Using Appreciating Assets to Create Liquidity through Bond Securitization

There comes a point in time where all owners of non-income producing appreciating assets consider a liquidity event for that asset. There currently exists only two (2) methods to achieve this liquidity event, monetization and sale. Neither approach meets the needs of the owner of the asset.

Monetization typically will result in a low Loan To Value amount of liquidity made available and when coupled with regular interest payments can dramatically reduce the liquidity initially provided. With regard to selling the asset to create liquidity, most owners do not want to give up a long term appreciating asset for a lump sum payment that does not reflect the true value of the asset.

Bach Capital Management (“BCM”) is pleased to introduce a third method of creating liquidity using appreciating assets that truly meets ALL of the needs of the owner
By partnering with a large Investment Bank/Broker Dealer and using BCM Treasury Management Investment Strategy BCM is able to create liquidity for owners of appreciating assets without the need for loans or selling the asset. Assets acceptable for this program include but are not limited to:

  • Land
  • Precious Metals
  • Precious Gems
  • In Ground Assets including but not limited to Oil, Gas and Minerals Fine Art and Collectables

The amount of appreciating assets to Bond size is usually a three (3) to one (1) ratio meaning the value of the assets posted as collateral needs to be three (3) times the size of the Bond. Multiple assets can be stacked together as collateral to meet this threshold and in some cases with certain types of assets may reduce the ratio from three (3) to one (1) to two (2) to one (1) resulting in substantially less collateral needed .

Benefits to the Owner of the Appreciating Asset
The owner of the asset receives a lump sum payment equal to twenty (20%) percent of the Bond size from the Bond proceeds after the sale of the Bond. Thereafter the owner receives three (3%) percent interest payment from the SPV on an annual basis for the term of the Bond. The annual three (3%) percent interest payment is based upon the value of the collateral NOT the size of the bond, resulting in a larger liquidity event. Because the dividends from the Bond proceeds are produced solely through the use of Index Options, these dividends are tax advantaged.

Pursuant to Section 1256 of the Internal Revenue Code, certain financial contracts, including Index Options are classified as “Section 1256 Contracts” and are treated differently than other products when the holding period is less than one year. Specifically, these products are subject to the “60/40 rule,” under which 60 percent of the gain (or loss) on a trade is treated as a long-term gain (or loss), regardless of how long the contract is held in a portfolio. The remaining 40 percent is treated as a short- term gain (or loss).

Given the wide discrepancy between short and long-term capital gains tax rates, the impact of this 60/40 rule can be very significant. Long-term capital gains are taxed at either zero (0%) percent, fifteen (15%) percent or twenty (20%) percent depending upon an individual’s taxable income. Short-term capital gains are taxed as regular income, subject to marginal tax rates reaching up to thirty-seven (37%) percent in 2021. This can lead to a significant tax advantage for income generated by Index Options.
Given the issuance of a One Hundred Million ($100,000,000 USD) Dollar Bond, the owner of the appreciating asset can expect to receive the following amount as a liquidity event over the full ten (10) year Bond term:

1. Twenty Million ($20,000,000 USD) Dollars from the Bond proceeds immediately following the sale of the Bond offering by the Investment Bank/Broker Dealer.

2. Nine Million ($9,000,000 USD) on an annual basis throughout the term of the Bond. Inasmuch as these payments are generated through the BCM Treasury Management Methodology, said dividends are tax advantaged. Unlike monetization, these payments are not loans and no interest payments are required. These monies can be used for whatever purpose the owner chooses. Furthermore, unlike a sale, the owner gets the liquidity and still maintains ownership of the asset. It is clear that the methodology outlined above is far superior to anything else offered in today’s financial marketplace.

Bond Process
The process of creating liquidity for appreciating assets through Bond Securitization is as follows:

1. The owner of a $300M income or non-income appreciating asset can expect to receive the following as liquidity amounts on a full ten (10) year $100M Bond. BCM charges a one-time One Hundred Thousand ($ 100,000 USD) Dollar Retainer Fee as part of its Engagement. Once the Bond has been sold the Retainer is returned to the asset owner.

2. The Investment Bank/Broker Dealer creates an SPV and begins due diligence on both the asset and the owner of the asset.

3. Once due diligence has been completed, the appreciating asset is pledged to the SPV as collateral for the Bond issuance. The owner of the appreciating asset maintains ownership of the appreciating asset.

4. The Investment Bank/Broker Dealer completes the underwriting for the Bond and appoints Bach Capital Management to serve as Fund Trustee. As Fund Trustee BCM is tasked with producing dividends from the Bond proceeds to ensure the payment of Bond interest to the Bond purchasers as well as the repayment of the Bond principal at the end of the Bond term. BCM will employ its BCM UPPLIFT TMIS Methodology to meet this goal.

5. The Investment Bank/Broker Dealer issues and is responsible for the entire sale of the Bond. All fees generated by the Investment Banker/Broker Dealer and the vendors they employ are all paid out of the Bond proceeds. There is usually no upfront fee either paid by or requested from the owner of the appreciating assets in this process.

6. Once the Bond is sold, the Bond proceeds are held in a custodian bank chosen by the Investment Bank/Broker Dealer and BCM begins its Fund Trustee function. The Custodian Bank receives confirmations of every transaction performed by BCM and the entire process is fully transparent at all times through the Bond Term.

7. At the end of the Bond Term (typically ten (10) years, the Bond principal is repaid to the Bond purchasers and the process concludes. The pledge of the appreciating asset to the SPV is released.

8. The owner of the appreciating asset can repeat this process as many times as they wish,

Please feel free to reach out to us at [email protected] for more information.

Michael Bach
CEO & Founder
Bach Capital Management