Many potential transactions are
impossible to complete because of a shortfall in
lendable collateral value. In these instances,
collateral enhancement programs may be a viable
option.
This is a fixed-rate financing, with primary
application for expansion and leverage buy-out
situations. Start-up businesses will not qualify for
this program. There are no up-front fees.
The Borrower must have a strong cash flow to pay
the debt service on an interest only note for 10
years or have a Guarantor to insure the debt
service. Companies desiring to expand without giving
up equity find this an ideal structure. The program
has been operating in the U.S. for over 20 years.
The Borrower must have current positive cash flow
and be able to demonstrate the ability to
effectively employ the funds provided to generate
adequate cash flow to service the debt or have a
Guarantor to insure the debt service.
Successful implementation of the program requires
three parties: The Borrower, a Commercial Lender
(must have $1 billion assets, international OK), and
a Depositor. The minimum borrowing requirement is
currently $9 million.
The Depositor, for a fee, provides funds to purchase
a 10-year CD to the Commercial Lender resulting in
the Borrower obtaining fixed-rate funding over a
ten-year term without giving up equity.
The CD guarantees the principal of the loan so the
Borrower may not have to pledge assets to secure the
loan. The Borrower may be required to pledge sources
of cash flow to guarantee the payments on the
interest only loan. All funding is on a ten-year
basis.
Impact of the Transaction
The total emphasis on the loan by the Commercial
Lender has been focused on the Borrower’s cash flow
and resources or Guarantor. They must be adequate to
service the interest only payments on the loan. The
principal amount of the CD fully secures the
Commercial Lender for the loan principal. The
non-interest bearing CD is the source certain for
repayment of the loan principal.
The borrower’s assets are not required to
collateralize the loan principal. They may however
be required to collateralize the interest payments
due on the loan.
Because the Commercial Lender assumes no risk of
principal, the credit quality for this loan will
likely be superior to the majority of its existing
loan portfolio. Furthermore, the Commercial Lender
can now safely make loans to previously unqualified
Borrowers.
Borrower has immediate funds to accomplish its
business objectives. This is accomplished without
equity dilution.
Borrower has an apparent high amount of interest
payable over the term of the loan with the
Commercial Lender; however, (a) all Borrower
payments are structured to be tax deductible as
interest, (b) Borrower’s cash flow requirement is
significantly reduced because no reduction of
principal is ever required; this is an interest only
transaction.
