« Archives in March, 2010

What is LIBOR?

March 29, 2010 / admin posted in Uncategorized / Comments Off

What is LIBOR and why do we use it?

LIBOR stands for London Interbank Offer Rate.  It’s London’s equivalent of the Federal Funds Rate, the rate where banks lend overnight or short term to other banks.  Just like the Prime Lending Rate is used with US banks for the establishment of their lending rates, LIBOR is used in the UK and frequently in other areas like parts of Western Europe.

Our primary funding resource is based in Western Europe so most of their payments out and payments in are based on LIBOR. Thus, our rates are based on LIBOR. LIBOR has rates for 1 month, 3 months, 6 months, and 1 year. We use the 3 months (90 day) index.

Today, 90 day LIBOR is at 0.28% and since our rates are based on a premium of 25-250 basis points (.25%-2.50%) over 90 day LIBOR that means clients are getting rates starting at 0.53% with a max of 2.78% over 3 yrs.

Stu

Southern Lending Solutions

An Example of the Program’s Use

March 19, 2010 / admin posted in Uncategorized / Comments Off

I thought I’d get away from the mechanics that show the flexibility and effectiveness of this program to use an example of how a company would use the program.

Imagine a tech company based in Singapore that works all over the world. They are a small, profitable public company on the main Singapore Stock Exchange.  They see an opportunity to grow by engaging in a new market to sell their products and services, that market being India.  The company needs $$ to advertise, market, open an office and put feet on the ground in the new market so it can bring in new business.  Like many market expansions, the payback and profit wouldn’t be right away. In fact, their own analysis says it will probably take 3-4 years before all the upfront costs are absorbed and profit and positive cash flow generated from this market. Singapore participates in DTCC so their shares can qualify for our program.

The options for this company currently include:

1) Bank loan

2) Private Equity Investment called a PIPE

3) Secondary Stock Offering

4) Loan on Securities

Option 1 is out since if that was a possibility they would have done so already.  Options 2 and 3 are 2 methods that work but do the same thing, reduce the current shareholders (that usually include upper management) percentage of ownership through dilution.

Option 4 does none of these and allows both the CEO and CFO (both of whom are major shareholders in the company) to pledge their shares in return for the funds required for the project.  The lack of reduction of equity stake is especially attractive since the CEO and CFO are on the inside of the firm and believe this new market can increase the stock’s value by 50-200% over the next 4-5 yrs.  They are in position to execute the growth program and believe in their abilities and the future growth prospects of the company.

Stu

Southern Lending Solutions

Understanding The DTCC

March 15, 2010 / admin posted in Uncategorized / Comments Off

The Depository Trust & Clearing Corporation was created to automate the process of clearing and settling of securities and other assets. In 2008, DTCC settled more than $1.88 quadrillion in securities transactions. The DTCC nvworks with over 110 different countries outside of the US. Prior to its creation, the transfer of securities was a labor intensive and cumbersome process involving bureaucratic red tape and  redundant security procedures.  Messengers hustled along the floors the worlds stock exchanges with envelopes tucked under their arms with the words “urgent delivery” stamped across them. The contents……..precious shares of company stock. The creation of the DTCC has enabled securities transactions all over the world in a safe and automated environment.

Southern Lending Solutions

Todd Rome

Overseas Markets

March 10, 2010 / admin posted in Uncategorized / No Comments

Do you have full representation in foreign markets? Today’s economic climate has left many businesses scared to expand overseas . This may be the perfect time to seize the opportunity. Since most countries are excited to work with American businesses and the US dollar, exploring international opportunities may be just the action needed to set your business apart from the fray. As stated in previous posts, many US Companies have already exploited the opportunity of research and development in emerging countries. The cost for doing research is often cheaper  and encourages commerce with foreign markets.  Countries with new or growing markets represent an opportunity for American companies that lack direction.

Todd
Southern Lending Solutions

The Key Multiplier

March 9, 2010 / admin posted in Uncategorized / No Comments

When you deposit $$ in a bank, the bank uses it to count to its capital requirements, which allows them to lend more.  The bank benefits, the depositor benefits and the recipient of the loan benefits.Its a win/win/win situation.  As stated in a previous post, their required ratio is known as a reserve requirement or how much a bank most keep in reserve.

Insurance is a funny business. They know how much revenue they will have right away because it comes from their insurance premiums. What they don’t know is what their expenses and profit/loss will be as they do not know how many claims will be filed for them to pay.  The way they make the bulk of their $$ is how they manage that float of cash since that $$ may not stay with them and go out on claims.  Insurers have capital requirements too, known as source capital. More source capital means more insurance policies written and more potential profit.  When we do a repo trade with the insurer funding it, they get the benefit of getting to write between 3-6x as much in insurance policies as $$ they are lending out.  This is a great deal for them and the client and this key multiplier is why its such a good deal for everyone.

Stu

Southern Lending Solutions

Payment Method: DVP vs Escrow

March 3, 2010 / admin posted in Uncategorized / No Comments

Many repo trade programs use third party (usually an attorney) escrow accounts.  In fact, one very reputable one that we would recommend has exactly this policy.  We have heard of many horror stories with escrow though as the securities are transferred in, payment transferred in, then securities transferred out and payment transferred out. That’s alot of moving parts and stories have surfaced of fraudulent activity and crazy things happening in the escrow process.  Also, some of the private equity or hedge funds use escrow so they then can use the escrowed shares to raise the $$ to pay for the loan.  Allowable but not completely desirable.

DVP stands for Delivery versus Payment. Securities transfer out and Payment transfers in. Both by Fed Wire, both instantaneous and very low risk.  It also means the funding entity doesnt need the shares in order to fund it as the $$ must be available beforehand for an instantaneous transfer. Clients like this higher degree of safety.

Stu

Southern Lending Solutions

Working With Foreign Exchanges

March 1, 2010 / admin posted in Uncategorized / No Comments

Despite what everyone thinks…the American Stock Exchange (AMEX) is not the only one. There are many emerging countries with very strong exchanges. A few of these markets include: Indonesia, Cyprus, and Israel.

Israel is incredibly hot right now due to it strong economic growth.  As many know, the pharmaceutical market is not only very lucrative but very expensive. The cost to do research overseas in countries such as Israel, is sometimes half of what it is in the US.  This makes it very attractive for newer companies to base their  research in Israel. Look for foreign exchanges such as the Tel Aviv  stock exchange to become the new front in the stock market.

Todd
Southern Lending Solutions

What is a Segregated Account?

March 1, 2010 / admin posted in Uncategorized / No Comments

So we know in a Securities Lending Program, a type of Repo Trade, that in the best case scenario that a reinsurer has goals that are in line with our clients’ goals.  How does this all work?

Banks and insurance companies have capital requirements. In banking, the Federal Reserve dictates banking capital requirements by issuing reserve requirements. In other words, a certain amt of capital must be held back in reserve.  These requirements create the limits of how much $$ a bank can lend.  In the insurance world, the equivalent of reserve requirements are known as source capital requirements. Source capital creates the limitations of how much insurance can be written (issued) by an insurance company.

The listed securities being lent against are used for our insurer’s source capital requirements.  The reason why we can count them is through the use of segregated accounts.

What is a segregated account?

A segregated account is an account placed at a bank, investment bank or elsewhere that allows for the counting of capital.  So when the securities are physically transferred away from their current place where their acct is held, they are transferred to one of the segregated accounts but still held under client’s ownership. So client still owns the securities but insurer gets to count them to write more insurance.  How is this possible?  Well every bank in the world does this by paying you a % for your deposits and then lending that $$ out. It’s the same here, just for insurance instead.

This is why the securities are physically transferred away as opposed blocking and keeping them where they are.

While most don’t care about these mechanics, this helps explain why the program does what it does, how are reinsurance funders benefit and why their benefit is aligned with our clients’ benefits.  It also answers 2 of the most common questions we get asked about our program.

Stu

Southern Lending Solutions