The so-called financial crisis drags on like a man in a hospital bed with a terminal illness, which the doctors are fighting day and night to conquer, because they are ignorant of what caused it, and fearful of what may follow it. But above all, they are terrified about whether they themselves might survive it.
I think some quotes taken from knowledgeable men over two centuries surpass anything I could contribute. I begin with Napoleon Bonaparte in 1815.
When a government is dependent upon bankers for money, they and not the leaders of the government control the situation, since the hand that gives is above the hand that takes… Money has no motherland; financiers are without patriotism and without decency; their sole object is gain.
Then that controversial thinker, Voltaire, had among others, these two thoughts:
If you see a Swiss banker jumping out of a window, follow him, there is sure to be a profit in it.
Paper money eventually returns to its intrinsic value – zero.
John Kenneth Galbraith has been regarded America’s most famous economist. He made a very succinct comment:
The process by which banks create money is so simple that the mind is repelled.
But it was two bankers themselves who had thoughts well worth bearing mind. One was of these was Sir Josiah Stamp – President of the Bank of England in the 1920s, and then the second richest man in Britain.
Banking was conceived in iniquity, and was born in sin. The Bankers own the Earth. Take it away from them, but leave them the power to create deposits, and with the flick of the pen, they will create enough deposits, to buy it back again. However, take it away from them, and all the great fortunes like mine will disappear, and they ought to disappear, for this would be a happier and better world to live in.
The other was Mayer Amschel Bauer Rothschild; from that very famous banking dynasty of the same name.
Give me control of a nation’s money and I care not who makes it’s laws.
Can I say very much more?
Two previous blogs have dealt with the registration in Ireland of Special Purpose Vehicles for Structured Finance Transactions. Many advantages have been noted, but here now are a few of the more ‘sideline’ benefits.
Stamp duty will not apply on the issue or transfer of notes issued by a Section 110 company. Stamp duty can apply on the transfer of Irish assets, but should not be payable on the transfer of non-Irish assets.
Special Purpose Vehicles are engaged in exempt activities, and so will generally have limited ability to recover any VAT charged to them. Irish VAT legislation confirms that management services (which includes portfolio management services) supplied to an SPV falling within Section 110, whether by an originator or otherwise, can be supplied exempt from Irish VAT. This exemption from VAT strengthens Ireland as a location of choice, as recent European Court decisions have confirmed that these services are otherwise within the VAT net.
Thus, to have a legislative exemption amount to the provision of absolute clarity, which is not available in other jurisdictions.
Any Special Purpose Vehicle, seeking to qualify for registration under Section 110, must notify the Irish Revenue and confirm that it satisfies the conditions in Section 110. Unlike other jurisdictions, this is a simple notification and self-certification process. No return approval or Revenue Ruling is required.
Ireland is party to an extensive range of double taxation treaties which, depending on the particular treaty, can ensure that the SPV receives income on its underlying assets free from withholding tax, or at least at a reduced rate. Avoiding tax leakage in this manner is very important to a transaction. A list of countries with which Ireland has a double tax treaty is available at http://www.revenue.ie/en/practitioner/law/tax-treaties.html
An Irish company is not required to make an annual statutory minimum profit for Irish tax purposes. Instead, the Special Purpose Vehicle need only receive a nominal fee (corporate benefit payment) at the start of the transaction.
The Irish Stock Exchange (ISE) has become the largest European exchange for the listing of asset backed debt securities, such as those issued by Special Purpose Vehicles. The ISE provides an efficient and comparatively speedy response time to draft offering circulars. Currently, the ISE guarantees comments within three days of receipt of the first draft of an offering circular.
All in all, it makes for a very attractive domicil for such transactions.
There is finance to be had, but because of the imposition of new rules, resulting from the financial crisis of the last few years, borrowers with a healthy cash flow are, contrary to what one might expect, suffering more than less fortunate companies in their attempts to borrow funds. The more strict affordability criteria today actually seems to have thrown out some common sense in assessing applications – something akin to throwing out the baby with the bath water.
In assessing whether to grant a loan, lenders had always worked on certain assumptions, whereby certain fixed costs where reasoned to be the same, or very similar, for a particular industry, or business, unrelated to the amount of the cash flow; and only sometimes related to size. Now, however, many lenders are assessing these items as a percentage of earnings, or cashflow. This means that the applicant with the greater cashflow will be disadvantaged, because, almost universally, the percentage method will result in greater amounts being deducted from the calculation of available servicing funds, than would be the case with the fixed sum. Thus, it is important for prospective borrowers to think carefully about which lender they will approach, because, effectively, some lenders will now lend less than others, based on this overall percentage approach to fixed costs.
Over the past few years, lenders have been increasingly moving away from basing lending decisions on cashflow and turnover, and the projected cash flows, and are now working on a basis of what a borrower can actually afford to pay right now.
Many lenders now use an affordability formula, either in conjunction with, or instead of, cashflow historical data and projections. All formulas now take into account the likely development of liabilities as a factor equal to, or even greater than, the cashflow situation. But, the problem is that there is some variance between these different formulas; and this make it very difficult for a company, seeking to borrow, to calculate just what should be possible. It is obvious that some knowledge of the inner workings in the light of experience is necessary to negotiate these tricky bends,
Some lenders are now requesting information on various items that would never have caused much concern in the past. Once again, what additional information is sought by one lending source may be quite different form the extra information required by another. Third party credit reports on the applicant company are now also playing a larger role than previously.
Funding is again becoming available, but the road to getting it is becoming harder to negotiate.
Despite the messages of impending doom, which still may be proven correct, and despite the ominous signs – Portugal falling under the rescue umbrella; Greece having to pay double figure interest, to be able to raise any money at all; Ireland’s present serious rumbles; and the possibility that the heavily indebted countries of the EU will have to devalue or bust – the Euro currency is, at least for now, defying all the odds, and is gathering strength. And it seems likely that it will do so for the immediate future.
Further, the Euro is doing it against a background of a rapidly improving U.S. economy. In comparison with Europe, there are many more U.S. firms earning even more than at any time since the 80s, all of which should mitigate against the Euro. On top of that, there is the ‘Atom’ situation in Japan, the rebellions in North Africa, and worries about the oil supply to the industrialized countries. Normally, under such circumstances, there would be a massive flight to the dollar.
Yet this established scenario seems no longer to hold good. In the last 3 months, the Euro has risen about 12%, from $1.28 to $1.44. That was definitely unexpected. Further, in the last weeks, the Euro has taken one hurdle after another in its stride; and thereby demonstrated a great attractiveness.
There is an unofficial rule, which maintains that trends, once established, tend to continue for a time, rather than collapse in the beginning. Hence, it seems the Euro may reach even further highs, at least in the short to medium run. Presently, the Euro seems to be swinging in an area between $1.42 and $1.45. It has been trying for a year to break through this barrier.
Last Friday, it reached $1.4440. If it can now spend a little time stabilised at $1.45, the signals are that, despite the problems of Euroland, it could then go as high as $1.50, or even $1.55. However, there is a very substantial school of thought, which maintains that the Euro cannot sustain such high levels in the long term. I am one, who tends to subscribe to that thinking.
But, more immediately, what does this all mean presently for those seeking funding? This is a situation in which potential borrowers, worldwide, may see a considerable advantage in presently applying for, and obtaining funding in Euro. If everything goes the right way, there is money to be made.
The Personal Property Securities Act 2009 (PPSA), which is to come into force in October 2011, will have a significant impact on how many businesses operate.
Under the PPSA, suppliers and other beneficiaries of a retention of title clause must register their interest to ensure that such a clause is enforceable.
Documentation relating to the transaction – typically the standard terms of business statement – will now need to be reworked. Business people will need to acquire an understanding of what constitutes a ‘security interest’, for these interests will be required to be registered, in order to be enforceable. Suppliers will also need to keep proper records of security interests permitted under the PPSA.
But the legislation stretches further. Not only will commercial entities be affected by the PPSA. Any individual, who has been, or is to be granted an interest, which constitutes a “security interest”, will have carefully to consider their situation. The definition of “security interest” in the PPSA is very wide, and includes the following examples:
- Mortgages (excluding a mortgage over land or water rights)
- Conditional sale agreements, including retention of title arrangements
- Hire purchase agreements
- Trust receipts
- Leases of goods
- Transfers of title
- Flawed asset arrangements (eg controlled/restricted bank deposits.
This above list is not exhaustive.
My readers may be wondering why I have addressed this topic. At first glance, it hardly seems relevant to questions of obtaining funding. However, when one thinks a little more deeply, it is possible to see how, where there is a very fine edge between obtaining funding and not, the correct handling of this question just might make all the difference to the outcome.
I am very pleased to be able to report in this post that, on 01. April 2011, we will begin a cooperation with a new, hard money source. This is an established source, well respected for many years for providing no nonsense, hard money loans. These funds will be available internationally, but the range of jurisdictions may be limited on a case by case basis.
Typical purposes for which hard money loans can be made available are as follows:
- acquisition loans
- bridge loans
- development loans
- gap financing
- interim financing
- mezzanine financing
- short term credit resolution
- emergency project funding
- factoring of accounts receivable
- undeveloped land funding
Comparatively fast funding can be made available, if necessary, for most types of commercial real estate projects.
For full details, visit our main web site under Services, and then Hard Money Loans in the menu bar.
This follows from my first post about cross guarantee financing.
The second gross guarantee concept was also conceived years ago, and was designed for use within the banking system itself. It’s initial aim was more or less to privatise banking regulation and the relevant deposit insurance risk. It was intended to create a cross guarantee contract for banking type institutions, which would protect all their deposits, non deposit funding, counterparty risks and balances owed to clearing houses and payment systems.
The institution would enter into such a contract, voluntarily, with a syndicate of other similar institutions, which were assembled much like an underwriting syndicate, to assume the risks specified in the contract. In some ways, it was a form of re-insurance. The practical effect of the cross guarantee contract was to unbundle the liabilities side, of the institutions balance sheet, in that it shifted the residual insolvency risk to the institutions direct guarantors. That removed the risk from the shoulders of the creditors, who in fact then become guaranteed under the cross guarantee contract. The idea was that the on-balance-sheet equity capital of the institution being guaranteed wold then serve as an insurance, deductible for cross guarantee purposes.
Thus, in a sense, that particular cross guarantee concept is the obverse – note, I said obverse, not converse – of asset securitisation, thus effectively liability securitisation. Hence, that particular cross guarantee concept protects against the loss of the funding and other liabilities of the institution, which is being guaranteed.
Also this concept was well removed from any practical application relating to obtaining commercial funding. The question was whether there was any use in keeping these concepts in mind, when trying to derive something innovate, which would make an almost impossible financing problem, quite possible. Something more was needed, to give a potential funder a healthy appetite for the transaction; and so thoughts turned elsewhere.
For more on the further development of the final concept, stay tuned.