Monday, June 29, 2009

Candidates Bid to Handle CIRM's $500 Million Loan Program

Directors of the California stem cell agency tomorrow will examine proposals from five financial firms that appear to be seeking millions of dollars to basically run the agency's ambitious and unprecedented $500 million biotech lending program.

The proposals come from Comerica Bank in San Diego, Orix Venture Finance in Palo Alto, Square 1 bank in East Palo Alto, Adjuvant Capital Partners in San Francisco and Silicon Valley Bank of Santa Clara.

Their plans were received by CIRM on June 8 after the agency posted an RFP for underwriters for the loan effort. The responses from the five financial firms were not made public until 16 days later.

Their posting late Friday on the CIRM web site came only two business days before the teleconference meeting of the directors' Finance Subcommittee at which they are to be discussed. The directors had asked to receive the material at least five days before tomorrow's meeting. One director said he preferred 10.

The winning underwriters are likely to be No. 1 on CIRM's list of outside contractors – in terms of dollars from CIRM. Outside contracting – at more than $3 million annually – is the second largest item in CIRM's $13 million annual operational budget. (Salaries and benefits are first.)

CIRM is expected to select more than one underwriter because of conflict of interest problems. It is a small financial world in the biotech community.

The Finance Subcommittee discussed the process of selecting underwriters at its June 11 meeting. According to the transcript, the CIRM staff initially proposed that it select the underwriters, but directors said no.

Directors asked for a staff analysis of the proposals that would include thoughts from CIRM Chairman Robert Klein, who originated the concept for the biotech lending program, and CIRM Vice Chairman Duane Roth, who headed the biotech loan task force.

The staff analysis posted Saturday on the CIRM web site is six sentences long, which seems a bit paltry.

Perhaps someone at CIRM knows the cost of each of the competing proposals, but it was not presented in the staff analysis. Their cost is nearly impossible to calculate from the proposals themselves because of their complexity and the lack of a common basis.

One applicant, Adjuvant Capital Partners, declined to use the fee options proposed by CIRM. Peter Barton Fair of Adjuvant wrote,
“Both of the proposed fee structures compensate the delegated underwriter based on the number of closed transactions they underwrite. As we have seen recently in the mortgage industry, incentivizing an underwriter based on volume creates a conflict of interest and can result in the underwriting of poor quality loans. The fee structure we proposed eliminates this conflict of interest.”
Fair's reference was to the use of delegated underwriting by Fannie Mae, which many believe played an important role in its financial downfall.

The Finance Subcommittee directed the staff to invite representatives from all five companies to attend tomorrow's meeting to answer questions.

It is doubtful that potential borrowers will appear. Some of them, however, might have questions about the fee structures. One applicant, Orix, proposed an upfront, nonrefundable fee that could total $50,000 from a loan applicant on a $10 million loan. Based on the Orix proposal, it appears that the fee would have to be paid before the CIRM board approves the proposed research. Orix also proposed $950-a-day, per person fees for “out of pocket expenses.”

Such fees may be customary and justified for this sort of work. However, CIRM's loan program ostensibly targets firms facing a “financial valley of death.” They may be a bit strapped to handle such costs.

If you are interested in hearing or participating in tomorrow's meeting, you can find teleconference locations in San Francisco, Palo Alto, Menlo Park, Irvine, Berkeley, Tucson, Az., Los Angeles and Stanford. Specific addresses can be found on the agenda.

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