The Reverse Bond. A Credit Enhancement Instrument. An Investment opportunity offered by: Momentum Financial Group LLC Atlanta, GA

Size: px

Start display at page:

Download "The Reverse Bond. A Credit Enhancement Instrument. An Investment opportunity offered by: Momentum Financial Group LLC Atlanta, GA"

Jemimah Cross
5 years ago
Views:

1 The Reverse Bond A Credit Enhancement Instrument An Investment opportunity offered by: Momentum Financial Group LLC Atlanta, GA

2 What are Reverse Bonds? A Reverse Bond is a credit enhancement instrument that has all of the characteristics of a traditional bond, only in reverse. Reverse bonds function as a financial guarantee for approved borrowers. MFG will issue reverse bonds to qualified borrowers in exchange for equity in the borrowing entity. MFG will also receive a reverse coupon during the term of the reverse bond. MFG is offering participation in our Reverse Bond offering to accredited investors. For more information, please request a copy of our Offering Memorandum.

3 Traditional Bond vs Reverse Bond Characteristics See Chart below for a $1 million traditional bond vs. reverse bond. Traditional Bond Characteristics Reverse Bond Characteristics Face Value: $1 million Face Value: $1 million Term (Months): Determined by Issuer Term (months): Coupon:Yes (Issuer pays Bond Recipient) Coupon: Yes (Reverse Bond Recipient pays Issuer) Value at Maturity: $1 million Value at Maturity: $0.00 Pledged as security for borrowing: Yes Pledged as security for borrowing: Yes Value: $ (Market Value) Value: $ (Negotiable equity in Recipient entity) Cost to Investor: $ (Market Value) Cost to Investor: $ 0.00* *Investor will pledge cash/cash equivalents equal to reverse bond s face value

4 Traditional Bond vs. Reverse Bond Investment Analysis: ($1 million) Traditional Bond Investment Cost: $1 million Investor must physically purchase bond. Income: Yes; Investor receives coupon payments. Equity participation: No Reverse Bond Investment Cost: $0.00 Investor (Grantor) will pledge $1 million into a trust account. Investor-approved bank will serve as Trustee; Income: Yes; Investor receives coupon payments. Equity participation: Yes

5 Reverse Bond Highlights Reverse bonds are issued in $1 million increments There are (3) Series of Reverse bonds totaling $21.0 Billion: 7,000 Series 15 (15-month term), or $7.0 Billion 7,000 Series 39 (39-month term), or $7.0 Billion 7,000 Series 63 (63-month term), or $7.0 Billion Reverse bonds require a Reverse Coupon payable by the Recipient to the Issuer 15 month: 3.00% per annum 39 month: 2.50% per annum 63 month: 2.00% per annum At closing, reverse coupon is paid in full to the Issuer for the term of the Reverse Bond There can be no liens/encumbrances against reverse bonds at maturity.

6 Key Factors At maturity, there can be NO liens or encumbrances against the reverse bond. Value of reverse bond at maturity is $0.00. Should there be any lien or encumbrance against the reverse bond, the issuer is required to pay the lien holder, up to the face value of the reverse bond. The lien holder can only request payment within (15) days before maturity of the reverse bond. Should the lien holder fail to request payment within that 15-day window, it forfeits all rights to assets backing each reverse bond.

7 Our Strategies to offset Investor Risks Upon issuance of reverse bond(s) to a recipient, the Issuer will require that the recipient issue an assignable corporate debenture equal to the face value of the approved reverse bond(s). Should the Issuer be required to pay any lienholder under the terms of a default, the debenture will go into effect for the entire face value of the reverse bond(s). Issuer will then become an unsecured creditor of the reverse bond recipient. Issuer will use all legal remedies available to it collect any losses it incurs from reverse bond recipients. MFG will also allocate 20% of all reverse coupon revenue to a Risk Mitigation Fund. This fund will continue to be funded by ALL of MFG s reverse bond activities indefinitely. MFG may explore obtaining a line of credit against its equity holdings across its portfolio of companies. MFG may explore obtaining a credit risk insurance insuring against a default.

8 Here s an Example

9 Case Study: Acme Corporation Acme Corp s Vitals: Anita Loan, CEO of Acme Corp. Successful Small Business Owner Strong Management Team Strong Banking Relationship One Business Location Acme Corp. Valuation: $1.0 Million Anita Loan

10 Acme Corp s Objective: Raise $700K Expansion Costs: $600K Working Capital Needs: $100K Open three (3) new locations Debt & equity financing options Desired Term: 63, 39, or 15 months Original Location Three (3) New Locations

11 Acme Corp. Assumptions: Current Valuation: $1.0M Equity Available: 25.00% Participating Lender: Yes Desired loan term: 63, 39, or 15 months Loan Repayment Strategy within Term: Yes Valuation at Loan Repayment: $4.0M (Est.)

12 Acme Corp. s Financing Options for needed Capital Debt Financing (Lender may require up to 40% of loan in cash & a personal guarantee) Equity Financing (Investor may require substantial equity stake) Reverse Bond Financing* Investor or Lender Acme Corp. *The reverse bond structure uses a combination of Debt and Equity

13 How can Reverse Bonds help Acme Corporation?

14 Reverse Bond Approval Requirements Here are some of the requirements for an approval by MFG: Acme Corp must have a strong business plan & management team; Acme Corp must have a strong banking relationship; Acme Corp must provide a clearly defined and approved loan repayment strategy prior to the maturity of reverse bonds; Acme Corp must obtain a business valuation; Acme Corp must agree to obtain an annual valuation; Acme Corp must agree to provide certified financial statements on a quarterly basis; Acme Corp must agree to obtain an annual audit of its financial statements;

15 Step 1: Engagement of the Underwriter Underwriter & Advisory Services Consultant Acme Corp. engages the services of a third party underwriter & advisory services consultant (approved by MFG) to underwrite and perform risk management assessment of its business plan. Acme Corp. is responsible for all expenses associated with this activity. Underwriter must retain third party, best in class risk management assessment advisors in Acme Corp s industry.

16 Step 2: Approval by the Underwriter Underwriter & Advisory Services Consultant Upon approval, Underwriter will present the Acme Corp (fully underwritten) package to MFG for a final approval.

Step 3: Approval by the Issuer (MFG) Underwriter & Advisory Services Consultant Commitment MFG reviews the fully underwritten package and presents

17 Step 3: Approval by the Issuer (MFG) Underwriter & Advisory Services Consultant Commitment MFG reviews the fully underwritten package and presents it to MFG s independent advisory committee for a final approval. Upon independent approval, MFG will issue a commitment for $1.0M of Reverse Bonds.

18 Step 3.1: Terms of Reverse Bond Commitment $1.0M of Reverse Bonds $1.0M Debenture Up to 25% Non Diluted Equity Reverse Coupon paid to MFG A $1.0M corporate debenture will be executed at closing MFG Equity position: 25.00% (worth $250K based on this example) Reverse Coupon Income: $105K for 63-Month Series; $81.25K for 39-Month Series; or, $37.5K for 15-Month Series (payable in full at closing);

19 Step 3.2: Issuance of Reverse Bonds Trustee Investor (Grantor) Investor places $1.0M cash into lockbox trust account (as Grantor) at his/her financial institution. This financial institution will act as Trustee. Issuer will be the Beneficiary of the Trust. Trust Account & Trust Agreement $1.0M Series 63/39/15 Reverse Bond Issuer (Beneficiary)

20 Step 3.2: Issuance of Reverse Bonds (Explanation) 1. MFG presents Acme Corp. package and trust agreement to Investor 2. Investor (Grantor) places $1.0M into a trust account with an Investor-approved financial institution for the duration of the reverse bond term (63, 39, or 15 months) 3. The Issuer of the Reverse Bonds is the Beneficiary 4. An Investor-approved financial institution will serve as Trustee 5. Reverse bonds are now cash backed and can be issued to Acme Corp.

21 Step 4: Closing (MFG & Acme Corp.) 25% Equity $1.0M Reverse Bond from MFG to Acme 25.0% Equity from Acme to MFG, of which 17.5% of Acme will go to Investor $1.0M Series 63/39/15 Reverse Bond

22 Step 4.1: Equity Considerations to Investor $1.0M blocked in Trust Account for Acme Corp Reverse Bonds 17.5% (or 70% of MFG s 25.0%) Equity in Acme to Investor Investor 17.5% Equity in Acme 25% Equity in Acme

0M Series 63/39/15 Reverse Bond Loan Term Assumptions Term: 63, 39, or 15 months

23 Step 5: Acme Corp s Closing with its Bank $1.0M Loan from bank to Acme $1.0M Reverse Bond from Acme to its bank $1.0M Series 63/39/15 Reverse Bond Loan Term Assumptions Term: 63, 39, or 15 months Interest: 3.00% Interest Only (Est.) Loan Guarantee: Reverse Bond Other terms: No prepayment penalty Loan is a revolving line of credit

24 Step 6: Use of $1.0M Loan Proceeds Loan (or Line of Credit) Principal $ 1,000, month Series 39-month Series 15-month Series Reverse Coupon Rate -2.00% -2.50% -3.00% Reverse Coupon Revenue* $ (105,000) (81,250) (37,500) Interest Reserve Requirement (3.00%) $ (157,500) (97,500) (37,500) Closing cost & Other Advisory Fees (Est. 4.00%) $ (40,000) (40,000) (40,000) Net Proceeds to Acme Corp. $ 697, , ,000 *At closing, Reverse Coupon is paid to MFG for the entire term (63, 39, or 15 months).

25 Step 7: Use of Reverse Coupon Proceeds Reverse Coupon Revenue to MFG $ 105,000 81,250 37, month Series 39-month Series 15-month Series Reverse Coupon Portion payable to Investor (70%) $ (73,500) (56,875) (26,250) Risk Mitigation Fund* (20%) $ (21,000) (16,250) (7,500) Balance for MFG Administrative & Overhead Expenses $ 10,500 8,125 3,750 *A Risk Mitigation Fund will be established (for all MFG transactions). Should Acme Corp. default on its obligations, MFG will tap into the Default Reserve Fund first to repay the loan/loc to Acme s Bank.

26 Thank you for your Consideration in this opportunity. Momentum Financial Group LLC Atlanta, GA

Glossary BankNewport All rights reserved.

Glossary BankNewport All rights reserved. Glossary 2015 BankNewport All rights reserved. Glossary 2 504 Loan Program Includes a loan secured with a senior lien from a private-sector lender covering up to 50% of the project cost, a loan secured