Funding projects with PPP profits

May 2023 | SPOTLIGHT | FINANCE & INVESTMENT

Financier Worldwide Magazine

May 2023 Issue

Major projects that impact humanity, build infrastructure and benefit the environment are largely paid for by profits from trading bank debentures in the banking system. These are specialised private placement programmes (PPPs) that allow investors to create the funds needed for a project. When a financially qualified individual or corporation holds a large amount of cash, through the use of essentially risk-less collateral where investors’ funds are never touched, they could be eligible to participate in one. The system is based on arbitrage, where a new-issue debenture seller (i.e., the bank) is engaged once the final buyer is in place for the debenture. A licensed trader executes a managed buy/sell, with predetermined profits. Most of the trades occur at the top banks in London, Switzerland, Singapore and elsewhere.

A PPP is created between a financially qualified client, usually with $100m cash in a top-rated bank. As the traders cannot use their own money to buy and sell the debentures, the client becomes a third-party source of funds, which remain in the client’s account for safety. The trader obtains a trade credit line, which is usually non-recourse, non-repayable and non-depletion, thus ensuring that the underlying client’s capital cannot be touched. The trader then uses the credit line to show proof of funds before executing the first stage of buying the newly issued debentures at a discounted rate.

Within the first stage buy/sell, profits are generated when the trader then re-sells the debenture at a higher price. This has been predetermined in advance with the second-stage buyer. This second buyer may be another trade group or hedge fund, pension fund, trust, foundation or institutional buyer.

When the profits are generated, most typical PPPs can generate a return to the client of 100 percent of the amount in trade, and more. The obvious question is how they pay out these kinds of profits.

Leveraging the credit line can result in a 10x purchase of paper. For example, if the client has $100m and the credit line is $80m, the trader buys $1bn in face value of the paper. As the trader buys, then sells, $1bn of face value, a profit is generated above and beyond the credit line, out of which a portion of the profits are paid to the client under a contractual trade agreement. It is expected that the client will use much of this profit to fund projects which have humanitarian, infrastructure or environmental benefits. Some programmes do not have a project requirement, however.

This system originally came out of World War II. This is one of the systems that paid for the rebuilding of Europe after the war. Since that time, various iterations of debenture trading have been created, but the essence remains the same. It is also important to note that this is not stocks, bonds or other conventional securities trading.

With the world in dire need of funding for essential projects to benefit countries and people, this system is used by various authorities to fund such projects. For example, funding is used to build and operate UN hospital ships and to aid Haiti’s recovery and other affected countries in dire need. Funding helps projects globally, such as waste to energy, sustainable green energy, rebuilding and improving healthcare, roads and transportation projects, and many other types of projects.

Many of the qualified clients that apply for a programme already have projects they wish to fund. One feature of the funded projects is that they do not have to be non-profit entities to participate. Projects that meet the test can be profitable ventures while providing benefits to their communities.

Once a qualified potential trade client is accepted for consideration, normal due diligence is done on both the principal and the funds in the bank. Some clients will have bank instruments from a top-rated bank in the form of cash-backed standby letters of credit or bank-issued medium-term notes. With the right documentation, it may also be possible to have a trade credit line placed against such an instrument.

These programmes offer an alternative to traditional funding sources that are commercially available, though becoming approved and accepted requires care and attention to the details in an application. The programme providers do not just accept any application. There are stringent rules of engagement that the would-be client must be aware of, and which must be followed. The approval rate for entry is very low. Perhaps 0.001 percent of applicants make it through the compliance gauntlet. Because the actual trading activities are regulated and scrutinised, any error can cause a declined application.

The successful client perfects the documentation in the manner it is needed. In addition, sometimes a client may behave in a way that is not conducive to the trader and his willingness to engage in a relationship. The trader is always in the driver’s seat and can turn away a less than ideal client.

This also means the client needs to be collaborative and meet the trader’s requirements. The goal is to be accepted into a relationship with the trader which will be harmonious and easy, and if all goes well, can lead to a strong long-term relationship. This is where 99.9 percent of applicants fail, particularly if they try to dictate terms, conditions and timelines. Since a trader is already dealing in nine to 12 figures each day, they can cherry-pick who they work with, regardless of the client’s stature and position.

The start of the relationship begins with the initial contact leading to the trader. The traders do not come out until the paperwork is complete and satisfactory. Some traders have selected one or two trusted people who are the ‘front door’.

Sometimes intake officers will be used to cull business that is not conducive to the trader’s interests, personality or willingness to engage. The intake officer, or the trade group representative receiving a client set of documents, is not allowed to quote profits or specific information about the trader until the first stage of documentation, which consists of the client’s ‘know your customer’ files, proof of funds from the client’s bankers, and certain other documents the trader needs to make a complete dossier.

Once a client presents its paperwork correctly, research is done by the trader’s compliance team to verify the eligibility of the client to be considered for a programme, along with the adequacy and acceptability of the dossier. This process, depending on the trader’s workload, can usually happen in 24 to 72 hours. Once successfully completed, a contract is drafted and then presented to the client principal. If all is acceptable to both parties, the programme is scheduled to begin.

The only person who can apply for one of these programmes is the actual owner of the money being considered. Mandates and powers of attorney are prohibited from signing the documents. The proof of funds is usually in the form of a current bank statement dated today and signed by two bank officers. Some traders will accept an email directly from the bank officer to the client principal asserting that funds are available.

Michael J. Weiner is the chief executive of PreConstruction Catalysts. He can be contacted on +1 (202) 657 6960 or by email: mike@pppfunding.com.

Michael J. Weiner

PreConstruction Catalysts