Posted on: Tuesday, March 1, 2005

Hawai'i Community Loan Fund files for Chapter 11

By Andrew Gomes and Catherine E. Toth
Advertiser Staff Writers

A nonprofit lending institution that helped finance disadvantaged small businesses and nonprofit organizations statewide has fallen into its own desperate financial need, filing for bankruptcy while holding out slight hope for survival.

The Hawaii Community Loan Fund, a lender of last resort for many otherwise "unbankable" enterprises, filed for Chapter 11 last week after concluding that prospects to alleviate debts were limited after making aggressive efforts to cut expenses and seek new capital.

"We had some successes, but not enough," said Paul Rehob, a former Bank of America executive and Chamber of Commerce of Hawaii official retained in November to try and turn around the loan fund as executive director. "It doesn't look good."

The fund's outstanding loans totaling roughly $1 million will continue to be serviced by the organization and should not be affected by the bankruptcy.

However, the fund will cease making new loans, cutting off one of the biggest financing sources for companies and organizations that typically can't qualify for conventional loans because of their credit history, size, experience or other factors.

"HCLF filled those gaps for business start-ups with no credit or poor credit but with good business plans and ideas," said Jane Sawyer, spokeswoman for the Hawai'i office of the U.S. Small Business Administration, which makes loans similar to HCLF's. "It's very unfortunate. HCLF will be very hard to replace."

The nonprofit, which typically lent between $5,000 and $250,000 per loan, was created in 1997 with a $1.5 million contribution from Hawai'i banks, savings and loans, foundations and the city government.

The organization was one of several Hawai'i loan funds certified by a federal Community Development Financial Institutions program, but claimed to be the only statewide community development lender.

Hawaii Community Loan Fund made 130 loans totaling $4.5 million over its active life, creating or retaining more than 350 jobs.

The organization also provided technical assistance and consulting to borrowers through the life of their loans, though that service also has been ended.

Beneficiaries included a hapu'u fern grower, private school, restaurants, retailers, medical waste removal business and nonprofit associations helping the homeless.

Richard Schnitzler and Dan Petrill of Hamakua Macadamia Nut borrowed $200,000 from HCLF to buy nuts from other farmers because their company was growing faster than its own crops.

"We couldn't have done this without (the HCLF loan)," Schnitzler said. The Big Island company with about 50 employees produces about six million pounds of macadamia nuts with plans to double its production next year.

"We go through hard times, but we're very happy," Schnitzler said. "We're happy because we're employing people. It's a sense of social responsibility."

HCLF typically borrowed money to relend to businesses and nonprofits. To cover operating expenses, the organization relied on grants and interest payments from borrowers. But over the past two years the organization suffered from borrower defaults and not enough donations, creating too much reliance on loans to cover operating expenses, Rehob said.

Rehob declined to disclose the loan fund's default rate, but a delinquency rate under 20 percent is considered good for loan programs targeting high-risk borrowers.

The loan fund tightened its loan procedures, cut staff from seven to one, sought new capital and tried to negotiate with creditors. But its board of directors concluded that the fund could not survive without relief from creditors.

In its bankruptcy filing, the nonprofit reported $2.2 million in debts. Its gross income last year was $246,726, down from $430,519 a year earlier.

The organization's biggest debts are loans from Bank of Hawaii ($1.2 million), American Savings Bank ($500,000) and the federal Community Development Financial Institutions fund ($500,000).

Jim Wagner, a local bankruptcy attorney representing HCLF, said the organization is unlikely to emerge from bankruptcy unless it receives significant donations. More likely, he said, HCLF's $1.4 million loan portfolio will be sold to another community development lender.

Bank of Hawai'i has been one of the loan fund's biggest supporters and creditors, contributing a mix of loans and grants totaling more than $1.4 million since HCLF's inception.

"We believe that there's a value and need for these institutions because they provide a source of capital and start up businesses that can help be a mechanism of pulling people out of poverty," said Kelly Walsh, Bank of Hawaii senior vice president of compliance and community development. "It can be a great economic development tool. Unfortunately, HCLF, it just didn't work out."

Reach Andrew Gomes at agomes@honoluluadvertiser.com or 525-8065. Reach Catherine E. Toth at ctoth@honoluluadvertiser.com or 535-8103.

— Catherine Toth