Monday, August 9, 2010

QUEUED Soft Loans - enhancing predictability

Queued soft loans (QSLs) are soft loans that are setup in ordered payment priority.  All principal and interest of the first loan is repaid before any payment on the next priority loan is made.

This a followup to recent Soft Loans introduction.  Part 2 of 3.

The distinct advantage over traditional bond-loans are that there is certainty of leverage for the investor.  If you have no debt whatsoever, and high income, you could get a small loan at the lowest possible interest rate if you promised not to get any other loans.  That promise is never made or asked for, so lenders are forced to assume you may get a lot more debt later, and price their loan more expensively.  With QSLs the leverage rate at the time the loan is made is known precisely, and can never worsen for that investor, and improves every time another investor is paid.  The lender can furthermore estimate a date he will be repaid based on expected operational profits.

A Queued (capped) Soft Loan Regular Exchange (RE) is a market much like stock or bond markets where individual traders may buy and sell specific QSLs.  It is almost always a bad idea to buy a QSL for more than its accrued value, because it can always, and often, be paid off early.  The RE exists to help QSL holders to cash out at less than full promised returns, by offering up his QSL.  The company is unaffected financially by these trades and need not be involved in the exchange.  The RE collects a commission on these trades.

A QSL Perpetual Offer Exchange (POE) is typically offered by the same organization running the RE.  It allows any entity the opportunity to buy into the queue of soft loans (at the end) by accepting the natural bid rate which is a small increment below the queue's natural rate (which is the average interest rate in the queue).  The proceeds from the new buyer go directly to whichever investor is at the head of the queue.  The POE does not collect regular fees on these trades, though is part of Comptroller entity fee based duties.

A QSL Future Operations Market (FOM) is a market where investors and the company agree on funding the company's future weekly operations and special and new projects.  For weekly operations the company is forced to accept bids at the natural rate, and use any excess revenues (over reserve of usually 1 month) to repay QSL queues.  For projects, the company may arbitrarily set a maximum interest rate that it will accept initiating the project for.  Potential investors may make a standing bid for the next weekly operations slot at the natural rate at time of bidding, and if so their bid may be accepted even if the natural rate falls below that bid (and there are not enough better bids).  It is yet to be determined if investment banking fees will be incurred in this market.  There are comptroller fees for reviewing and packaging projects for offer, but weekly operations are included in standard comptroller duties.

QSL holders have some options to faciliate reinvestment in the company, whenever they are about to be paid for their loan:  1. They may guarantee an accepted bid in the company's next Future Operations Market auction at the natural rate.  2.  They may repurchase into POE at a slightly advantaged average of the natural bid rate and the natural rate, and 3.  If (and only if) their QSL rate is below the natural rate, they may pass on being repaid.  Choosing instead to continue maintaining their safe position at the head of the queue, while accruing interest.

The natural rate is the average interest cost to the company.  By allowing automatic bids below the natural rate to be accepted, the interest cost to the company tends down, and individual investors are repaid much more quickly than they would if only organic (internal to company: revenue surpluses) payments were made.
By allowing for programmed orders from QSL investors, the natural rate can rapidly cascade down as a result of improved outlook in the company.  For example if 100 investors are each willing to lend $1000 to the company at 9%, but the company only needs a total of $100K in financing, then the negotiated rate could be closer to as much as the company may bear (15% for sake of example).  But if 1 extra investor is willing to invest $1000 at 9%, then the natural rate will quickly cascade down to 9% because every investor who is offered repayment will choose to reinvest.

The unlimited supply of loans created by the POE satisfies the perfect competition ideals of Adam Smith, for enterprise financing.  Open loans, means that whoever provided the first acceptable finance terms doesn't forever encumber the enterprise with high rates.  (Investors who prefer not offering open loans have free reinvestment options).  Expensive loans can be easily replaced.  Its an advantage to investors as well because in a $100M project, putting in the first $10M is much more risky than putting in the last $10M.  Namely, the risk that the other $90M won't be raised, or incur delays.

Part 3: Capped QSLs

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