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Mark S. Johnson
markstephenjohnson@comcast.net
404-909-5167
April 2015
Stimulating Wealthy Individual
Borrowing
Employing Credit Strategies that Deliver
Quantifiable Economic Benefit
Preamble
With the high level of private banking focus on increasing Assets Under
Management (AUM/A) or Advisement the potential revenue increases that
robust Credit Outstandings can provide sometimes take a back seat. Its
understandable in the client themselves don't often think of borrowing as their
financial solution.
More often than not the High Net Worth Individual thinks borrowing is, at best,
costly and, at worst, places undo risk on their financial plans. By showing the
client the Economic Benefit potentially gained through the use of a Strategic
Credit Structure the Adviser's role is truly enhanced and the client gains an
alternative attractive financial solution. A solution that not only provides the
client with substantial economic benefit but also increase the bank's credit
balances outstanding and maintains or potentially enhances the current level of
AUM.
2
2
Table of Contents
Delivering Quantifiable Economic Benefit (QEB)
Protecting the QEB We Create
Webster's defines strategy : a plan, method, or series of maneuvers for obtaining a specific goal or result
Strategic Credit Solutions
STRATEGY
Involves the analysis of
multiple alternatives to
achieve desired results
GOAL: Maintain
or enhance the
clients’ wealth
A STRATEGIC
CREDIT
SOLUTION
Strategy may
be multi-
faceted with
several
execution
steps to
achieve
success
Quantifiable
Economic
Benefit
(QEB)
provides
Achieving Quantifiable Economic Benefit for the client?
Observe
Client
Behavior
(e.g.; buy
something,
investments,
gifting)
Observe
Client
Planned
Financial
Solution
Analyze
Alternatives
to Client’s
Planned
Solution
Advise
Client of
Alternative
Solutions
Deliver
QEB
through
the use of
a Strategic
Credit
Structure
Strategic Credit Structures can provide the client with Quantifiable Economic Benefit beyond the
more traditional “mass market’ approach through:
 Cost savings over traditional mass market credit structures, or through
 Interest rate alternatives, or thorough
 Potentially enhanced investment earnings, or through
 A combination of all three
Credit Strategies: a few examples
Client Behavior Credit Strategy Economic Benefit
Client plans to liquidate
investment assets to
fund “Private
Investments”
Arbitrage
Capital
A loan secured by the clients
investment portfolio structured to
match the expected term of a Private
Investment or a line of credit to fund
multiple Private Investments
 Avoids potential tax implications associated with
selling investment assets to fund the Private
Investment or rebalancing if portfolio cash is
employed
 Preserving income earned in the investment portfolio
over the term of the Private Investment on assets
that would other wise be sold
Client desires 100%
financing for an asset
purchase
Eliminate
Down
Payments
Combine typical asset purchase
financing with a separate line of
credit or loan secured by the client's
investment portfolio for the down
payment required
 Avoids potential tax implications associated with
selling investment assets to fund the down payment
or rebalancing if portfolio cash is employed
 Preserving income earned in the investment portfolio
on assets that would otherwise be sold
Client desires to finance
(or refinance) an asset
purchase
Synthetic
Asset
Purchase
Financing
Loans secured by the client’s
investment portfolio but structured
to mirror typical market terms
available to the type of asset being
financed (e.g.; real estate [business or
personal], equipment, airplanes, boats)
 Avoids potential tax implications associated with
selling investment assets to fund the Private
Investment or rebalancing if portfolio cash is
employed
 Provides cost savings associated with lower rate
than conventional asset purchase financing rates
 Eliminates fees and closing costs typical of the asset
finance market
Client values lowest cost
of financing over rate
stability
Interest Rate
Structure
Utilize various credit t structures to
minimize the interest rate expense
and/or volatility .
*Client considerations: Risk tolerance
(both investment risk and interest
rate risk)
 Provides cost savings associated with lower cost of
floating rate vs fixed rate
EXAMPLE: Arbitrage Capital to Fund Private Investments
*Remember – Assumptions will change based on the clients’ applicable situation.
Assumptions:
- Based on 5 year Private Investment hold and 5 year term loan.
- Scenario 1 Loan is secured by properly margined liquid securities.
- Scenario 1 “Loan Carry Cost” based on Floating Rate of L + 1.50% = 1.65% for 5 year term with no rate variations assumed.
- Rate risk could be reduced in Scenario 1 by use of a fixed rate alternative structure
- Scenario 2 Capital Gains Tax on cash raised assumes Capital Gain of $4MM on liquidation of $5MM
- Added benefit to the bank or maintaining$10,000,000 AUM
SCENARIO 1
Arbitrage Capital Funding Credit Strategy:
Loan Structured to Finance Private Investment
Private Investment $5,000,000
Expected Hold 5 yrs
AUM $10,000,000
Loan Amount $5,000,000
Term 5 yrs
Interest Rate (Floating) L + 1.50%
Earnings on Private Investment 10% $2,500,000
Earnings on AUM 6% $3,000,000
(Loan Carry Cost) ($412,500)
Scenario 1 Net Earnings $5,087,500
SCENARIO 2
Liquidation of Assets to Fund Private Investment
Private Investment $5,000,000
Expected Hold 5 yrs
AUM $5,000,000
Earnings on Private Investment 10% $2,500,000
Earnings on AUM 6% $1,500,000
(Capital Gain Tax on Cash Raised) 15% ($600,000)
Scenario 2 Net Earnings $3,400,000
ECONOMIC BENEFIT
$1,687,500
[Scenario 1 Net Earnings –
Scenario 2 Net Earnings]
OPPORTUNITY COST
($1,687,500)
[Scenario 2 Net Earnings –
Scenario 1 Net Earnings]
EXAMPLE: “Synthetic Asset Financing” Alternative
*Remember – Assumptions will change based on the clients’ applicable situation.
Assumptions:
- Based on 7 year AUM investment horizon and 7 year term loan.
- Scenario 1 Loan is secured by properly margined liquid securities.
- Scenario 2 Client liquidated $1MM AUM for down payment which reduced AUM earnings
- Current Economic Benefit could be enhanced significantly by use of a floating rate in Scenario 1
SCENARIO 1
“Synthetic Asset Finance” Credit Strategy:
Loan Structured to Finance Asset Purchase
AUM $10,000,000
Loan Amount $5,000,000
Term 7 yrs
Interest Rate (Fixed) 4.14%
Earnings on AUM 6% $3,000,000
(Loan Carry Cost) ($1,449,000)
Scenario 1 Net Earnings $1,551,000
SCENARIO 2
Traditional Asset Purchase Financing
AUM $9,000,000
Loan Amount $4,000,000
Term 7 yrs
Interest Rate (Fixed) 4.50%
Origination Fee / Closing Costs 2.5%
Down Payment Required 20%
Earnings on AUM 6% $2,700,000
(Loan Carry Cost + Fees) ($1,360,000)
Scenario 2 Net Earnings $1,340,000
ECONOMIC BENEFIT
$211,000
[Scenario 1 Net Earnings –
Scenario 2 Net Earnings]
OPPORTUNITY COST
($211,000)
[Scenario 2 Net Earnings –
Scenario 1 Net Earnings]
Economic Benefit Considerations and Protection Strategies
Business of banking is dynamic . . .
Changing rates, tax implications, estate planning
guidelines, etc. must be incorporated in the
recommended strategic approach in order to deliver
Economic Benefit and meet the Client’s needs.
 Credit facility structural changes can be utilized to
protect the Economic Benefit
 The Client’s Risk Tolerance is the ultimate arbiter and
will determine the recommended strategy
Example of Various Credit Structures based on a Client’s Interest Risk Tolerance
LOW Client’s Risk Tolerance HIGH
No Interest
Rate Risk:
Fixed Rate
Loan for the
Term
Required
Lower Risk in the
Current Rate
Environment:
Floating Rate Loan +
Floating-to-Fixed
Rate Swap
More Moderate Risk:
Long Term Floating Rate Loan + Option to
enter Floating-to-Fixed Rate Swap
if/when desired or
Combine Long Term Fixed and Floating
Rate Loans, totaling the needed amount
Higher Risk:
Short Term Loan
with Floating Rate
for a longer term
need
Sample
Interest
Rate
Structures

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Stimulating Wealthy Individual Borrowing

  • 1. Mark S. Johnson markstephenjohnson@comcast.net 404-909-5167 April 2015 Stimulating Wealthy Individual Borrowing Employing Credit Strategies that Deliver Quantifiable Economic Benefit
  • 2. Preamble With the high level of private banking focus on increasing Assets Under Management (AUM/A) or Advisement the potential revenue increases that robust Credit Outstandings can provide sometimes take a back seat. Its understandable in the client themselves don't often think of borrowing as their financial solution. More often than not the High Net Worth Individual thinks borrowing is, at best, costly and, at worst, places undo risk on their financial plans. By showing the client the Economic Benefit potentially gained through the use of a Strategic Credit Structure the Adviser's role is truly enhanced and the client gains an alternative attractive financial solution. A solution that not only provides the client with substantial economic benefit but also increase the bank's credit balances outstanding and maintains or potentially enhances the current level of AUM. 2 2
  • 3. Table of Contents Delivering Quantifiable Economic Benefit (QEB) Protecting the QEB We Create
  • 4. Webster's defines strategy : a plan, method, or series of maneuvers for obtaining a specific goal or result Strategic Credit Solutions STRATEGY Involves the analysis of multiple alternatives to achieve desired results GOAL: Maintain or enhance the clients’ wealth A STRATEGIC CREDIT SOLUTION Strategy may be multi- faceted with several execution steps to achieve success Quantifiable Economic Benefit (QEB) provides
  • 5. Achieving Quantifiable Economic Benefit for the client? Observe Client Behavior (e.g.; buy something, investments, gifting) Observe Client Planned Financial Solution Analyze Alternatives to Client’s Planned Solution Advise Client of Alternative Solutions Deliver QEB through the use of a Strategic Credit Structure Strategic Credit Structures can provide the client with Quantifiable Economic Benefit beyond the more traditional “mass market’ approach through:  Cost savings over traditional mass market credit structures, or through  Interest rate alternatives, or thorough  Potentially enhanced investment earnings, or through  A combination of all three
  • 6. Credit Strategies: a few examples Client Behavior Credit Strategy Economic Benefit Client plans to liquidate investment assets to fund “Private Investments” Arbitrage Capital A loan secured by the clients investment portfolio structured to match the expected term of a Private Investment or a line of credit to fund multiple Private Investments  Avoids potential tax implications associated with selling investment assets to fund the Private Investment or rebalancing if portfolio cash is employed  Preserving income earned in the investment portfolio over the term of the Private Investment on assets that would other wise be sold Client desires 100% financing for an asset purchase Eliminate Down Payments Combine typical asset purchase financing with a separate line of credit or loan secured by the client's investment portfolio for the down payment required  Avoids potential tax implications associated with selling investment assets to fund the down payment or rebalancing if portfolio cash is employed  Preserving income earned in the investment portfolio on assets that would otherwise be sold Client desires to finance (or refinance) an asset purchase Synthetic Asset Purchase Financing Loans secured by the client’s investment portfolio but structured to mirror typical market terms available to the type of asset being financed (e.g.; real estate [business or personal], equipment, airplanes, boats)  Avoids potential tax implications associated with selling investment assets to fund the Private Investment or rebalancing if portfolio cash is employed  Provides cost savings associated with lower rate than conventional asset purchase financing rates  Eliminates fees and closing costs typical of the asset finance market Client values lowest cost of financing over rate stability Interest Rate Structure Utilize various credit t structures to minimize the interest rate expense and/or volatility . *Client considerations: Risk tolerance (both investment risk and interest rate risk)  Provides cost savings associated with lower cost of floating rate vs fixed rate
  • 7. EXAMPLE: Arbitrage Capital to Fund Private Investments *Remember – Assumptions will change based on the clients’ applicable situation. Assumptions: - Based on 5 year Private Investment hold and 5 year term loan. - Scenario 1 Loan is secured by properly margined liquid securities. - Scenario 1 “Loan Carry Cost” based on Floating Rate of L + 1.50% = 1.65% for 5 year term with no rate variations assumed. - Rate risk could be reduced in Scenario 1 by use of a fixed rate alternative structure - Scenario 2 Capital Gains Tax on cash raised assumes Capital Gain of $4MM on liquidation of $5MM - Added benefit to the bank or maintaining$10,000,000 AUM SCENARIO 1 Arbitrage Capital Funding Credit Strategy: Loan Structured to Finance Private Investment Private Investment $5,000,000 Expected Hold 5 yrs AUM $10,000,000 Loan Amount $5,000,000 Term 5 yrs Interest Rate (Floating) L + 1.50% Earnings on Private Investment 10% $2,500,000 Earnings on AUM 6% $3,000,000 (Loan Carry Cost) ($412,500) Scenario 1 Net Earnings $5,087,500 SCENARIO 2 Liquidation of Assets to Fund Private Investment Private Investment $5,000,000 Expected Hold 5 yrs AUM $5,000,000 Earnings on Private Investment 10% $2,500,000 Earnings on AUM 6% $1,500,000 (Capital Gain Tax on Cash Raised) 15% ($600,000) Scenario 2 Net Earnings $3,400,000 ECONOMIC BENEFIT $1,687,500 [Scenario 1 Net Earnings – Scenario 2 Net Earnings] OPPORTUNITY COST ($1,687,500) [Scenario 2 Net Earnings – Scenario 1 Net Earnings]
  • 8. EXAMPLE: “Synthetic Asset Financing” Alternative *Remember – Assumptions will change based on the clients’ applicable situation. Assumptions: - Based on 7 year AUM investment horizon and 7 year term loan. - Scenario 1 Loan is secured by properly margined liquid securities. - Scenario 2 Client liquidated $1MM AUM for down payment which reduced AUM earnings - Current Economic Benefit could be enhanced significantly by use of a floating rate in Scenario 1 SCENARIO 1 “Synthetic Asset Finance” Credit Strategy: Loan Structured to Finance Asset Purchase AUM $10,000,000 Loan Amount $5,000,000 Term 7 yrs Interest Rate (Fixed) 4.14% Earnings on AUM 6% $3,000,000 (Loan Carry Cost) ($1,449,000) Scenario 1 Net Earnings $1,551,000 SCENARIO 2 Traditional Asset Purchase Financing AUM $9,000,000 Loan Amount $4,000,000 Term 7 yrs Interest Rate (Fixed) 4.50% Origination Fee / Closing Costs 2.5% Down Payment Required 20% Earnings on AUM 6% $2,700,000 (Loan Carry Cost + Fees) ($1,360,000) Scenario 2 Net Earnings $1,340,000 ECONOMIC BENEFIT $211,000 [Scenario 1 Net Earnings – Scenario 2 Net Earnings] OPPORTUNITY COST ($211,000) [Scenario 2 Net Earnings – Scenario 1 Net Earnings]
  • 9. Economic Benefit Considerations and Protection Strategies Business of banking is dynamic . . . Changing rates, tax implications, estate planning guidelines, etc. must be incorporated in the recommended strategic approach in order to deliver Economic Benefit and meet the Client’s needs.  Credit facility structural changes can be utilized to protect the Economic Benefit  The Client’s Risk Tolerance is the ultimate arbiter and will determine the recommended strategy Example of Various Credit Structures based on a Client’s Interest Risk Tolerance LOW Client’s Risk Tolerance HIGH No Interest Rate Risk: Fixed Rate Loan for the Term Required Lower Risk in the Current Rate Environment: Floating Rate Loan + Floating-to-Fixed Rate Swap More Moderate Risk: Long Term Floating Rate Loan + Option to enter Floating-to-Fixed Rate Swap if/when desired or Combine Long Term Fixed and Floating Rate Loans, totaling the needed amount Higher Risk: Short Term Loan with Floating Rate for a longer term need Sample Interest Rate Structures