How The MEDC Is Tackling Jobs In Michigan

Business Week

By backing loans to small manufacturers, the Michigan Economic Development Corp. is helping companies diversify—if they add workers

Wolverine Metal Stamping in St. Joseph, Mich., has long been trying to diversify beyond automotive clients. To do so, Wolverine needs capital. That's been increasingly hard for small manufacturers to come by as their assets, used as collateral for bank loans, have depreciated during the recession and, in many cases, the auto industry's collapse. Now, a fund sponsored by the Michigan Economic Development Corp. (MEDC) is providing collateral so companies can get loans to shift away from autos. "Existing programs try to help the health of the lender," says Ned Staebler, vice-president for capital access at MEDC, citing the bank bailouts. "The commercial businesses need to be healthier too."

The depreciation of collateral has been severe. A company that had collateral valued at $6 million three years ago could now see those same assets appraised for $2 million, says Ed Mounce, commercial services manager at OMNI Community Credit Union in Battle Creek, Mich., because of the glut of real estate and equipment.

To buy the robots, steel, and presses it needs to diversify, Wolverine had lined up a $2.5 million loan from GE Capital (GE) as of September 2008. While a spokesperson says GE doesn't comment on individual credit decisions, Wolverine's chief financial officer, Bruce Weber, says GE backed out the day after Lehman Brothers collapsed. For over a year, he says, "we've been trying to get the exact same financing done"—but during that time Wolverine's machinery had depreciated by 20%. Meanwhile, the company booked $10 million in new business with such appliance makers as Whirlpool (WHR).

With help from the MEDC-sponsored Michigan Supplier Diversification Fund, the 65-person, $15 million Wolverine is finally getting its loan. OMNI is lending $2.5 million, while getting $1 million in so-called collateral support from the fund. To provide this backing, the fund makes deposits to lending institutions of up to 50% of a loan's value, to a maximum of $2.4 million. That money acts as cash collateral for the business, bolstering the bank's balance sheet and decreasing as the loan is paid down. In return, businesses pledge to create jobs. Weber says Wolverine has brought back almost half the 30 workers laid off this year and plans to rehire the rest by summer. MEDC's Staebler estimates that every $5,000 spent by the fund creates or saves a job. The fund expects a 5% to 6% default rate.

MEDC ran through its $13.2 million fund by making nine loans in four months. About 700 to 1,000 of the state's small manufacturers need funds to diversify. Trade organizations say Michigan companies could use $1 billion in such support, and Staebler says a $10 billion national program could save or create up to 2 million jobs.

Mark One was starting to diversify when it hit funding snags. The Gaylord (Mich.) company, with $10 million in sales, makes machinery used to clean and prep metal surfaces. In 2006, Mark One began developing a more efficient, chemical-free process, drawing interest from a large industrial packager that makes steel drums. Carmakers made up all of Mark One's sales four years ago, but contributed just 10% this year, leaving CEO Frank Kestler to rely on packagers and metal processors. "The banks were retreating from Michigan because of the decline in the automotive industry," Kestler says. With a $3 million loan from Huntington National Bank, backed by $1.2 million in collateral support, Mark One plans to double its staff of 50 in three years. That may do little to dent Michigan's 15.1% jobless rate, but it's a start.