Sunday, July 13, 2014

Kestrel Aircraft at the crossroads: Wisconsin Housing and Economic Development Authority denies that $60 million more was committed

Kestrel Aircraft: All These Incentives, but No Construction, No Jobs 

Kestrel Aircraft’s manufacturing future in Superior remains uncertain this summer as company owners and Wisconsin economic developers sort out the details of a 30-month-old state financing package.

“Kestral looks good, the company has confidence in the general aviation market and we have a clear financing plan,” CEO Alan Klapmeier said in a mid-June interview. But having cash in the pocket is difficult for virtually all new ventures. “We’ve been having challenges getting all the economic development pieces we expected in Wisconsin,” he added, choosing his words carefully. “We’re working through the issues.”

The project made a big splash in January of 2012, when plans were announced for Kestrel to design and construct a general aviation turbojet in Superior. Chamber of Commerce President and CEO David Minor called it “the biggest economic development since World War II.” A Kestrel engineering office was quickly established in Superior. Klapmeier and a Superior economic development team had high hopes for the company. They said it would employ 100 persons the first year, 300 the second and about 600 when manufacturing began.

But plans to construct two production plants have not advanced. One facility was to be located in Winter Business Park, where structural components were to be made from composite materials. A second was to be built three miles south at the Richard Bong Municipal Airport, where those parts would be assembled. On the Jan. 20, 2012 edition of Almanac North, Douglas County Board Chair Doug Finn said construction hopefully would begin that spring. Thirty months later, however, ground has not been broken for either plant and employment remains near the first-year mark.

The aviation company initially was able to secure public sector loans through the Wisconsin Economic Development Corp. (WEDC), city and county officials announced at the January 2012 news conference in which Gov. Scott Walker participated. Local speakers further said Kestrel would receive federal new market tax credits valued at $90 million, which are administered by the Wisconsin Housing and Economic Development Agency (WHEDA). That total was listed in the city’s news release and widely reported by the Twin Ports media. Today, however, WHEDA officials say $60 million of those credits were never offered. They note that the agency’s own press release in January 2012 only mentions $30 million. If that’s the case, why didn’t Walker say something? Nobody seems to know.


“We never promised Kestrel anything other than the initial $30 million. We did not promise them an additional $60 million, and that’s a fact,” WHEDA spokesman Kevin Fischer said June 24 in a telephone interview.

Kestrel, which initially intended to manufacture its planes in Maine, moved to Superior for similar reasons, Minor said in the Almanac North segment.

“Basically, Maine was not able to fulfill what they promised in new market tax credits,” he said, explaining that they were administered by a private agency. “In terms of Wisconsin, the benefit is the agency named WHEDA,” which is a state agency. “They control those tax credits. They were able to commit them in a document that Kestrel signed off on.”

No matter the total, the tax credits package is not the same as cash. To receive actual money, the recipient must sell the credits to an investor who desires to reduce his or her tax load. The investor typically benefits by purchasing the credits at a discount, not full value – i.e., $90 million in tax credits might not yield $90 million to the entrepreneur.

Selling the credits wasn’t a problem for Kestrel, which had located a buyer, Klapmeier said. But $30 million falls far short of what an airplane manufacturer needs in its early stages. In 2012, Kestrel partner and board member Adrian Norris told BusinessNorth the company would incur expenses of approximately $120 million by the time its first airplane was sold.

State funds may eventually become available to construct the two production facilities, but currently, they are not. Lacking facilities to produce airplanes also means the company cannot generate sales revenue in the near future, which has become an impediment to gaining confidence with private investors.

“When a project is late one year, investors wonder if it will be late the next year,” Klapmeier explained, noting that every element of uncertainty is a handicap when attempting to raise private capital.

That said, Kestrel hopes to close soon on a private equity infusion that will again accelerate the project, he said, thanks to overseas investors who are confident about Kestrel and its ability to become profitable.

A difficult journey

Within his industry, Klapmeier is well known and respected as a visionary. That only gets you so far, however, in the lending community, where good ideas and vision are often termed “blue sky.”

Wisconsin Technology Council President Tom Still, an expert in venture capital, said Kestrel’s dilemma – in which the company hasn’t yet developed collateral in the form of inventory, machinery or structures – is common among early-stage entrepreneurs.

“It’s not unusual for young companies in any sector to have trouble raising money. A general rule of thumb is that only one in 10 will obtain angel investments. Out of those, only one of 10 move on to get equity financing,” said Still, who writes a column that is published in BusinessNorth and other periodicals.

How long does it typically take?

“Companies such as Kestrel, pardon the pun, have a long runway,” Still said. “It’s a long process, and many find it takes much longer to raise private equity than they expected.” That has been underscored, he added, by the recent recession. Although the government contends a rebound is in progress, Still believes investors remain more cautious than before the downturn began.

As companies develop, it’s not unusual for their plans to evolve, along with their financing needs. That has been the case at Kestrel. In response, Wisconsin lenders this year took a fresh look at current conditions in the private equity market, took them into consideration and restructured Kestrel’s loans, said Mark Maley, public information director for the Wisconsin Economic Development Corp. (WEDC). They also secured a $10,000 grant so Klapmeier could attend an investment conference in China, Maley said.

Further, WEDC restructured terms of its loan repayment schedule.Last December, Kestrel asked to have its payback requirements revised, and board members agreed. A similar deal was reached with the Douglas County Revolving Loan Fund Board, from which Kestrel borrowed $470,000 – approximately half of the fund’s capital.

“This is a capital-intensive business they’re in. It’s not like developing software, where the investment is a lot less,” Still said. There are additional challenges, including complicated regulatory hurdles, strong competition in the general aviation industry and a slow return on private money that’s invested early in the venture.

“They certainly got a great head start in terms of state support, which bodes well with private investors, but they’re also competing against many other entrepreneurs who also have great ideas,” Still said, including two other aviation companies in Wisconsin alone plus others internationally.

“There’s an element of risk, but that’s the nature of the business we do,” Maley said. “We’re hopeful they’ll succeed.”

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