Tuesday, August 10, 2010

Queued CAPPED Soft Loans -- management protection

Queued Capped Soft Loans (QCSLs) are QSLs which are capped at a natural (arbitrary, but humanly digestible) 200% of original principal (for investor QSLs.  Employee cap is 300%).  A QCSL security can never receive total lifetime payments over 100% of its original purchase price.  A trade on the RE does not reset the cap, but a trade on the POE does create a new QCSL for the investor.

This is 3rd part in series of posts on Soft Loans part1, part2

The cap serves to protect both management from usury, but also all investors queued behind other loans (nearly all of them).  Usury is a genuine social harm.  Protecting people from accepting a loan for 50% interest does them a favour.  If you are in a position of a debt that will result in your murder if not paid, then you over promised in borrowing.  If death or harm could be caused by other means (lack of medical procedure), then the lender should be considering the benefits of charitable gift rather than usurious loan.

An equivalent security to a QCSL would be a QSL with an insurance policy (by company) that would pay investor all accumulated interest above the cap.  By having the investor self-insure the incredibly expensive and inefficient bureaucracy of a 3rd party insurance provider analyzing the investment, determining a premium, including an expected profit in its premium for adopting the risk, and aggravating the world with additional service offerings.  Self-insurance also protects against any incomplete insurance coverage such as non-payment conditions or lapse in premium payments.

An investor could purchase equivalent insurance product through 3rd party or as a derivative, that would pay him all gains lost due to cap, but doing so is absurd.  Expensive, but also being paid an eventual 100% return on an investment is unlikely to be considered harmful, and through the Soft Loan Exchange, the investor can cash out at any time.

The important investor benefit of QCSLs (capped) is that it allows investor decisions under certain worst case scenario.  If an investor is about to buy into the existing queue or future operations, then knowing that the company has $5B in existing QCSLs, then he knows with certainty that he will be repaid double or his annual bid rate if the company makes $10B (or more) of operational profit in its lifetime.

The main protection for purpose holders is that runaway debt becomes less likely.  Those behind investors in priority need the hope of one day being paid to continue striving for purpose.  Caps help maintain the possibility.

The main appeal to investors of QCSLs is the certainty of priority.  All unsecured QCSL holders can never have some other investor gain higher or equal payment priority than them.  All secured QCSL holders cannot be displaced by any future projects or asset acquisitions.  By contrast, in traditional finance, a 10 year bond holder is susceptible to any hair brained scheme by management to expand or to sell to a leveraged buyout scheme, and shareholders are susceptible to much worse dilution or management salary increases and risk taking.

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