, generally representing a cost savings over conventional credit options available in this marketplace.
The Managed Variable Rate Demand Note (MVRDN) is a patent-pending financial instrument and structure that is designed to be applied by fund of funds, hedge funds and asset managers within the alternative investment market as a more cost effective way to raise debt capital for subsequent investment. An MVRDN bears interest at a rate just 15 to 20 bps over 30-day LIBOR calculated on an interest-only basis
The MVRDN is a unique and efficient way for virtually any fund or asset manager that is subscribing to one or more of a variety of investment strategies to raise assets for management through the institutional capital markets. For example, the MVRDN can be utilized in support of:
||Energy Trading |
||Mortgage Backed Securities
||Asset-Backed Lending |
How it Works
The MVRDN is a debt instrument that improves upon the best characteristics of its commercial predecessor, the conventional Variable Rate Demand Note. That is, the MVRDN, through the incorporation of a ‘put’ function coupled with a remarketing mechanism that operates throughout the entire term of the Notes, qualifies for short-term interest pricing while the term of the instrument can be as long as 25 years with no penalty for early redemption. Additionally, it is credit enhanced for both principal and interest, making the MVRDN candidate for purchase by money market investors that require highly liquid, investment grade (rated A1 or better) paper. The MVRDN is designed in such a way to permit the pooling of capital for the purposes of investment management by the MVRDN Issuer (the Borrower) while providing credit or financing capabilities similar to conventional credit lines or leverage facilities at a much lesser cost. On average, the all-in credit cost of utilizing an MVRDN in lieu of conventionally sourced credit or leverage could be expected to be as much as 90 bpts a year less than similar products or facilities now available to the hedge fund and alternative investment community.
How can the MVRDN be Applied
The MVRDN can be licensed and applied by asset managers, fund of funds, hedge funds, lenders, venture capitalists and similar firms for the purposes of raising inexpensive debt capital sourced from the capital markets.
There are two primary questions that may be posed as the basis to assess how best a particular investment application can be supported with an MVRDN. First, can the investment strategy being employed be positioned for credit enhancement by a suitable investment grade firm such that the resulting MVRDN can qualify for purchase by its target institutional subscriber base? Second, does the MVRDN Issuer have sufficient equity available to offset first-losses or principal risk on the investment portfolio being funded as well as support a reasonable interest reserve in case of underperformance of the portfolio?
The responses will indicate clearly the most likely credit underwriting and enhancement approaches to be utilized in order to enable a successful MVRDN issuance and operation. Generally, the response to the second question as to the availability of sufficient equity and interest reserves determines the answer to the first; that is, the presence or lack of equity indicates the best means of achieving the required credit enhancement.
When there is equity available to offset first-losses or bear the principal risk of the portfolio operation, the credit enhancement of the MVRDN becomes more broadly available since the MVRDN in large part then behaves similarly to and becomes a more cost effective surrogate for a conventional CFO. Under a CFO, first-losses are borne by the asset manager as the basis to induce a third party institution to incur certain costs to cause the issuance of the CFO and then subsequently fund the asset manager’s operations. Under an MVRDN, first-losses are borne by the asset manager as the basis to induce solely a third party credit enhancement such that the asset manager may directly issue and place the MVRDN in the marketplace for its own benefit. The latter option constituting an opportunity for clear cost savings to the asset manager or fund.
When there is no equity available or none that the asset manager wishes to dedicate to cover first-losses associated with the investment portfolio’s operation underlying the MVRDN, the approach to credit enhancement becomes substantially more specialized since the credit enhancement provider must be willing to assume principal risk on the portfolio. Since principal risk falls upon the credit enhancement underwriter, the underwriter can seize upon this opportunity to utilize its enhancement as a means of participating in the investment performance of the fund or asset manager. In such case, not only would that credit underwriter receive basic enhancement fees, but it would also gain notional exposure to a desirable investment portfolio without making an initial capital contribution or even actively booking a debt obligation on its balance sheet.
United FT’s MVRDN (a new and proprietary technology protectable under the laws of trade secret) bridges a gap between what have traditionally been mutually exclusive market segments; the short-term money market subscriber base and the alternative investment and hedge fund audience. In introducing this new credit tool into active use within the alternative investment market, new efficiencies are fostered that bring with them substantial cost savings over conventional credit and leverage facilities. An MVRDN can be efficiently issued by a qualified asset manager or fund and, thereafter, debt serviced with greater ease through the distribution of low monthly interest payments that result in a substantial increase in overall cash flow. When that increased cash flow is prudently leveraged, the fund or asset manager as the MVRDN Issuer may benefit further from a tremendous increase in its overall return on portfolio assets.