Sunday, December 2, 2001

Large aquaculture
loan risky for
state Ag Dept.

A single $2.5 million loan under
consideration for Ceatech USA
is 10 percent of the program

By Tim Ruel

Ceatech USA's pending loan of $2.5 million is one of the state Agriculture Department's largest loans ever, drawing continuing concern from the administrator of the Agriculture Loan Division.

A failure to repay could jeopardize the entire $26 million program, said administrator Doreen Shishido.

"It is a significant amount," she said. "We're talking 10 percent." It would be akin to First Hawaiian Bank making a single loan of $500 million, based on the bank's 2000 net loan portfolio of $5.4 billion.

More significantly, the money for the Ceatech loan comes from the Agriculture Department's revolving fund. "A revolving fund means we're self-sufficient," Shishido said. The interest collected pays for administrative expenses, including staff salaries, and the principal goes back into the fund for future loans.

"If we don't get the money back we don't get paid," she said. Any failure of Ceatech to repay would "affect the livelihood of this program," Shishido said.

Denis C.H. Kam, a former loan executive for local banks, defended Ceatech's application for the money at an Oct. 25 Board of Agriculture meeting on Kauai. Kam made the presentation at the request of James J. Nakatani, chairman of the Agriculture Department.

Ceatech is a viable shrimp farming company that can use a state loan to expand operations by building more ponds to raise shrimp and turn a profit, Kam said.

"We're committed and we don't all want to have to move to Montana," Ernest Dias, president and chief executive of Ceatech, told the board. "We don't want anybody walking around pointing fingers at my kids telling them how their father burned the state of Hawaii."

Ceatech, founded in 1995, has posted continuing losses that total $6.7 million. The Honolulu-based firm has primarily received funding from its stockholders and directors, as well as a $3 million Bank of America loan that is guaranteed by the U.S. Agriculture Department and backed by the firm's lease of state-owned land.

Ceatech had sought a $4.5 million loan earlier this year from the state Agriculture Department under a new program crafted specifically for farms on Kauai. The lure of the loan is its below-market interest rate of 3 percent. Shishido denied Ceatech's application, saying the company couldn't pay the money back. Shishido has rejected Ceatech's projections that expansion would help the company reach profitability, saying that Ceatech has made such promises before in its public earnings reports.

Following Kam's presentation, the board effectively overruled Shishido and approved a smaller $2.5 million loan to Ceatech. Shishido was not called to testify during the board's meeting.

In his presentation, Kam said Ceatech's loan was a reasonable risk and that the company could break even as early as August 2002.

Kam's main assertion was that Ceatech's financial projections were based on three years of actual operating results.

Kam admitted that Ceatech's assets don't have any current value for collateral if the company fails to pay the loan, a point previously made by Shishido.

"As the company is in the late stages of development, you're not going to have solid assets offered as collateral," Kam told the board. Rather, he pointed to the future value the assets would have after the company turns a profit. However, the state still could recoup nothing if Ceatech defaults on the loan.

Ceatech is currently negotiating its collateral with Kam.

The tone of Ceatech's presentation often focused on the need to diversify Hawaii's agriculture from its history of growing sugar.

The remarks appear to be directed toward Kauai sugar grower Gay & Robinson, which has been seeking a $4 million loan under the same program as Ceatech. Because the total amount of the program was limited to $5 million, the firms were effectively competing for funds.

"I think if we are truly going to diversify our agricultural sector, then we need to make some investments in commodities other than sugar," said Letitia Uyehara, deputy director of the Agriculture Department.

Kam questioned why Gay & Robinson was requesting money under the same program as Ceatech, since Gay & Robinson had no outstanding loans. Gay & Robinson should apply under a less lenient state loan program, Kam said. Kam is a board member of the Agriculture Department's Agribusiness Development Corp., which was formed in 1994 to diversify Hawaii's agriculture from sugar to other crops.

Kam's comments stand in direct contrast to a previous position from the Agriculture Department.

Gay & Robinson has been attempting to expand its operations to stay alive in the wake of the failure of Kauai sugar grower Amfac in November 2000.

In March 2000, the Agriculture Department released a draft piece of legislation that said the state should avert the potential closure of Gay & Robinson by loaning the firm as much as $10 million.

This year, Gay & Robinson spent $2.3 million to buy Amfac's sugar terminal at Nawiliwili Harbor, giving it the capacity to ship more sugar. Gay & Robinson has also increased its employee count 15 percent since June, to nearly 310 workers from 270.

Shishido approved Gay & Robinson's loan bid for $4 million, but the firm was later advised to drop its request to $1.8 million, which freed up funds for Ceatech. Gay & Robinson, which will have to seek funding elsewhere at a higher rate of interest, could not be reached for comment.

The firm agreed to cut its request partly because of politics, Gay & Robinson said in an Oct. 18 letter to Shishido.

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