Help - need advice on leveraging bonds

[johnataylor]

Hello everyone,

I need some advice. I run a private money lending group out of San Francisco. We have about $1.5M in equity. The market for our loans is huge, so we're looking for a way to leverage into some credit facilities to increase our lending capacity.

The credit crunch has tightened access to funds. Most banks want strict collateral to lend against. We've looked into "structured financing," and the whole SBLC/BG and leased instrument thing looks like a fraud. Our best bet, it seems, would be to acquire truly asset-backed collateral to use for acquiring a line of credit.

We're thinking bonds, and we're wondering if there's a way to leverage our existing capital into a zero coupon, 10 or 20-year bond. For example, is there a way to take $4M and get 4:1 leverage (or better?) into a bond that yields $16M at maturity? We'd then put this bond up for collateral to obtain a 1:1 line of credit.

If there's a way to get this done, please let me know. If you understand what we're trying to accomplish, but think there's a better way of doing it, please let me know as well. Thanks!

 

[sjfan]

Quote from johnataylor:


We're thinking bonds, and we're wondering if there's a way to leverage our existing capital into a zero coupon, 10 or 20-year bond. For example, is there a way to take $4M and get 4:1 leverage (or better?) into a bond that yields $16M at maturity? We'd then put this bond up for collateral to obtain a 1:1 line of credit.

If I understand this, you are trying to buy $16MM bonds on a levered basis and then post the bonds as collateral against credit? I think there are several problems with that. First, you'll probably end up not getting a zero, but on of the treasury long bonds. In that case your position will cost you, as you will pay your broker LIBOR + XXXbps and recieve treasury spread... as of now 20 year swap spread is 78bps. So, your cost of borrowing will be XXXbps+78bps. Not cheap...

Now that you have the bonds, you don't need to borrow cash against it. You can just sell the bonds and use the cash proceeds. This is all then limited by the collateral you can use to fund your $16MM bond position.. here, of course, you run into your usual trouble. Your collaterals will be deeply haircutted that you won't get to be able to borrow $16MM.

So, at the end of the day, the extra step of leveraged buying of bonds won't really help you, I don't think.