Professional clients are increasingly seeking innovative investment solutions that meet their sophisticated needs. Non-recourse leverage is one helpful tool to help reach their goals. Julius Baer’s Tailored Solutions Group also works closely with intermediaries to make this possible.
Imagine a client who is asset-rich but cash-poor. Someone who has a USD 3 million portfolio and wants to raise USD 2 million without taking any additional debt.
How can you square the circle? For instance by extracting cash through a leverage certificate. Depending on the specific securities in question, the client could for example sell his portfolio to Julius Baer against cash and buy a leverage certificate providing participation in his original USD 3 million worth portfolio, by investing only USD 1 million. Your client would keep the portfolio’s full potential upside while extracting 67% of its value.
So-called non-recourse leverage is increasingly valued by ultra-high net worth individuals (UHNWIs) and institutional clients. This is a type of leverage where the loan is secured only by pre-specified collateral: the bank doesn’t issue margin calls, and in the event of losses has no access to other borrower assets outside the transaction. It’s commonly granted through leveraged certificates. In other words, your client invests in a certificate with an embedded loan, leaving his or her bank account unencumbered by leverage.
Being able to offer clients innovative and personalised solutions like this is becoming increasingly important for wealth managers and intermediaries alike.
Returning to the imaginary client, the certificate could be set up in a variety of ways depending on his or her investment view and other preferences. For example, it could include distributions, floating or fixed financing costs, as well as de-leveraging and potential re-leveraging triggers. Additionally, if the client is keen on keeping legal ownership of the securities, the transaction could use derivative solutions instead of an outright sale.
There are also other ways of extracting cash. These include derivative-based methodologies, like put-protected or collar-protected loans, deep-in-the-money options or total return swaps.
From cash extraction to yield enhancement
Leverage certificates could also be an excellent tool for yield enhancement. Your client’s investment would be magnified by the embedded loan, allowing him or her to participate more than proportionately in any possible capital appreciation and significantly increasing the potential returns.
By way of example, the client could invest USD 1 million in a 300% participation certificate. This would buy participation in the performance of USD 3 million worth of underlying investments – whether fixed income, equities, mutual funds or less liquid securities. The maximum risk would be the initial USD 1 million investment.
Four key advantages
Non-recourse leverage solutions in certificate form are popular for a number of reasons.
- First of all, the client’s bank account remains unlevered, and the bank cannot request any additional collateral or liquidity. The client’s books will not include any debt: it features on the bank’s balance sheet instead.
- The certificate will have an ISIN (International Securities Identification Number), making it easy to book or transfer across custodians.
- The certificate price reflects the net performance of the underlying securities, including the embedded leverage and the relative costs on a single reporting line.
- Depending on the client’s domicile, a certificate could also simplify his or her tax reporting, even delivering a tax benefit.
Being able to offer clients innovative and personalised solutions like this is becoming increasingly important for wealth managers and intermediaries alike. As in other cases, Julius Baer can work closely with intermediaries to tailor a structure in line with clients’ needs.
For more information on bespoke solutions, please reach out to your relationship manager.