|
Project
Financing > This page
Self-Liquidating Arbitrage Loans
(Source: A Scully)
You don't have to be rich to get an Arbitrage
Loan. You just need to know what to do and where to go. Needless to say,
you have probably seen hundreds of offers over the past ten to twenty
years - but have you been able to get a Self-Liquidating Loan? Probably
not. Because there's many con artists associated with this investment
technique. If it was that easy everybody could arrange one!
An arbitrage loan is different. Its a loan
where you profit from the spread between interest rates. You can
get a loan and make money through some arbitrage and hedging. This is
absolutely legal under international banking rules.
Some procedures must be respected and you
have to know what to do and how. To give you an idea of how an arbitrage
loan is made here is an example. Basically, an Arbitrage Loan, looks like
this:
- BORROW from $5.000.000 to $ 20.000.000
for a period from 5 to 10 years;
- OBTAIN discounted collateral using
some of the money you borrowed. This collateral is usually in the form
of letters of credit or certificates of deposit; which is pledged as
collateral to the lending bank and will repay the principal of the loan,
in-full at maturity;
- INVEST some of the money you borrowed
in an income-producing investment that will pay the interest on your
loan each year, in arrears. The income stream from this investment is
assigned to the lending bank to pay your interest on the loan;
- PAY all of the broker's commissions
and finder's fees from the balance of your loan's proceeds;
- THE DIFFERENCE BETWEEN THE INTEREST
PAID AND THE INTEREST MADE IS YOUR PROFIT.
You have borrowed the MONEY; paid for COLLATERAL to re-pay the PRINCIPAL;
paid for an income-producing instrument to pay the INTEREST for you;
and paid all of the COMMISSIONS and FEES. The amount you have left is
yours to keep and do with as you like (depending on the market, to the
tune of $200,000 to $1,000,000.). This is called the "ARBITRAGE
PROFIT."
All of the above actions take place SIMULTANEOUSLY
at the closing of the loan, which is arranged by the " Escrow
or law firm " for the Boutique Investment Banker who put the
deal together. The boutique investment banker is the most important piece
of the puzzle. It gives the bank what it need to feel comfortable with
the transaction.
Since you will obtain the required collateral
and income-producing instruments from the loan proceeds, your credit history
does not matter. All you need, is a viable project for which the fall-out
from the loan will be used.
You don't need to have a high net worth or
be a millionaire to get an arbitrage loan. In fact you don't need to invest
a dollar of your own money. Your current financial position is unimportant
under this plan.
You may wonder if any bank will lend you
5 or 10 million based on a project without a substantial investment from
you. Yes, it will since its fully secured by Certificate of deposit or
acceptable Letter of Credit and by the assets in your project. But not
all banks will accept this.
International banks seldom do any loans less
than 5 million. You virtually kill your chances by trying to make an arbitrage
loan for a smaller amount than 5 million. You also need a sound project
with a business plan. This is of primary importance.
Recommended further reading:
Loans
on a world wide level
Project finance
Preparing your business plan
The executive summary
Finance procedure
Business
Plan information and resources
|
