Lauton U: Getting Your Projects Funded the Easy Way -The Miracle of Paper Assets – Part I

Paper assets are one of the best types of collateral you can use to finance your project. However, they are also one of the most misunderstood and misused assets classes in commercial financing today.

So today we are going to pull back the veil and we’re going to take a closer look into what they are and what they are not. We will also discuss how you can use them to quickly and easily finance almost any kind of project or venture imaginable.

Benefits of using paper assets

There a number of incredible benefits associated with using paper assets as collateral. Here are a few reasons why investors love them:

  • Due diligence on them is fast and easy to perform. Unlike trying to establish the value of real property or a company, due diligence on paper assets simply entails verifying the authenticity of the instrument and determining the strength of the issuing institution.
  • Expenses are reduced dramatically because funding sources focus on the validity of the instrument rather than on the project itself. This eliminates the need for many third party reports—such as appraisal reports— since the paper assets will be serving as the collateral for the deal. In the case of a default, the lender or investor can simply redeem the paper assets to recover their losses.
  • Projects collateralized with paper assets can be funded much fasterthan with any other asset class. With the right kind of paper assets there are sources who will close on a deal in just a week’s time.

    • With all of these benefits the question now becomes . . .

    What types of paper assets are potential lenders/investors accepting?

    This is a tricky question to answer. If you go by a lot of the nonsense found online you can be led astray and get into trouble very quickly. The best place to go to find out what paper assets are being actively traded by investors is the Depositary Trust & Clearing Corporation (DTCC). This information is key because you don’t want to present funding sources with paper assets that are illiquid because of lack of trading.

    This entity oversees the functions of the Depository Trust Company (DTC) and the National Securities Clearing Corporation (NSCC). These two subsidiaries, along with others such as Euroclear, help facilitate the smooth functioning of the US and global capital markets. They provide a clearinghouse system for paper assets that minimizes the need to physically transfer them from one place to another. They accomplish this by offering an integrated platform that effect book entries of ownership in place of the physical transfer of paper assets. In addition, the DTC also serves as a custodian of the securities deposited by its participants and provides securities settlement services. If a paper asset is being traded by investors, chances are, the transaction is being cleared through the DTC.

    Here is a list of the types of instruments currently being cleared through this system:

    Municipal Securities

    • Auction Rate Notes
    • Insured Custodian Receipts
    • Municipal Bonds
    • Municipal Notes
    • Variable Rate Demand Obligations (VRDOs)

    Government Securities

    • Brady Bonds
    • Non-U.S. Government Debt
    • U.S. Treasury, Federal Agency and Government Sponsored Enterprises
    • Issues

    Debt Instruments (in addition to Government and Municipal Debt)

    • Asset Backed Securities
    • Auction Rate Notes
    • Bank Notes
    • Certificates of Deposit (Retail & Institutional CDs)
    • Collateral Mortgage Obligations (CMOs)
    • Commercial Paper (CP)
    • Consumer Price Index-Linked Bonds (CPI Bonds)
    • Convertible Debt
    • Corporate Bonds
    March 9th, 2010
    Posted in Uncategorized
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