{"component": "definition", "props": {"groups": [{"size": 4, "snippet_links": [], "samples": [{"hash": "vXNFkh8z6j", "uri": "/contracts/vXNFkh8z6j#seq", "label": "Equity Participation Agreements", "score": 15.1704312115, "published": false}], "snippet": "00000002\" RES=\"600dpi\" FMT=\"TIFF6.0\" FTR=\"UNSPEC\" CNF=\"890\" N=\"1\">", "hash": "c3092cc51dc2565d218cbdc71bae6f95", "id": 1}, {"size": 2, "snippet_links": [{"key": "high-risk", "type": "clause", "offset": [100, 109]}, {"key": "return-on-equity", "type": "definition", "offset": [118, 134]}, {"key": "for-the-borrower", "type": "clause", "offset": [146, 162]}, {"key": "cost-of-credit", "type": "clause", "offset": [217, 231]}, {"key": "protective-covenants", "type": "definition", "offset": [297, 317]}, {"key": "by-the-bank", "type": "clause", "offset": [334, 345]}, {"key": "to-the-bank", "type": "clause", "offset": [401, 412]}, {"key": "services-offered", "type": "clause", "offset": [435, 451]}, {"key": "a-commitment", "type": "definition", "offset": [487, 499]}, {"key": "availability-of-funds", "type": "clause", "offset": [514, 535]}, {"key": "for-non", "type": "clause", "offset": [730, 737]}, {"key": "business-case", "type": "clause", "offset": [773, 786]}, {"key": "market-power", "type": "definition", "offset": [794, 806]}, {"key": "financial-structure", "type": "clause", "offset": [904, 923]}, {"key": "for-example", "type": "clause", "offset": [952, 963]}, {"key": "taxable-income", "type": "definition", "offset": [985, 999]}, {"key": "cost-of-debt", "type": "definition", "offset": [1005, 1017]}, {"key": "cost-of-equity", "type": "definition", "offset": [1044, 1058]}, {"key": "tax-basis", "type": "clause", "offset": [1071, 1080]}, {"key": "financing-vehicle", "type": "definition", "offset": [1124, 1141]}, {"key": "the-debt", "type": "clause", "offset": [1248, 1256]}, {"key": "cost-differential", "type": "clause", "offset": [1264, 1281]}, {"key": "stock-market", "type": "definition", "offset": [1349, 1361]}, {"key": "for-epa", "type": "clause", "offset": [1381, 1388]}, {"key": "private-placement", "type": "definition", "offset": [1478, 1495]}, {"key": "public-policy", "type": "definition", "offset": [1605, 1618]}, {"key": "concerning-the", "type": "clause", "offset": [1667, 1681]}, {"key": "conclusion-of", "type": "clause", "offset": [1773, 1786]}, {"key": "type-of-financing", "type": "clause", "offset": [1822, 1839]}, {"key": "national-banks", "type": "clause", "offset": [2157, 2171]}, {"key": "comptroller-of-the-currency", "type": "definition", "offset": [2196, 2223]}, {"key": "effect-of-this", "type": "clause", "offset": [2262, 2276]}, {"key": "confirmed-with", "type": "definition", "offset": [2286, 2300]}, {"key": "chief-counsel", "type": "definition", "offset": [2319, 2332]}, {"key": "office-of-the", "type": "definition", "offset": [2403, 2416]}, {"key": "paragraph-7", "type": "definition", "offset": [2484, 2495]}, {"key": "new-york", "type": "definition", "offset": [2577, 2585]}, {"key": "first-national", "type": "definition", "offset": [2652, 2666]}, {"key": "bank-of", "type": "clause", "offset": [2667, 2674]}, {"key": "section-6", "type": "definition", "offset": [3017, 3026]}], "samples": [{"hash": "vXNFkh8z6j", "uri": "/contracts/vXNFkh8z6j#seq", "label": "Equity Participation Agreements", "score": 15.1704312115, "published": false}], "snippet": "00000048\" RES=\"600dpi\" FMT=\"TIFF6.0\" FTR=\"UNSPEC\" CNF=\"847\" N=\"47\"> O0) -47 -higher-variance (i.e., high risk, higher return on equity) projects. For the borrower, the EPA can increase the availability and reduce the cost of credit by providing an economical alternative to a comprehensive set of protective covenants usually imposed by the bank to achieve the same result. Second, it offers a reward to the bank for credit or special services offered to a borrower (e.g., a \"bail-out,\" a commitment for continued availability of funds through difficult times). From the borrower's viewpoint, the EPA can be a fair and relatively painless way of paying for useful services on a conditional basis. This may be especially important for non-prime borrowers (the typical small business case) whose market power and price elasticity are low or nonexistent. Arguments were also advanced regarding economic and financial structure barriers to the use of EPA. For example, when a borrower has taxable income, the cost of debt is usually well below the cost of equity on an after tax basis. — The EPA then becomes an expensive financing vehicle. Where no taxable income exists, the cost of debt and cost of equity are more nearly equal after tax, and the debt-equity cost differential argument is reduced in importance. Also, it is well known that the stock market as an \"exit route\" for EPA vehicles has been very uncertain in recent years. In the paper a variety of internal and private placement alternatives were demonstrated which make the EPA feasible, even with small-firm borrowers. Finally, certain public policy questions were addressed and arguments advanced concerning the prospective impact such pricing would have on banking and its relation to the economy. The conclusion of this paper is that demand for this type of financing will grow and that it should be governed through regulation and not through prohibition. - I.,.-L~ —IL~~ ~ ~ ~L*~U~i I~ IL~C-I~I~1 ~CI II CCICI~I - I — C -CI1~l REFERENCES [1] Comptroller's Manual for National Banks (Washington, D.C., U.S. Comptroller of the Currency, Sec. 7312, January 1969), p. 37. The effect of this has been confirmed with Mr. \u2587\u2587\u2587\u2587 \u2587\u2587\u2587\u2587\u2587\u2587\u2587, Chief Counsel, Comptroller of the Currency. [2] Private communication &jith the office of the Comptroller of'the Currency, Washington, D.S., April 27, 1980. [3] Paragraph 7, U.S. Rev. Stat. ~ 5136, 12 U.S.C., ~ 24. [4] \u2587\u2587\u2587\u2587\u2587'\u2587 Digest and Legal Opinions,(New York, American Bankers Association, Vol. III), p. 2600. [5] Cassatt v. First National Bank of West New York (1933) 111 N.J. 536, 168 Atl. 585, 89 A.L.R. 1302, review denied 291 U.S. 660, 54 S. Ct. 377, 78 L. ed. 1052; \u2587\u2587\u2587\u2587\u2587 v. Brockton National Bank (1940) 305 Mass. 521, 26 \u2587\u2587\u2587. (2d) 360; Mc Carthy v Brockton National Bank (1943) 314 Mass. 521, 50 N.E. (2d) 196. [6] \u2587\u2587\u2587\u2587\u2587'\u2587 Digest Supplement (New York, American Bankers Association, Section 6, March 1969), p.", "hash": "fda7eb4ed906c849554f0c2272835548", "id": 2}, {"size": 2, "snippet_links": [{"key": "bank-loans", "type": "clause", "offset": [76, 86]}, {"key": "publicly-traded", "type": "definition", "offset": [136, 151]}, {"key": "commercial-banking", "type": "clause", "offset": [343, 361]}, {"key": "scope-and", "type": "clause", "offset": [390, 399]}, {"key": "market-share", "type": "clause", "offset": [400, 412]}, {"key": "core-deposits", "type": "definition", "offset": [526, 539]}, {"key": "bank-equity", "type": "definition", "offset": [545, 556]}, {"key": "bank-assets", "type": "definition", "offset": [590, 601]}, {"key": "the-combination", "type": "clause", "offset": [603, 618]}, {"key": "the-credit", "type": "definition", "offset": [779, 789]}, {"key": "the-customers", "type": "clause", "offset": [814, 827]}, {"key": "various-stages-of-development", "type": "clause", "offset": [911, 940]}, {"key": "to-extend", "type": "clause", "offset": [1008, 1017]}, {"key": "the-equivalent-of", "type": "definition", "offset": [1018, 1035]}, {"key": "repayment-of", "type": "clause", "offset": [1082, 1094]}, {"key": "the-common-stock", "type": "clause", "offset": [1206, 1222]}, {"key": "with-the-bank", "type": "clause", "offset": [1265, 1278]}, {"key": "high-risk", "type": "clause", "offset": [1306, 1315]}, {"key": "commercial-loans", "type": "definition", "offset": [1316, 1332]}, {"key": "loan-financing", "type": "definition", "offset": [1371, 1385]}, {"key": "chattel-mortgage", "type": "definition", "offset": [1438, 1454]}, {"key": "small-business", "type": "definition", "offset": [1517, 1531]}, {"key": "investment-companies", "type": "definition", "offset": [1532, 1552]}, {"key": "to-provide", "type": "definition", "offset": [1560, 1570]}, {"key": "term-financing", "type": "definition", "offset": [1576, 1590]}, {"key": "small-companies", "type": "clause", "offset": [1594, 1609]}, {"key": "high-growth", "type": "clause", "offset": [1615, 1626]}, {"key": "equity-participation", "type": "definition", "offset": [1638, 1658]}, {"key": "by-the-bank", "type": "clause", "offset": [1746, 1757]}, {"key": "terms-of", "type": "clause", "offset": [1769, 1777]}, {"key": "time-of-closing", "type": "clause", "offset": [1787, 1802]}, {"key": "voting-interest", "type": "definition", "offset": [1827, 1842]}, {"key": "the-borrowing", "type": "clause", "offset": [1846, 1859]}, {"key": "supplemental-compensation", "type": "definition", "offset": [1886, 1911]}, {"key": "business-loans", "type": "clause", "offset": [1924, 1938]}, {"key": "voting-power", "type": "clause", "offset": [2017, 2029]}, {"key": "method-of", "type": "clause", "offset": [2053, 2062]}, {"key": "the-stock", "type": "clause", "offset": [2227, 2236]}, {"key": "a-bank", "type": "clause", "offset": [2261, 2267]}], "samples": [{"hash": "vXNFkh8z6j", "uri": "/contracts/vXNFkh8z6j#seq", "label": "Equity Participation Agreements", "score": 15.1704312115, "published": false}], "snippet": "00000041\" RES=\"600dpi\" FMT=\"TIFF6.0\" FTR=\"UNSPEC\" CNF=\"891\" N=\"40\"> -40 - * Bank loans will become far more prominent at the expense of publicly traded issues, which will shrink in importance. * \u2587\u2587\u2587\u2587\u2587 will attempt to demand strong guarantees or equity kickers from borrowers, this giving them a greater say in corporate decisions. [21] If the commercial banking industry is to increase the scope and market share of its credit activity it must come to grips with two major problems, purchased funds now equal about 2.25 times core deposits; and bank equity equals less than four percent of bank assets. The combination of pressures will require an imaginative response from the banking industry. As a result, the role of analysis and judgement has become critically important in the credit function. In developing the customers required for continued growth, banks will need to accomodate the needs of firms in various stages of development, including less mature firms. In many cases banks will be required to extend the equivalent of risk capital: unsecured, long-term funds, the repayment of which is dependent on future earnings. This will demand an analytical approach more closely resembling that of the common stock analyst than that historically associated with the bank credit analyst. For years, high risk commercial loans have been handled through installment loan financing where add-on interest, strict amortization, and the chattel mortgage made such loans bankable. More recently, banks have chartered small business investment companies (SBIC) to provide long-term financing to small companies with high growth potential. Equity participation is virtually a standard feature of SBIC operations and the volume of equity realizable by the bank's SBIC (in terms of value at time of closing) will represent.a large voting interest in the borrowing firm. The use of EPA's as supplemental compensation on non-SBIC business loans differs distinctly from their use in SBIC operations. The bank cannot realize voting power or dividends from this method of pricing commercial loans because
it cannot effectively hold the stock. The volume of warrants a bank may take without fearing S.", "hash": "cf17e48c7d3eb541c8f3144c94d19dd2", "id": 3}, {"size": 1, "snippet_links": [{"key": "work-on", "type": "definition", "offset": [91, 98]}, {"key": "the-firm", "type": "clause", "offset": [157, 165]}, {"key": "agency-costs", "type": "definition", "offset": [188, 200]}, {"key": "ownership-structure", "type": "definition", "offset": [206, 225]}, {"key": "treatment-of", "type": "definition", "offset": [306, 318]}, {"key": "variation-of", "type": "clause", "offset": [321, 333]}, {"key": "the-application", "type": "clause", "offset": [334, 349]}, {"key": "in-\u2587", "type": "clause", "offset": [359, 363]}, {"key": "financial-decisions", "type": "clause", "offset": [400, 419]}, {"key": "new-york", "type": "definition", "offset": [421, 429]}, {"key": "bond-indenture", "type": "clause", "offset": [556, 570]}, {"key": "loan-agreement", "type": "definition", "offset": [574, 588]}, {"key": "financial-management", "type": "clause", "offset": [681, 701]}, {"key": "community-bank", "type": "definition", "offset": [844, 858]}, {"key": "new-interest", "type": "definition", "offset": [933, 945]}, {"key": "business-review", "type": "clause", "offset": [979, 994]}, {"key": "business-week", "type": "definition", "offset": [1051, 1064]}], "samples": [{"hash": "vXNFkh8z6j", "uri": "/contracts/vXNFkh8z6j#seq", "label": "Equity Participation Agreements", "score": 15.1704312115, "published": false}], "snippet": "00000050\" RES=\"600dpi\" FMT=\"TIFF6.0\" FTR=\"UNSPEC\" CNF=\"826\" N=\"49\"> -49 - [16] The seminal work on this application is \u2587. \u2587\u2587\u2587\u2587\u2587\u2587 and \u2587. \u2587\u2587\u2587\u2587\u2587\u2587\u2587\u2587, \"Theory of the Firm: Managerial Behavior, Agency Costs, and Ownership Structure,\" Journal of Financial Economics, Vol. 3, October 1976, pp. 305-360. A valuable treatment of a variation of the application is found in \u2587. \u2587\u2587\u2587\u2587\u2587 and \u2587. \u2587\u2587\u2587\u2587\u2587\u2587, The Theory of Financial Decisions (New York: McGraw Hill, 1979) Ch. 14 et. seg. [17] \u2587\u2587\u2587\u2587\u2587 \u2587. \u2587\u2587\u2587 Home, \"A Linear Programming Approach to Evaluating Restrictions Under a Bond Indenture or Loan Agreement,\" Journal of Financial and Quantativ tive Analysis, 1, June 1966, pp. 68-83. [18] Van Home, Financial Management and Policy, Englewood Cliffs, N.J. (PrenticeHall, 5th. ed,., 1980) pp. 284-291. [19] \u2587\u2587\u2587\u2587\u2587\u2587 \u2587. \u2587\u2587\u2587\u2587, Is There A Place For Equity Kickers In A Community Bank? (Boston, Financial Publishing Company, 1972) pp. 92-110. [20] \u2587. \u2587\u2587\u2587\u2587\u2587, \"New Interest in Incentive Financing,\" Harvard Business Review, July-August, 1966, p. 101. [21] \"New Era For Banking,\" Business Week, April 21, 1980, p. 94,95. - — ' --- —- ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~~~~~~~~~~II2 -- - - ~cLI
", "hash": "df6ad4c07eb391b1b38c2516297571ee", "id": 4}, {"size": 1, "snippet_links": [{"key": "one-year", "type": "clause", "offset": [142, 150]}, {"key": "portfolio-yield", "type": "clause", "offset": [204, 219]}, {"key": "current-portfolio", "type": "definition", "offset": [258, 275]}, {"key": "the-interest-rate", "type": "clause", "offset": [283, 300]}, {"key": "the-assistance", "type": "clause", "offset": [355, 369]}, {"key": "the-banks", "type": "clause", "offset": [375, 384]}, {"key": "subordinated-debt-holders", "type": "definition", "offset": [439, 464]}, {"key": "five-years", "type": "definition", "offset": [540, 550]}, {"key": "certificate-of-deposit-rate", "type": "definition", "offset": [557, 584]}, {"key": "general-creditors", "type": "clause", "offset": [656, 673]}, {"key": "subordinated-creditors", "type": "definition", "offset": [694, 716]}, {"key": "the-package", "type": "clause", "offset": [749, 760]}, {"key": "issue-to", "type": "clause", "offset": [786, 794]}, {"key": "shares-of", "type": "clause", "offset": [860, 869]}, {"key": "common-stock", "type": "definition", "offset": [874, 886]}, {"key": "the-warrants", "type": "clause", "offset": [904, 916]}, {"key": "the-holding-company", "type": "clause", "offset": [977, 996]}, {"key": "credit-arrangement", "type": "clause", "offset": [1030, 1048]}, {"key": "approved-by", "type": "definition", "offset": [1064, 1075]}, {"key": "interest-payments", "type": "definition", "offset": [1203, 1220]}, {"key": "the-loan", "type": "clause", "offset": [1257, 1265]}, {"key": "the-transaction", "type": "clause", "offset": [1281, 1296]}, {"key": "bank-regulators", "type": "definition", "offset": [1334, 1349]}, {"key": "agreed-to", "type": "definition", "offset": [1423, 1432]}, {"key": "interest-for", "type": "definition", "offset": [1609, 1621]}, {"key": "of-the-borrower", "type": "clause", "offset": [1664, 1679]}, {"key": "accepted-by", "type": "definition", "offset": [1689, 1700]}, {"key": "regulatory-agencies", "type": "definition", "offset": [1705, 1724]}, {"key": "regulatory-agency", "type": "clause", "offset": [1814, 1831]}, {"key": "bank-lenders", "type": "definition", "offset": [1839, 1851]}, {"key": "equity-participation", "type": "definition", "offset": [1882, 1902]}, {"key": "acceptance-of", "type": "clause", "offset": [1924, 1937]}, {"key": "risk-in", "type": "clause", "offset": [1946, 1953]}, {"key": "a-loan", "type": "definition", "offset": [1954, 1960]}, {"key": "income-participation", "type": "definition", "offset": [2074, 2094]}, {"key": "term-loans", "type": "clause", "offset": [2119, 2129]}, {"key": "interest-on", "type": "definition", "offset": [2297, 2308]}, {"key": "taxes-and", "type": "clause", "offset": [2365, 2374]}], "samples": [{"hash": "vXNFkh8z6j", "uri": "/contracts/vXNFkh8z6j#seq", "label": "Equity Participation Agreements", "score": 15.1704312115, "published": false}], "snippet": "00000010\" RES=\"600dpi\" FMT=\"TIFF6.0\" FTR=\"UNSPEC\" CNF=\"887\" N=\"9\"> -9-... the FDIC's five-year $325 million loan... will be interest-free for one year and bear interest set at 125% of the FDIC investment portfolio yield for the subsequent four years. At the current portfolio yield, the interest rate would be 10.67%. The FDIC loan will be subordinate to the assistance from the banks, but senior to the First Pennsylvania Bank's existing subordinated debt holders ahd stockholders. The $175 million in loans from private banks will be for five years, at a certificate of deposit rate established annually. They will be subordinate to depositors and other general creditors but senior to other subordinated creditors, including the FDIC. As part of the package, First Pennsylvania will issue to the FDIC and the assisting banks warrants to purchase 20 million shares of its common stock at $3 per share. The warrants have a seven year life and any proceeds must be invested by the holding company as equity in the bank. [10] This credit arrangement has since been approved by First Pennsylvania stockholders. The pricing scheme very clearly employs warrants in what is obviously a trade-off for reduced interest payments both initially and over the life of the loan. The spirit of the transaction is evident in the following comment: Bank regulators believe the aid package provides \"substantial rewards\" to those who have agreed to help First Pennsylvania and will prevent shareholders from receiving a complete \"bail-out.\" [1 ] It may be inferred from this remark that the trade-off of a \"certain\" level of interest for a return conditional on the profitability of the borrower has been accepted by the regulatory agencies. It may also be inferred that the \"reward\" for the partial \"brail-out\" is recognition by regulatory agency and by bank lenders of the use of the conditional equity participation as a premium for the acceptance of greater risk in a loan. These appear to be important inferences, especially in the light of the following comment: Some banks have used income participation clauses with commercial term loans and with loans on income properties, such as apartment houses. Although the authors believe that such clauses make economic sense, legislative threats to make all the interest on such loans non-deductible for the computation of income taxes and to outlawd income participations