State-backed loans called high risks Independent auditors question support for development funding

$10 million at issue

Critical information was not given to panel before it OK'd deals

September 11, 1996|By Jay Hancock | Jay Hancock,SUN STAFF

Independent auditors have found that more than $10 million in economic development loans guaranteed by the state bear a high risk of default, and that in several cases Maryland's development-loan board wasn't given critical information about the deals before it approved them.

All three of the loans in question were backed by the Schaefer administration in the early 1990s. None of the three borrowers, which include two biotechnology companies, has missed loan payments.

But the risk of default is high enough that the Maryland Industrial Financing Authority's accountants have advised it to set aside enough cash to pay back all three loan guarantees. The authority's problem loans have soared in value from $1.9 million in 1993 to $10.3 million now, and state auditors, legislators and Glendening administration officials are criticizing the ways the deals were scrutinized and completed.

The guarantees "exposed state funds to a fair degree of loss," said Anthony Verdecchia, legislative auditor for the Department of Fiscal Services, who issued a report on development financing in July. "We're not saying that these are bad ventures. But they need to do a better job of underwriting and documenting the underwriting process. We're talking about taxpayer money here."

The state's bond insurance fund helps get loans for companies deemed to be important to Maryland's economy -- companies that otherwise couldn't secure them. In return for insurance premiums, the fund agrees to reimburse lenders if the borrowers go bust. It's similar to private mortgage insurance paid by homeowners who made small down payments.

But in several instances, state staffers didn't furnish crucial information to the financing authority, failed to document the true extent of a borrowers' problems or didn't file other key paperwork, Verdecchia's report said. For example:

The state agreed to guarantee $3 million in loans to Hanover-based Crop Genetics Inc., a biotechnology concern, based in part on CGI's promising deal to sell products through DuPont, the giant chemical company.

But before the loan could be issued, the DuPont deal collapsed and CGI agreed to merge with Biosys Inc., a financially troubled biotech company whose own accountants doubted its ability to survive. But there was "no evidence" that either adverse fact had been communicated to the financing authority, Verdecchia's inspection found.

The authority approved the CGI deal. It is now classified as one of the bond insurance fund's troubled loans. Officials of Biosys, based in Columbia, did not return a phone call yesterday.

Osiris Therapeutics Inc. moved from Ohio to Baltimore with $3.5 million in financing guarantees furnished by the state. But "documentation was lacking to substantiate that a thorough analysis of the risk involved with this project had been conducted," Verdecchia's audit said.

What's more, the state doesn't have stock certificates or any other documents to prove its $500,000 ownership stake in Osiris, the audit said, and Osiris refuses to furnish a legal opinion saying that the ownership exists. Osiris isn't expected to have any revenue until 1999. Meanwhile,it accounts for $3 million of the state's $10 million in problem loans.

James Burns, chairman of Osiris, said there was no problem with the state's ownership stake. "They wanted a letter from our counsel that all the shares are validly issued ," he said. "And those opinions cost money, and that was never part of my negotiation."

The Baltimore International Culinary College used state guarantees to help finance its $8 million purchase in 1994 of the Comfort Inn on West Franklin Street. But the building was appraised at only $3 million, and the state is on the hook for $4 million in guarantees, which has also been added to the problem loan pool. Culinary college officials did not return phone calls.

At a hearing yesterday of the Senate Budget and Taxation Committee, state development officials spoke of lax oversight on other, smaller deals. One company that received state funds, Freewing Aerial Robotics Corp., moved to Texas. Several others are out of business, and many said they hadn't been contacted by state officials since receiving the money years ago.

Implicit at the hearing was criticism of the Schaefer administration and Mark L. Wasserman, his secretary of economic development.

Most of the dubious loans are "issues that go back a fair period of time," said James Brady, the present economic development secretary.

"We were left with the aftermath of those issues, and now we have to manage those." Brady said the department has drastically changed the way it evaluates financing prospects.

Wasserman, now working for Amtrak in Washington, was out of the country and unavailable for comment.

But several officials pointed out that state-guaranteed loans are by definition more risky than regular bank loans and must be expected to go bad occasionally.

Pub Date: 9/11/96

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