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History of Collateral for CWCB Loans <br /> In the past the CWCB would"own"the project,and actually deed it back to the project sponsor <br /> after repayment. We would use "the project" or an undivided part interest in the project as collateral. <br /> While ownership of an entire project would have some value in the event of default, it would require <br /> that the CWCB take control of operations, and eventually sell the project to recoup the loan amount. <br /> The CWCB would be responsible for operation and maintenance expenses, and in the end the sale <br /> proceeds would likely be less than the outstanding loan balance. This type of collateral helps us <br /> negotiate with the Borrower after default,but has limited value to others. In summary,the project has <br /> low liquidity, since it very difficult to convert it to cash. <br /> In the past the CWCB has also identified parts of the project(such as "300 tons of riprap", <br /> "200 feet of 10"pipe", " 24" gate valve",etc.)to use as collateral. Clearly this type of collateral would <br /> be of little or no value in event of default, since it represents only a piece of the project.Also,it would <br /> likely cost more to dig up 200 feet of pipe than the used pipe would be worth. <br /> Liquidity <br /> Liquidity is the ability to convert collateral into cash,in the event of default. Table 1 on the <br /> next page generally rates several types of collateral into Low,Moderate,and High liquidity(High being <br /> • the most easily converted to cash) Highly liquid collateral will maintain its stated value regardless of <br /> economic conditions. Low liquidity collateral may be worth very little in depressed economic <br /> conditions. <br /> In a perfect world, we would like all collateral for CWCB loans to be of High liquidity. In <br /> reality, few of our Borrowers can offer this. For example,if a Borrower could offer a CD in the full <br /> amount of the loan,that Borrower wouldn't need the loan. On the other hand,Borrowers would prefer <br /> to offer collateral of Low liquidity(like the project itself)since this type collateral is always available, <br /> and is seldom accepted by other lending institutions. <br /> A reasonable middle ground is needed. For this reason, there have been numerous Board <br /> discussions regarding collateral requirements, usually carried on during the CWCB loan approval <br /> process. The result has been that CWCB collateral requirements have evolved to that shown in Table <br /> 1. These requirements are more in line with standard underwriting requirements of lending institutions. <br /> • <br /> 3 <br />