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A New Large Project Financing Niche


Successful Large Project Financing hinges upon several factors.  Following are just a few of the basic ones:  Obviously, the project has to be an ironclad, well-planned venture which, once completed, can easily support the debt service of the loan(s) created to fund it.  There has to be a very strong, experienced and diverse support team throughout the stages of planning, designing, feasibility analysis, entitlement, acquisition and/or construction, rollout or implementation and then the ongoing maintenance.  It goes without saying that a good strong relationship with a bank or primary funding source is also essential.

Funding can take the form of Debt Financing, Equity Participation, Public Offering, Bond Issue, Venture Capital, governmental tax credits or matching funds and a handful of other vehicles.  It can often involve Collateralization in the form of a Bank Guarantee, a Letter of Credit, an Insured Corporate Note, a Bond, of course, Equity; and a wide range of other assets and variations of the ones already mentioned.  The larger the project is, the more likely it is to involve a combination of these, not only because of its larger size, but because this allows the Lenders to mitigate their individual risks as well.

I am very excited to be associated with the American Representative of an International Group which has spent more than two years planning and creating a new niche in the Large Project Financing arena.  They have created a truly innovative approach at Funding Projects with Life Settlement Policies Underpinning a Standby Letter of Credit.  These transactions allow clients to open a Standby Letter of Credit (SLC), delivered via SWIFT, from an $8 Billion bank, using a portfolio of Life Settlement Policies to underpin the SLC.  The borrower’s bank accepts the SLC as collateral for lending the money to accomplish the entire transaction.

Currently, these SLCs are limited to Life Settlement portfolios of between $25 Million and $50 Million USD, as the program is rather new.  Hopefully soon we may be able to announce an increase in the transaction size to accommodate L/S Portfolios of up to $100 Million.

The principal of the loan is guaranteed by use of the SLC.  The Client, however, is obligated to service the interest requirement of the loan until the SLC matures and satisfies the Principal.  The ability to pay this ‘interest-only’ requirement is essential to make the transaction viable, and that is where a good strong relationship with the borrower’s bank comes in.  This structure can be particularly effective with select project financing transactions.  Here is a general bulleted outline of the financing procedure in chronological order:

1. Client explains program to their bank which is comfortable with the project’s ability to cover interest-only payments on SLC until it matures.
2. Client verifies their bank is willing to Lend against SLC issued by the "Issuing" Bank.
3. Client completes and executes Letter Of Intent (LOI) on his own letterhead.
4. Client opens escrow with his own attorney of 1/10th of 1% of the L/S Portfolio face value.
5. Irrevocable Commitment Letter (ICL) to open the SLC and deliver via SWIFT is issued to client by "Issuing" Bank.
6. Escrow is released for issuance of the Commitment Letter
7. The client LOI and the Issuing Bank’s Commitment Letter allow us to obtain Life Settlement Portfolio (L/S).
8. "Issuing" Bank performs due diligence on L/S portfolio.
9. Upon acceptance of policies, L/S portfolio is escrowed in Seller’s Bank.
10. SLC is delivered and confirmed via SWIFT and 4% to 5% fees (project dependent) for SLC are immediately paid upon delivery and confirmation of instrument directly to Issuing Bank.
11. At Closing:
    a. Funding Bank executes payments as per irrevocable instructions, including fees, payment to seller for policies and direction of premium reserve to Issuing Bank.
    b. Ownership of portfolio is formally transferred to Issuing Bank.
    c. Balance of funds, after fees and expenses are available to client.

Following is a more in-depth Transaction Overview and Estimated Pricing Using a $25 Million L/S portfolio as an example:  (ALL OF THESE FIGURES ARE ESTIMATES)

A six-and-one-half-year L/S portfolio is secured, including the premium reserve, at 50% of face value ($12.5 Million).  NOTE: This cost is paid at closing of transaction.  At current market conditions this price is reasonable, but estimate is subject to change.  The U.S. Group has negotiated with a highly respected, established firm to acquire Life Settlement portfolios.

The "Issuing" Bank will accept the portfolio to underpin and issue an eight-year SLC to client for estimated 90% of portfolio’s face value ($22.5 Million) (Note: The SLC matures 18 months beyond the last life expectancy of the portfolio.)

The Client uses his bank to receive funding against the SLC (estimated 85% to 95% of SLC).  (90% of $22.5 million is $20.25 Million loaned by Client’s funding bank).

Client is obligated to pay interest on loan of $20.25 Million to his bank (estimated at 5%/yr, $1,012,500/year for eight years, $8,100,000 total).  Client’s bank will call the SLC to satisfy the $20.25 Million principal obligation.  It is important for client to demonstrate cash flow to his Funding Bank evidencing his ability to service the debt (interest payment on $20.25 Million).
 

Bulleted Summary:

  •  6.5-yr $25 M L/S portfolio, including premiums, is purchased for $12.5 M.
  •  SLC is issued, using L/S portfolio to underpin, for $22.5 M.
  •  Client’s bank lends $20.25 M against SLC at 5%/yr interest ($8.1 M total)
  •  Total fees are 4% of portfolio’s face value ($1 M)

$20.25 M – bank lends
- $12.5 M  –  portfolio and premium cost
- $  1 M     –  fees
= $  6.75 M – Cash for project

Interest obligation is $1,012,500/yr for 8 years - $8.1 million total.  Principal of the loan is satisfied by the SLC upon maturity at 8 years.  If you calculate 8 annual payments of $1,012,500 on a loan of $6,750,000 (funded to the project) with no future value, the interest rate is 4.24%.  If you calculate 8 annual payments of $1,012,500 on the principal of $20,250,000 (Lending bank’s total loan) with no future value, the interest rate is -16.82%, (…you are paid to borrow the money?).  Only with a vehicle collateralized by an asset like Life Settlements could a transaction be win-win-win-win for the L/S portfolio seller, the International Bank, the Lending Bank and the Project!

NOTE: This program is NOT in effect at this time.  We hope it may resume with a very much larger bank.

In the meantime, there is another very strong collateral program that is available.

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