[Continued from the previous article explaining Private Trading Platforms] Leveraging hard assets, particularly those anticipated to appreciate significantly over time, utilizing Trading Platforms (PTPs) is a strategy that involves using these assets as collateral to secure financing or loans. This process allows for the potential appreciation of the asset while maintaining ownership.
Let’s take an an in-depth look at how this process unfolds.
The first step involves the asset valuation, where a valuable hard asset, such as real estate, precious metals, or fine art, is assessed by the PTP or a third-party expert to determine its current market value.
This valuation takes into account the asset’s condition, rarity, or uniqueness, providing a basis for the loan agreement.
Once the asset’s value is established, securing financing is the next step.
A loan is provided to the asset owner based on this valuation, with the asset serving as collateral. The loan amount typically reflects a percentage of the asset’s value, considering the lender’s risk tolerance and the asset’s liquidity.
The terms of the loan, including the interest rate, repayment schedule, and loan-to-value ratio (LTV), are agreed upon, where the LTV ratio is critical in determining the borrowing amount against the asset’s value.
Maintaining ownership of the asset is a crucial aspect of this strategy. The asset owner retains ownership, allowing them to benefit from any appreciation in value over the loan period. The PTP or lender holds a lien on the asset or takes possession of it, especially in cases of movable assets, until the loan is repaid.
Repayment and release of collateral follow, where the asset owner repays the loan as per the agreed schedule.
This repayment can come from the cash flow generated by the asset, other income sources, or by selling the asset later, at a higher value.
Once the loan is fully repaid, the lien is lifted or the asset returned, allowing the owner to benefit from any appreciation in the asset’s value during the loan period.
There’s also potential for re-leveraging. If the asset appreciates, the owner can seek a reassessment of its value and potentially secure additional financing against the increased equity, further leveraging the asset’s value.
This strategy provides a way to access liquidity without selling assets, finance other opportunities such as projects, and potentially increase returns through appreciation.
A Practical and Simplified Example
In order to clarify the leveraging process and outcome, let’s begin with a very simple, hypothetical example.
If you have a specific asset valued at X and take out a loan using the asset’s value as collateral with terms to repay it in full within 5 years without interest, and if the asset’s value triples (for example) before the loan is due, you can settle the loan and retain the appreciated value.
After repaying the loan, the remaining value of the asset is 2X, which represents the appreciated value beyond the original loan amount.
This effectively allows you to use the financing to your advantage, retaining ownership of the asset as its market value increases.
After repaying the loan, you benefit from the increased asset value, effectively netting a value gain of 2X, not just doubling but tripling your initial asset value from the start and retaining two-thirds of that increased value after loan repayment.
So you were basically able to use funds at the value of the asset for 5 years without giving up ownership of the asset itself.
In the context of private deals, particularly within Private Trading Platforms (PTPs) or when engaging with private lenders for bespoke (custom tailored) financial arrangements, it’s perfectly viable to structure a loan where no interest is incurred unless the borrower fails to repay within the agreed timeframe. This would be possible if the lending entity or individual were to rehypothecate the asset for their own leveraged gains.
These deals offer significant flexibility and can be customized to meet the specific requirements and risk appetites of both the lender and borrower. This customization takes into account the unique attributes of the collateral, such as a hard asset, and the relationship between the parties involved.
Another Example Where Interest is Paid on the Hypothecated Asset Loan
Expanding on the simplified example above, let’s consider a scenario where a 10% annual interest rate is applied to the original loan.
If the underlying value of the asset were to triple before the loan’s maturity date, you would still realize a substantial return.
Even after deducting the interest payments, the dramatic increase in your asset’s value means you effectively retain a net value equal to 150% of the asset’s original value.
This exemplifies the significant potential for leveraging high-value or appreciating assets as collateral.
The notable appreciation of the asset’s value far outweighs the cost of interest, leading to a considerable net gain after the loan is repaid.
This underscores the effectiveness of using appreciating assets to secure financing, offering a strategic advantage in achieving substantial returns.
How Trading Platforms Specifically Apply to RV/GCR Assets and Exchanges
Taking this asset hypothecation and rehypothecation scenario further, let’s envision a situation where I’ve acquired 10 bearer bonds from the fictional sovereign nation of Elbonia. [Yes, I borrowed the Country of Elbonia from my favorite comic strip Dilbert by Scott Adams]
If each bond has a face value of 1,000,000 Elbonians, it brings us to a fascinating rewarding financial opportunity.
