Direct Bank Purchases

We have developed an expertise in serving as a private placement agent for borrowers wishing to finance their capital and refinancing needs with a direct bank purchase ("DP"). Over the past 24 months there has been an increase in the use of DPs, which are usually placed with commercial banks. Typically, a bank will commit to a period as short as 3 years and as long as 10, with some banks issuing commitments of up to 20 years. DPs are most often structured as multi modal bonds that are amortized with a long final maturity. We have worked with banks that will either set the rate using an index (percent of LIBOR) plus a spread or will use cost of funds plus a spread.

ADVANTAGES

  • Attractive rates.
  • Reduction of counter-party risk.
  • Reduction of remarketing risk typical of other variable rate instruments.
  • Direct negotiations with a bank can facilitate flexibility of terms and covenants.
  • No annual letter of credit fee.
  • Not required to have a rating.
  • Non-rated credits have had success in securing DPs.
  • Since DPs are not publicly offered, the issuance of additional debt is not subject to rule 15c2-12. Issuing this type of debt is not considered a "material event" requiring notification. We, however, encourage voluntary disclosure.

RISKS

  • Once the commitment period is over, the borrower assumes interest rate and market access risks.
  • At the end of the commitment period there is a mandatory put back to the borrower. If the borrower is unable to refinance the DP, the bank may continue to hold the bonds, but the rate may be much higher than during the commitment period.