Jan 6, 2020
In the course of trading in bank debentures, the profits come from buying low and selling high to a pre-established exit buyer. Because traders cannot use their own money to operate a program, they look for financially qualified investors for collateral support of the initial purchase of a new issue asset. In the case of trading as we discuss it, a trader has locked in the first issuance of some instrument (Standby Letter of Credit, Bank Guarantee, Medium Term Note) while at the same time, the next buyer has been lined up and ready to take the asset at a higher price. But because the trader can't execute the start trade without new money acting as a line of credit collateral, there is nothing to buy or sell. That's where you, the investor, comes in.
Typically there is a credit line needed to make the trades work, and in order to get the credit line, the trader must show new money from an investor. Of course, the investor money is never really touched-- it just acts as supporting collateral for the trade credit line. This means little to no risk to the investor losing his money-- as the credit line is generally non-repayable, non-recourse, and/or non-depletion. This limits the risk of the underlying collateral being tapped in the event of a default. For additional safety, the bank blocks the funds from depletion during the trade contract.
Because the trader already has the "exit" buyer (i.e. the second buyer taking the asset at the pre-determined higher price), the profit spread has also been predetermined.
When profits are generated, they are generally split so that the investor shares in the bounty, sometimes up to the full amount of the trade credit line, resulting in an 80 to 100% profit to the investor. Each program has different types of profit sharing with the trader, which are negotiated when the program is established with the client.
For illustration purposes, a new issue asset of a bank debenture may be purchased at about 40% of the face value. So a 500-Million Euro face value instrument may cost the trader 200 Million to buy. The trader uses the trade credit line to make that purchase. Then, once the instrument is bought, an exit buyer who was pre-established at the beginning of the program may purchase it at 70% (or 350 Million). The difference is the profit made in the trade, of 150 Million. That is then used to pay profit to the investor (a shared percentage of the total profit), as well as the trader. When bank debentures trade multiple times during a month, this profit adds up handsomely. This is why an investor can see a profit on his money ranging from 80 to 100% of the amount of the trade credit line, and sometimes more (depending on the program).
The challenge for many investors is understanding the minimal risk for loss of principal. Particularly if the money owned by the investor stays in his own bank account or is used to issue a cash-backed Standby Letter of Credit. Small Cap programs that typically require movement of funds to a trader account so he can obtain the trade credit line as discussed earlier. Very few Small Cap programs, but some, can take under 100 Million (usually a 5-Million Euro or USD size), and some offer an insurance policy against loss of principal. Several that I have seen do not offer this. One that I know of does.
Now that you have an understanding of the principles behind a Managed Buy/Sell, the next question most potential investors ask is, “what are the steps needed to engage with such a program?”.
Most programs need a minimum of 100-Million USD or Euro. That number is a little bit deceiving, because you have to factor in the trade credit line being anywhere from 70 to 80% of the value of the account. It is that 70-80% which must equal at least 100 Million. So the real need is for the investor to have about 150 Million, to account for the deduction with the Loan-to-Value factored in.
A financially qualified investor, in order to avoid potential solicitation rules, is the one who moves first to establish the relationship. This is done with a Know Your Customer set of documents which address the investor’s desire and capacity to enter a program. While the preparation of these takes just a little time to complete, it allows for the trading organization to open the conversation and subsequently prepare the trade contract shortly after receipt by the appropriate authorized intake person.
In general, it takes a couple of weeks to arrange the trade commitments and the banks, along with the authorities governing these programs approval, at which time the trading may proceed at the next opportunity to start, between the trading organization and the investor. To provide as much transparency as possible after establishing trust. Without trust, there cannot be a transaction. That is one of the first things any investor needs to feel is in place before too much discussion of a program.
The fact is that Managed Buy/Sell programs using bank debentures do exist, however actual providers are few and far between. The supply is very, very low, and the demand well exceeds it. Getting in the way of being connected to something real are usually the Internet brokers who smell money but don’t have the relationships or knowledge of how these work, therefore the likelihood of success is almost nil. When you have a trusted party you are working with, with authentic relationships and compatibility, it is possible to be included in a program. For most investors, this is the mechanism used to fund projects without debt or repayment.
Byline : Michael Weiner has been working with Managed Buy/Sell programs for several years as an intake officer. More information can be found at PreConstructionCatalysts.com or by phone at (1) 202-657-6960. Email is firstname.lastname@example.org
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