MCC Investment and Leasing also provides bank instruments placing / leasing and sales.
Bank instruments are asset backed notes issued by a bank to an investor which mature over 5-10 years, collecting an annual coupon (“interest”) until it matures at its pre-defined value.
Banks, create paper notes (“IOU’s”) which they sell to investors, guaranteeing a certain annual interest and maturity value. This allows the investor to collect their expected profit, while the bank accesses immediate cash to meet capital requirements for additional financing opportunities.
Unlike bonds, the bank instrument is rather complex, and is typically referred to as a “hybrid note”. Bank instruments: collect high annual interest rates and are backed by top rated banks, and are issued ONLY in amounts of tens of Million EURO. Bbank instruments can be purchased at a discount from face value, and traded to investors in the secondary market.
5 step summary to clarify the details of how bank instruments evolve.
Bank Instrument Steps to Maturation
- Once the investor or trader has been cleared through compliance, the issuing bank will “cut”/create an instrument (Medium Term Note or Bank Guarantee), naming the investor or trader as the sole beneficiary. This instrument will have a predefined interest rate (0-7.5%/yr.), and a value on the date of its maturity.
- If the investor chooses to hold the note, they just collect interest and exercise the value upon maturity. If the initial purchaser was a “trader”, they would have a pre-defined “exit buyer” to buy the note at a higher value.
- Once the first purchaser has purchased the note, they will usually resell it to another buyer at a higher price. Though the buyer isn’t purchasing the note directly from the bank, many private placement programs are run by middlemen who fit right here in the process.
- The final middle man repeats the process the others have done, but they look for a different type of buyer. In this case, the note has been traded several times, and is at a smaller discount than it originally was.
- The final purchaser holds the note, collecting the difference between the discount they paid vs. face value, and the annual interest until the time of its maturity.
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