Collateral Enhancement - CD Program

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

  1. 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.

  2. 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.

  3. Borrower has immediate funds to accomplish its business objectives. This is accomplished without equity dilution.

  4. 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.