolvingLoan Fund

• One of the most successful privately-funded smallbusiness development programs in Israel

• Provides small business loans to perceived riskierborrowers

• Leverages bank dollars and provides a creditguarantee

• Encourages philanthropic investment in smallbusiness sector

Northern Israel Revolving Loan Fund(Koret Israel Economic Development Fund Model)

KIEDF+

Philanthropy Joint Venture

Small Business35-50%

15%/ 16%$15,000-100,000

6.5:1

Micro-Enterprise60%

15%/ 16%$5,000-15,000

6.5:1

Microfinance75%-100%

5%$500-$5,000

20:1

Guarantee Amount (paid to Bank in case of default)

*In one instance, KIEDF subsidizes the interest to the borrower Loan Amount

Leverage

Deposit of Outstanding Credit Guaranteed

Deposit

Credit

1% Subsidy*

Guarantee

BANK

PRI Credit Loan, Grants, Donations,

Investment Dollars

Steps for Implementation:Expansion of KIEDF Model

• Require additional funding to lend to more businesses in need

• Focus on lending to businesses with restricted bank accounts

• CLO may increase liquidity and lower cost of capital, therebyexpanding program

•Continue to identify funding for KIEDF’s Revolving Loan Fundmodel to expand the program

•Continue to provide technical assistance and research for theKoret Foundation at large

ACTION ITEMS:

Small Business CollateralizedLoan Obligation (CLO)

• Special purpose vehicle (SPV) assemblesloan pool by purchasing loans• May purchase KIEDF small business loans

• SPV uses loan pool to:• Issue securities

• Set up a loan loss reserve

• Credit enhancement mitigates risk

• Loan issuer has liquidity to make newloans, providing capital to new borrowers

Northern IsraelSmall Business CLO

BorrowerSenior Debt

SubordinatedDebt

Junior Debt

Government

Bank Borrower Borrower

Loans

Community Bank

Interest and principal repayment

SPECIALSPECIAL

PURPOSEPURPOSE

VEHICLEVEHICLE

Proceeds of collateralized loan obligation

Equity

Proceeds of collateralized loan obligation

Steps for Implementation:Creation of CLO

• Israel-based SPV

• Banks may be interested

• Government guarantee or philanthropic donationsas credit enhancement

•Identify sponsor to act as Special Purpose Vehicle; checkstatus of combined KIEDF/Government Small Business Loanprogram synthetic CLO

•Identify appropriate CLO structure and key players

•Contact appropriate bank connections

•Identify role of credit enhancement partners

ACTION ITEMS:

Additional Financing from the ChicagoClimate Exchange Offset Program

CCX Forest and Agriculture Offset Program

• Nearly 9,000 acres of forest destroyedduring the war

• CCX Offset Program provides greenhousegas emission reduction credits forreforestation of degraded forest land

• CCX Preliminary estimates suggestrevenues in the range of $3.5 million over 20years

CCX Forest and Agriculture Offset Program

CCX Registry

Source: Based on Chicago Climate Exchange “Overview of CCX Market Design,” 2006

CCX Electronic

Trading Platform

CCX Members:

Binding commitments

to cut emissions or

buy project-based offsets

Offset Providers:

Plan trees & reforest

Aggregators

(e.g. Farm Bureau)

Verifiers

(Private Contractors)

In-field

verification

of activity

Bundling and

documentation

of offsets

Steps for Implementation:CCX Offset Program

• Israel-based offset providers and aggregator(s)

• Oversight from CCX verifiers

• Partnership with the CCX to gain entrance to theexchange and properly set up program

•Identify offset providers and an offset aggregator in Northern Israel.

•Identify financing to begin reforestation process with appropriateoversight from verifiers.

•Gain entrance to the Chicago Climate Exchange. Aggregatorshould become educated on the CCX Registry and the ElectronicTrading Platform.

ACTION ITEMS:

Koret Israel Economic

Development Funds

MILKEN GLOBAL CONFERENCE April 2007

ENTREPRENEURIAL PHILANTHROPY for

ECONOMIC DEVELOPMENT

www.kiedf.org

KIEDF Program Platform

• Small Business - $25,000 - $500,000

• Microenterprise - $5,000 - $25,000

• Microfinance Funds - $1,000 - $5,000

• Israeli-Arab Fund - $5,000 - $75,000

• Bedouin Negev Fund - $500 - $2,500

• Koret KIEDF Knesset Fellows Program

Koret Israel Economic Development Funds

KIEDF+

Philanthropy Joint Venture

Small Business40-70%

15%/ 16%$25,000-500,000

6.5:1

Micro-Enterprise60-70%

15%/ 16%$5,000-25,000

6.5:1

Microfinance75%-100%

5%$500-$5,000

20:1

Guarantee Amount (paid to Bank in case of default)

Loan Amount

Leverage

Deposit of Outstanding Credit Guaranteed

Deposit

Credit

1% Interest Subsidy on Small

Business Loans

Guarantee

BANK

KIEDF Results – 1994-2007

• 4,200 Loans - $130,000,000 Facilitated Financing

• More than 20,000 Jobs Created and Supported

• More than 80,000 Israelis directly assisted

• First Round Leverage: Small Business – 6.25+ to 1

• Microfinance Leverage: 20 + to 1

• Losses-1% of credit guaranteed / 2.75% of funds

• Historic Costs – 4% of Financing Facilitated

• Only Microfinance & Israeli Arab Programs

KIEDF- 2007 - 2009

• UJC-JAFI-Tzafona - $25 Million SME• Economic Development Northern Israel

• CLO – Loan Portfolio Securitization

• Northern Israel Revenue Bond• Credit Enhancement

• Urban Renewal Financing-Kiryat Shmona

KIEDF – Northern Israel Goals

• Develop forward looking, non-tourist based industry,service & agriculture sectors

• Create jobs > 2x the minimum wage and> 1 jobs per family with microenterprise

• Technology and clean/green based industry

• Help finance incubator company exits

• Help finance industrial area entrances

• Incentive loans from $10,000 - $500,000

• Leverage bank, partner & government sources

KIEDF – Tzafona – JAFI (2007-2011)

• 2,300 + Loans

• $200,000,000 + Credit

• Jobs & GDP

• Infrastructure ??

931100%$162,379,981

$500,000$300,000101

25%$40,594,995

$300,000$150,000253

35%$56,832,993

$150,000$75,000577

40%$64,951,992

ToFrom

Loans Loans%

Sum of loans

Profit / Loss-$2,994,586

Consultants$0

Operating-$2,625,000

Interest subsidy-$4,676,543

Loan losses-$2,922,840

Total return on assets$7,229,797

Return by the end of 10th year$14,505,414

Total credit$162,379,981

Return on assets (%)5.5%

Interest subsidy (%)0.8%

Lost loans (%)3.0%

Deposit (%)16%

Guarantee (%)60%

2008 budget$7,500,000

2007 budget$10,000,000

KIEDF – Tzafona 2007-2011

Total cost / Credit1.8%

Consultants / Credit0.0%

Operating / Credit1.6%

Subsidy / Credit2.9%

Losses / Credit1.8%

Return / Budget41.3%

Profit / Loss-$4,170,817

Consultants-$1,330,501

Operating-$1,500,000

Interest subsidy-$1,854,164

Loan losses-$878,784

Total return on assets$1,392,632

Return by the end of 10th year$1,829,183

Total credit$41,846,845

Return on assets (%)5.5%

Interest subsidy - Medium loans(%)0.8%

Interest subsidy - Small loans(%)1.4%

Lost loans (%)3.0%

Deposit (%)16%

Guarantee (%)70%

Medium loans (up to $200K)30%

Small loans (up to $45K)70%

Budget$6,000,000

$100,000$45,000163$11,801,711

$45,000$5,0001,202$30,045,134

1,365$41,846,845

ToFrom

LoansNumber of

loansSum of loans

KIEDF – JAFI 2007-2011

Total cost / Credit10.0%

Consultants / Credit3.2%

Operating / Credit3.6%

Subsidy / Credit4.4%

Losses / Credit2.1%

Return / Budget23.2%