The "No Interest Structured Collateral Loan Program", commonly called the "CD/MTN Program", is an established system of structured financing that uses traditional banking mechanisms as its fundamental components. The result is a stable structure that procures 100% monetary instrument collateral for international project financing. Using a well calculated and balanced approach, the program provides highly competitive benefits and profits to all participants.
A CD (Certificate of Deposit)/MTN (Medium Tem Note) is merely a financial instrument that is backed by cash, and is freely transferable. The general structure of using a CD/MTN as a collateral instrument has existed for 50 years. Naturally, there are many firms and brokers who have used or attempted to use CD/MTN instruments as collateral in one way or another. Some professional firms have been successful, but many inexperienced intermediary brokers have failed.
Given the problems that can arise from these types of loans you need to work with firms that have the experience and success records to complete these type's of funding.
The "Program" itself is a structure, or mechanism, of structuring third party collateral into the loan or funding package for project financing. Since this structure must be implemented through a series of complex legal contracts between multiple participants in the transaction, the CD/MTN Program must be managed by a licensed law firm.
The particular group of Collateral Providers and their investors who we work with have specialized in this system for over 20 years. The collateral providers and investors are required by contract to participate in the program for a minimum of 5 years, so it is a well established system with reliable participants.
The "No Interest Structured Collateral Loan Program" is one of the fastest systems for structured capital loans, using collateral from a third party investor. Because the investor provides collateral by means of a "deposit" to purchase a "certificate of deposit" (CD) or MTN, the investor is called a "Depositor". The end result of the structured transaction is the equivalent of an "interest free" loan (from the point of view of the client) in most cases, where the Client repays only a discounted amount of Capital, with minimal risk and maximum benefit to both the bank and the company.
The primary function of the structure is to procure collateral provided from a third party at a "discount", and arrange for it to be paid for by the Borrower Company from the loan funds at the time of closing. The result of the structure is that Borrower receives a net amount of capital that it needs to implement its project at a cost lower than a traditional loan, the Depositor receives immediate repayment of the collateral plus profits, and the bank receives full collateral backing of the total principal amount of the loan.
The ability of the structure to reliably generate a "win-win-win" transaction for all participants is made possible by the fact that the CD/MTN instrument used as collateral doubles in value over a 10 year period. This increase in value from maturity of the CD/MTN makes it possible to provide real and tangible benefits for all parties to the transaction.
All other expenses related to structuring the loan and procuring the collateral are added to the amount of the loan, to ensure that they are paid from the loan at closing.
Depositors are multinational corporations and consortiums of trusts and pension funds, which have billions of dollars in liquid assets. They have contractual and legal obligations to make these funds work for maximum profits. For such capital sources, direct investment in projects is too "high risk", too "low return", and too much time to wait. Accordingly, they categorically refuse to finance actual projects or invest funds directly, as a matter of principle and policy.
Instead, Depositors accomplish their goals through purchasing collateral for use in structured loan transactions. Within about 24 hours, with no risk whatsoever, the Depositor receives 50% of its money back in "cash", plus the "interest certificates" of the CD/MTN as repayment of the other 50%, which Depositor then sells to a pre-arranged "exit purchaser" for a profit.
DESCRIPTION OF PARTICIPANTS •
Applicant Company - provides a fully prepared investment project that qualifies for financing, applies for structured collateral financing through the Program Manager, and signs the necessary contracts with other parties to the transaction.
• Program Manager - manages a flow of qualified investment projects from Applicant Companies, maintains contractual relations with a group of Collateral Providers, and maintains working relations with a group of participating Funding Banks. The Program Manager is not a participant in the transaction, but coordinates and facilitates all stages of structuring the transaction.
• Collateral Provider - maintains contractual relations with groups of Depositors and Purchasers, and maintains working relations with a group of participating Issuing Banks. Works directly with Issuing Banks on behalf of Depositors, and directly with Funding Banks on behalf of Applicant Companies.
• Depositor - purchases the CD/MTN as a financial instrument for use as collateral, by making a deposit into the Issuing Bank, to guarantee the loan to Applicant Company from the Funding Bank. The Depositor is usually a pension fund, trust, investment fund, credit union, or a major multinational corporation. (Sometimes the Collateral Provider itself elects to be the Depositor.)
• Purchaser - purchases the right of trust ownership of the "Interest" component of the CD/MTN instrument at a discount from the Depositor. He thereby becomes the assigned beneficiary of the interest stream generated by the deposit. The Purchaser is usually a government pension fund or private trust. (Sometimes this participant is not needed, as the Depositor may prefer to remain the beneficiary owner to receive increased profits over time.)
• Issuing Bank - receives the monetary deposit from Depositor, issues the CD/MTN containing both "Primary" and "Interest" components, and registers the owners, trustees and beneficiaries of both components of the CD/MTN instrument as a result of the transactions. This must be an A rated bank. Funding Bank - receives the "Primary" component of the CD/MTN as a monetary collateral instrument, issues a loan to the Applicant Company backed by the CD/MTN, and distributes the loan funds in accordance with instructions of the Applicant Company. This can also be an investment fund, credit union or alternative bank without an A rating, as long as they accept the collateral and have sufficient reserves to finance the project. (In most cases, the Funding Bank is the same entity as the Issuing Bank.)
FUNDAMENTAL COMPONENTS OF THE TRANSACTION
The following is an overview of the fundamental components of the financing transaction:
1. Client requests the Capital Amount necessary for implementing the Project, and submits an application through the Program Manager. The Program Manager then verifies all financial factors and calculates the required total amount of the CD/MTN loan, to ensure that the "Net Capital" paid to Client from the structured loan is equal to the Capital Amount needed for the project.
2. Depositor purchases a CD/MTN from Issuing Bank in an amount equal to 200% of Capital Amount.
3. Depositor, as owner of the CD/MTN, assigns this financial instrument to Funding Bank as 100% Collateral on the Loan to Client.
4. Funding Bank issues to Client a loan in an amount equal to 200% of the necessary Capital Amount, and equal to 100% of the purchase price of the CD/MTN.
5. Client gives Escrow instructions to Funding Bank. In accordance with these instructions, Funding Bank performs the following:
A. Pays 7.0% of Loan Amount to Collateral Provider as closing costs, which includes all expenses and fees incurred for procurement of the collateral. (Tax deductible as legal & professional services.) Collateral Provider has recovered all expenses plus compensation, and exits, such that Client does not owe them anything, and has no remaining obligations.
B. Pays up to 0.5% of the Loan to Funding Bank (or third parties) to cover any potential closing costs, if any. (Tax deductible as financing costs.)
C. Pays 50% of the Loan (equal to 50% of the purchase cost of the CD/MTN) to Depositor, consisting of 50% repayment for the provided collateral. (Tax deductible as repayment of investment.)
D. Assigns the "Interest" component of the CD/MTN instrument to Depositor as beneficiary, consisting of the second 50% repayment for the provided collateral (in the form of contractual assignment in repayment of investment, registered by the Issuing Bank). (Tax deductible as repayment of investment.) Depositor takes possession of a Derivative Certificate of Interest on the CD/MTN, has now recovered 100% of its investment plus profits, and exits, such that Client does not owe them anything, and has no remaining obligations.
6. Depositor usually sells the "Interest" component of the CD/MTN instrument to Purchaser. The interest stream matures to 100% of the value of the original monetary deposit, which is equal to the Loan Amount. Since Depositor already received 50% direct repayment from Client, it can recover the remainder of its investment funds by selling its beneficiary rights to the "Interest" component for 52% of maturity value or slightly more. This results in immediate and full repayment of investment, plus a commission of at least 2%. The Purchaser is purchasing monetary funds at almost half their value, and in 10 years will cash the financial instrument for its full maturity value.
7. Client has purchased the CD by payment of half of the Loan Amount and by assignment of the "Interest" component, and has become the full owner of the originally issued CD/MTN stripped of the interest stream, and thus owns the "Primary" depositary component of the CD/MTN.
8. Client assigns the "Primary" component of the CD/MTN to Funding Bank as 100% cash Collateral on the total Loan Amount, equal to 200% of the Capital Amount.
9. Client receives at least 42.5% of the Loan Amount, which equals 100% of the Requested Capital Amount for implementation of the project.
10. Client has already agreed with Funding Bank in advance that after 10 years, the collateral instrument is automatically converted to a repayment instrument, and thus becomes property owned by the Funding Bank. Accordingly, until the moment of conversion Funding Bank is the "assigned beneficiary in repayment" of the "Primary" depositary component.
11. Funding Bank independently cashes the CD/MTN at the end of 10 years, and all funds from cashing are applied to fully repay the Principal of the Loan. (Tax deductible as repayment of principal on the loan.) The beneficiary right to cash the CD/MTN was previously registered by the Issuing Bank, which performed its obligations, and then both Funding Bank and Issuing Bank exit.
12. In practice, Client has already repaid the Principal of the Loan from the beginning, as a result of the structured transaction. Thus, Client pays to Funding Bank only annual interest on the Loan during the 10 year period. (Tax deductible as interest payments.)
13. From the Client's point of view, the "interest only" payments are equivalent to fixed annual payments returning the amount of Capital received during the 10 year period. For this reason the loan is sometimes called "no interest". Everything else is taken care of as a result of the structures and mechanisms of the financing transaction.
14. All contracts between all parties for all components of the transaction are prepared in advance and signed simultaneously, and their signing constitutes the actual implementation of the transaction. Thus the transaction is instantly completed, with no risk to any of the parties or participants.
CD PROGRAM HIGHLIGHTS
• Loan Sizes: $10 Million to $2 Billion
• Bank issues a loan to Client for 100% of CD/MTN Amount (Equal to 200% of the requested Capital Amount for the Project) (7% of the 200% covers closing costs)
• Example: Loan Amount requested for the Project is $10M. The actual amount the payments are based on is $20M.
• Payments are made over a 10 year period based on the actual loan amount @ 200%
• Interest is Libor plus 1 - 2% (Average rate of interest is 6.5%)
• Closing time is 6-10 months
• All types of projects are eligible • Non-Recourse Loan
• For "Construction Loans" and other projects that require a long start-up period before launching, deferments are standard, ranging from 1.5 - 3 years. During the period of deferment, the Borrower/Company does not have to pay any interest or minimum payments. While most projects are capable of repaying the loan (of any amount) in full within 3-4 years after launching, the standard practice is to loan for 10 years.
• No penalties for early pre-payment at any stage.
• Principal is Self-Liquidating (See CD/MTN Program Funding Summary Above)
• The Amount paid back over the 10 year period works out to be equal to the Loan Amount requested ($10 M) in our scenario above. If the Loan Amount requested were $100 M, the amount paid back over 10 years would be $100 M.
(Note the difference between the CD Program and a traditional method of funding where principal and interest payments are made)
