Dairy Funded by Development Bank to Close

In a blow that could cost the beleaguered Los Angeles Community Development Bank--and potentially taxpayers--as much as $18 million, its largest borrower notified employees Wednesday that it will close.

Copeland Beverage Group, a South Los Angeles dairy, announced the imminent closure to more than 100 workers early in the day, a company source said. The announcement is a bitter disappointment to both the dairy and the federally funded bank, formed in the wake of the riots to create jobs in the city’s most troubled pockets.

The Copeland deal began as a $4-million loan touted by politicians as a prototype to cure urban ills. But it burgeoned in the last two years into a $24-million commitment that now accounts for a quarter of the bank’s portfolio.

Although the bank had identified the loan as severely impaired as early as January, it continued to loan money to the dairy. Bank Chief Operating Officer Steve Valenzuela said Wednesday that the loan had been designated a total loss.

Combined with other already-soured deals, it brings the portfolio losses to 30%--three times higher than what the bank initially planned for. While 10% is covered through other reserves, the remaining 10% could come out of other bank programs, he said.

The anticipated job loss from the closure is especially stinging, as the bank’s mandate was to create jobs by financing businesses rejected by conventional lenders. A Times investigation earlier this year found that nearly a third of the bank’s major borrowers were in trouble with their loans and that the bank was falling far short on its job creation mandate.

The announcement of an imminent closure came a week after the bank informed dairy officials that no more loans would be forthcoming. Overseen by the city, county and the federal Department of Housing and Urban Development, the bank was not supposed to exceed $20 million in loans to any individual borrower. The fact that the Copeland loan had breached that cap had created consternation among City Council members in the last few weeks.

The bank’s interim chief executive, former RLA chief Linda Griego, said the bank learned only late Wednesday of the planned closure and that bank staff members were “exploring our options with respect to protecting our collateral.”

Launched in 1995, the bank was first criticized for not making enough loans. A series of large high-profile deals followed, several of which soured.

“Hopefully we’ve learned from our mistakes . . . so we’re smarter going into some other deals,” Griego said. “There was some pressure to look at some bigger deals, and perhaps we weren’t quite ready to do the bigger deals.”

The bank’s funds are secured by future federal social service grants to the city, making the institution’s success of particular importance to government officials here. However, neither the mayor’s office nor the City Council has been eager to take a public position on the bank’s record.

Mayor Richard Riordan was on vacation Wednesday and unavailable for comment on the Copeland loan. Rockard Delgadillo, deputy mayor for economic development, declined to comment.

Griego said the bank board plans to hold discussions soon to evaluate its mandate and will consider focusing more on smaller deals--which are time-consuming to manage.

Other community development lenders had watched with alarm as the Copeland loan ballooned by fourfold. Generally, lenders avoid “throwing good money after bad” if a borrower continues to struggle, several lenders have said.

The dairy loan has been controversial in other ways. Initial financing was granted to Kevin Copeland, making him the first African American dairy owner in the country. But as the company struggled financially last summer, Copeland was ejected as CEO by the board of directors. He has accused the bank of micromanaging his business and stacking the board against him.

While Copeland is no longer involved with the company’s operations, the bank maintains he is on the hook for the company’s debt. Bank attorneys sent Copeland a letter earlier this summer demanding $23 million.

According to sources, Copeland Beverage Group has not made a profit since it first received financing from the bank--before or after Copeland’s ouster. It had planned to pursue an acquisition strategy to bring in the sales of other dairies in order to break even. However, that strategy relied on additional funding from the bank.

Hopes of such funding were dashed last week.

The dairy plans to severely pare its staff by week’s end and will shut down permanently at an undetermined date, according to a company source. Management was informed in a somber meeting Wednesday morning that “the city pulled the plug on us,” the source said. Managers were told to pass the message on to workers.

Calls to dairy management were not returned.

The dairy intends to temporarily continue serving those customers who are unable to immediately find a replacement plant.

The bank is counting on collecting only about $6 million in collateral from the dairy, Valenzuela said, but it hopes to explore options to collect more.

Of the $96.9 million the bank had loaned as of the end of June, 16% had been repaid. The Copeland deal--24% of the portfolio--had been graded a total loss, and 26% of the portfolio was deemed “very high risk,” said bank Chief Financial Officer Gordon Lejeune.

Those loans are comparable to what a commercial lender would consider a “substandard loan,” Lejeune said, “and substandard is pretty much what we’re here to do.”

In addition, $6.6 million in loans had been charged off.

Though bank officials acknowledged that the Copeland loss is painful, “We think 16% payback in the years we’ve been in operation is actually pretty good,” Lejeune said.