The LMI Debenture is available for use by SBICs that make financings which qualify as "LMI Investments" under section 107.50 of the regulations.

The LMI Debenture differs from the standard SBA-guaranteed debenture in several respects:

• It is a deferred interest debenture that is issued at a discount and requires no interest payments or SBA annual charge for the first 5 years plus the stub period between the debenture’s issuance date and the next March 1 or September 1. The stub period allows all LMI Debentures to have common March 1 or September 1 maturity dates to simplify administration of the program.
• It is available in two maturities - 5 year and 10 year (plus the stub period). The 10 year LMI Debenture requires semi-annual interest payments and annual charge payments during the last 5 years of its term.
• It does not permit prepayment for a period of 12 months (plus the stub period) after issuance. Thereafter, it permits prepayment, but only on March 1 or September 1 of each year. Thus, the actual period during which you cannot prepay can be from 12-18 months depending on the length of the stub period. Prepayments after the lockout period can be made without a prepayment fee.
• SBA does not intend to pool LMI Debentures. The Federal Home Loan Bank of Chicago (FHLB) has agreed to purchase all LMI Debentures and hold them until maturity. The interest rate on LMI Debentures will be a spread over the FHLB's cost of funds and will be determined on the draw date.

You must have an outstanding debenture commitment, as well as qualifying LMI Investments or specific plans to make such Investments, in order to issue an LMI Debenture. The Just-In-Time (JIT) funding process has been modified so that you can now apply for LMI Debentures, as well as standard debentures, using a single draw application. If you have an outstanding debenture commitment and you have made or intend to make LMI Investments, you can apply to issue an LMI Debenture using the JIT funding process.

Funding under JIT is a two-step process. First, you apply for approval to draw leverage under an outstanding SBA leverage commitment. You receive a 45-day LMI Approval Notice or standard Approval Notice from SBA for each debenture for which you are approved. Second, you request your funds by faxing the completed Approval Notice to The Chase Manhattan Bank one business day before you need the funds.

For those of you who are unfamiliar with the JIT funding process, these are some of the highlights as affecting LMI Debentures:

• There are two draw application windows every month – the 1st and 3rd Wednesdays of the month. SBA must receive your draw application by 10:30 a.m. (Eastern) on such days.
• You can apply for multiple takedowns as part of one draw application. Multiple takedowns can include a combination of LMI Debentures and standard debentures as part of the same draw application package.
• You must include in the draw application package one signed LMI Debenture (5-year or 10-year) for every LMI takedown for which you are applying.
• Approvals of LMI draw applications are faxed by SBA on the 2nd and 4th Wednesdays of every month. If unused, these LMI Approval Notices expire 45 days after they are issued.
• Only one draw is allowed per LMI Approval Notice. That draw can be in any amount (in $5,000 increments) up to and including the Maximum Face Amount of LMI Debenture indicated on the LMI Approval Notice.
• To draw funds, you must complete Section II of the LMI Approval Notice and fax the entire document to The Chase Manhattan Bank (as custodian of the debentures) by 2:00 p.m. (Eastern) on the business day prior to your draw date. On your draw date, the FHLB will price your LMI Debenture and you will receive your funding.

As we mentioned above, there are two versions of the LMI Debenture: the 5-year LMI Debenture and the 10-year LMI Debenture. Both versions have a zero coupon feature for approximately 5 years, so that the proceeds you receive for the sale of the debenture are reduced by the cost of the interest and SBA annual charge for such period. A 2% SBA Leverage Fee calculated on the Face Amount of the Debenture is also deducted from the proceeds of both versions. The SBIC issues an LMI Debenture with a specific face amount and receives the net proceeds from the debenture’s sale, which are equal to: the face amount of the Debenture, less the interest and SBA annual charge discounted for approximately 5 years, less the 2% SBA Leverage Fee.

Your eligibility for LMI Debentures will be determined in two ways:

• General leverage eligibility requirements. You must be eligible to issue leverage in an amount equal to the face amount of the LMI Debenture you are requesting. Eligibility for this purpose is determined under sections 107.1120 - 107.1160 of the regulations.
• LMI eligibility requirements. You must be eligible to issue an LMI Debenture in the face amount that you are requesting. Eligibility for this purpose is based on your outstanding LMI Investments and the LMI Investments you are proposing to make with your net proceeds. You are eligible for an LMI Debenture with a face amount not greater than 1.7 times the sum of your existing and specifically planned LMI Investments, minus the face amount of your outstanding LMI Debentures. In other words, the LMI Debenture you are requesting, plus your outstanding LMI Debentures, cannot exceed 1.7 times the sum of your existing LMI Investments plus any LMI Investments you are proposing to make with the leverage proceeds.

In general, net proceeds of your LMI Debentures should roughly match your LMI Investments. Given recent interest rates, the 1.7 ratio should provide sufficient cushion to allow for this rough matching of proceeds to investments.

For your planning purposes, you will need to know more precisely the amount of net proceeds that you can expect to receive when you request an LMI Debenture with a certain face amount. The Federal Home Loan Bank of Chicago has provided a computer program to help you estimate the face amount of LMI Debenture(s) you will need in order to generate net proceeds sufficient for your purposes. It is called the "LMI Debenture Calculator" and can be accessed through the FHLB hyperlink provided above. You enter the face amount and the term of the LMI Debenture into the LMI Debenture Calculator. The Calculator will produce the net proceeds for the current business day using the current interest rate charged by the FHLB. The Calculator only provides an estimate of your ultimate proceeds because the interest rate charged by the Bank is changed every business day, and there is no way to know in advance what rate will be in effect on the day you draw funds.

We suggest that you use the LMI Debenture Calculator to track the interest rate charged by the FHLB from the time that you apply for funding until the day (or days) you draw funds. On the day(s) you request your draw(s), we suggest you once again use the LMI Debenture Calculator to ensure that you have the best information available to finalize your request for a face amount LMI Debenture. The LMI Debenture Calculator cannot tell you in advance the exact net proceeds that you can expect to receive. The best you can do is base your decision on information in effect on the business day prior to the day you will issue your LMI Debenture and receive your funds. The LMI Debenture Calculator is an estimating tool provided to help you more precisely estimate what the face amount of each of your LMI Debentures should be.

Both versions of the LMI Debenture are on the Investment Division's web site (www.sba.gov/inv) under "SBIC Forms". A new model legal opinion for the LMI Debenture also can be found there.

Please contact your SBA Account Executive to request the current draw application package (which includes the provisions relating to LMI Debentures).