Debenture Calculator

Using the NMVC Program New Markets Debenture Calculator

The New Markets Debenture Calculator is available for use by New Markets Venture Capital Companies (NMVCCs) that make financings which qualify as "Low Income Investments" under section 108.50 of the NMVC program regulations.

If you are familiar with New Markets Debentures and using the calculator, you can bypass the information on this page and go directly to the following link to access the New Markets Venture Capital Program's Low Income (LI) Debenture Calculator:

http://www.fhlbc.com/sba/newmarketcalculatorpage.htm

New Markets Debentures

The New Markets Debentures have the following characteristics:

1. New Markets Debentures are deferred interest debentures issued at a discount.  This allows prepayment of interest for the first 5 years of its term and therefore requires no payment for 5 years from the date of issuance plus the length of time between the issue date and the next March 1 or September 1, whichever comes first.  SBA refers to this period of time as the "stub" period and employs its use so that all New Markets Debentures have common prepayment and maturity dates of March 1 or September 1.  A New Markets Debenture issued on March 1 or September 1 would have a full six month stub period.

2. New Markets Debentures are available only for a 10 year maturity (plus the stub period).  The 10 year New Markets Debenture requires semi-annual interest payments during the last 5 years of its term.  It does not permit prepayment for a period of 12 months (plus the stub period) after issuance.  Thereafter, prepayments are allowable, but only on March 1 or September 1 of each year. The actual period during which you cannot prepay may be from 12-18 months depending on the length of the stub period.  The cost of prepayment is the present value of the New Markets Debenture on the semi-annual date chosen for prepayment.

3. SBA will not pool New Markets Debentures. The Federal Home Loan Bank of Chicago (FHLB) has agreed to purchase all New Markets Debentures and hold them until maturity. The interest rate on New Markets Debentures will be determined by FHLB using a spread over the FHLB's cost of funds as determined on each draw date.

New Markets Debenture Eligibility Requirements

NMVCCs must be eligible to issue leverage in an amount equal to the face amount of the New Markets Debenture requested (Sections 108.1120 - 108.1150) of the NMVC program regulations).  NMVCCs are eligible for a New Markets Debenture with a face amount not greater than 1.5 times the sum of existing and specifically planned LI Investments, minus the face amount of any outstanding New Markets Debentures.  In other words, the New Markets Debenture amount requested, plus outstanding New Markets Debentures, cannot exceed 1.5 times the sum of existing and proposed LI Investments.  In general, net proceed amounts of New Markets Debentures should roughly match LI Investment amounts. Given recent interest rates, the 1.5 ratio should provide sufficient cushion to allow for this rough matching of proceeds to investments.

New Markets Debenture Draws

You must have an outstanding debenture commitment from the SBA, as well as qualifying Low Income (LI) Investments or specific plans to make such Investments with the net proceeds of the New Markets Debenture requested. The Just-In-Time (JIT) funding process has been modified so that NMVCCs apply for New Markets Debentures according to the instructions provided in SBA Form 2208. A model legal opinion for the New Markets Debenture can also be found in SBA Form 2209.

Funding under JIT is a two-step process:

1. NMVCCs apply for approval to draw leverage under an outstanding SBA leverage commitment. You receive a 45-day NMVC Approval Notice for each New Markets Debenture for which you are approved.

2. NMVCCs request funds by faxing the completed Approval Notice to JP Morgan Chase Bank one business day before needing the funds.

Key Aspects To Remember

1. There are two draw application windows every month – the 1st and 3rd Wednesdays of the month. SBA must receive your draw application by 10:30 a.m. (Eastern) on such days.

2. NMVC Approval Notices are faxed by SBA on the 2nd and 4th Wednesdays of every month and expire 45 days from the date of issuance.

3. Only one draw is allowed per NMVC Approval Notice. That draw can be in any amount (in $5,000 increments) up to and including the Maximum Face Amount of New Markets Debenture indicated on the LI Approval Notice. To draw funds, you must complete Section II of the LI Approval Notice and fax the entire document to JP Morgan Chase Bank (as custodian) by 2:00 p.m. (Eastern) on the business day prior to your draw date. On your draw date, the FHLB will price your New Markets Debenture and you will receive your funding. As we mentioned above, the New Markets Debenture has a zero coupon feature for approximately 5 years, so that the proceeds you receive for the sale of the debenture are reduced by the cost of the interest for such period.  SBA guarantees a New Markets Debenture with a specific face amount.  The NMVCC receives the net proceeds from the debenture's sale, which is equal to: the face amount of the Debenture, less the interest discounted for approximately 5 years.

Calculating Net Proceeds

NMVCCs need to know more precisely the amount of net proceeds needed when requesting a New Markets Debenture with a certain face amount. The FHLB's New Markets Debenture Calculator provides a simple way to estimate the face amount of the New Markets Debenture you will need in order to generate net proceeds sufficient for your purposes.  You simply enter the face amount and the term of the New Markets Debenture into the New Markets Debenture Calculator. The calculator will produce the net proceeds for the current business day using the current interest rate charged by the FHLB. The calculator only provides an estimate of ultimate net proceeds because the interest rate charged by the Bank is changed every business day, and there is no way to know in advance what rate will be in effect on the day you draw funds.

We suggest that you use the New Markets Debenture Calculator to track the interest rate charged by the FHLB from the time that you apply for funding, once approved, until the day you actually draw down the funds, as the net proceeds of the face amount will depend on that day's interest rate. The New Markets Debenture Calculator cannot give you in advance the exact net proceeds for the day that you expect to draw, so it is best to estimate a cushion in the requested amount to account for any fluctuation in interest rates between the application date and the date you actually draw down the funds.

The New Markets Debenture Calculator can also be used to estimate the net proceeds you can expect to be made available on the day you draw by calculating the net proceeds and face amount on the business day prior to the day you will issue your New Markets Debenture. It is possible that the net proceeds required will result in an actual face amount that is less than the net amount for which you applied. Any excess funds will expire after 45 days and revert to your available commitment for future draws.

For example, as of 11/1/03 the calculator shows that a debenture request for face amount of $1.0 million would generate $752, 738.60 in net proceeds at an interest rate of 5.423%.  If interest rates were to rise by one quarter of a percent or 25 basis points between that date and the date the funds were drawn down, you would net only $743,081.25.

If you draw down less that the face amount of your request (e.g.. $900,000 rather than $1.0 million) the difference of $100,000 remains available for future debenture funding.

Again, to apply for a New Markets Debenture follow the instructions provided in SBA Form 2208. A model legal opinion for the New Markets Debenture can also be found in SBA Form 2209.