• Joanne Marlowe, Founder and Chief Executive Officer at UFT


• 29.09.2016 09:45 am
undisclosed

Asset Managers and Corporate Treasurers today are actively seeking liquidity and new sources of yield. Investment Recharacterization is a strategy that enables the Manager or Treasurer as the "Investor" to access liquidity by recapturing previously invested capital from virtually any pre-existing portfolio investment, loan or asset. Recaptured funds can then be reinvested to increase portfolio yield.  Enhancement CPCs and their ability to enable “cashless” investments are the innovative financial tool that makes a recharacterization transaction possible.

Recharacterizations start with the creation of a credit enhancement facility (“Credit”) linked to the asset being recharacterized. The Investor then causes the issuance of a suitable letter of credit as secured by other portfolio assets or its general credit, which serves to both credit enhance the underlying asset being recharacterized as well as purchase the Enhancement CPCs linked to the Credit. Like every Enhancement CPC, a capital platform will then provide matching funds equal to the face value of the Credit, and that capital is then available for recapture by the Investor. A recharacterized investment maintains a risk-return model comparable to the original investment prior to its recharacterization. Once recharacterized, the Investor has the opportunity to: (i) add new income producing assets to its portfolio using the recaptured capital; (ii) hold on to existing and desirable investment exposure in a "risk-neutral" transaction: (iii) virtually eliminate opportunity cost associated with the original investment; and (iv) enhance overall portfolio yields without liquidating current investments or introducing conventional leverage.

There are two distinct types of recharacterizations — Investment/Loan Recharacterization and Asset Recharacterization. Investment/Loan Recharacterizations occur when the Investor has previously loaned capital to a third party and will recapture its original loaned proceeds by assigning or re-pledging the underlying loan collateral or assets as security for the Credit. This structure allows for the original loan to remain in place, but the Investor has seamlessly traded its cash-funded position for the provision of credit support to the same loan recipient, which may position the transaction on the Investor’s balance sheet as a contingent liability. Asset Recharacterizations, however, occur when the Investor owns a portfolio asset that it is able to pledge for the purpose of accessing liquidity. The asset becomes the collateral for the Credit that is fractionalized into Enhancement CPCs. In this scenario, the recharacterized asset is still owned by the Investor, but the economic interest in that asset supports the payment of yield on the Enhancement CPC, which, unless sold-on to a third party by the Investor, is also still owned by the Investor. In both cases, the portfolio manager is able to leverage assets that are not customarily able to be cost-effectively leveraged.