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The Collateralized Variable Rate Demand Note, or CVRDN, represents a new branch to the family tree in the Variable Rate Demand Note (VRDN) market sector, manifesting the best of the characteristics found in the conventional VRDN instrument, plus a noteworthy set of significant improvements over conventional thought in this market. The CVRDN offers the potential to achieve the same investment grade quality as a traditional VRDN, provides consistent 7-day liquidity upon an optional tender, and complies with 2(a)(7) investment guidelines.  It does so while still providing for an increase in yield without increasing exposure when compared to comparably rated VRDNs.  Additionally, by standardizing issuance documents, greater issuance efficiency is promoted, which can avail more substantial blocks of CVRDNs under a single offering.

First, the CVRDN is issued pursuant to a standard set of offering document templates and terms that gives the CVRDN a universality of format amongst its respective Issuers that is not otherwise enjoyed or directly controllable in traditional VRDN issuance practices. This is because the CVRDN was developed by United Financial Technologies, a structured products and financial instrument design firm, and is only availed to select and highly qualified firms for issuance under standard license rights. As a result, each Issuer of CVRDNs, although independent from another, is required to subscribe to specified issuance practices pursuant to their license agreement with UFT.  Likewise, the Guarantors and financial participants of each CVRDN issuance have pre-approved all formats of guarantees or letters of credit, underwriting materials and reimbursement agreements such that institutional support for the operation and administration of the CVRDN is consistent from one issuance to another. Generally speaking, although many other instruments in the VRDN family of financial product exhibit comparable qualities when compared amongst themselves, the issuance documents may vary materially per the participating guarantor or underwriter policies.  Not so with a CVRDN.  Therefore, once an investor or Subscriber has reviewed and approved the master CVRDN documentation through their credit/legal departments and assured that the underlying guarantors for a particular issuance are on the Subscriber’s “approved list”, every sanctioned CVRDN issuance will assuredly subscribe to those same sanctioned templates regardless of Issuer identity and nature of use of proceeds.  This eases the review process for a Subscriber’s purchase of CVRDNs, increasing overall efficiencies.

Second, the CVRDN offers the potential for an increase in yields when compared to other similar short-term instruments without diminishing the CVRDN's investment grade credit rating or correspondingly increasing perceived risks associated with the operation of the instrument.  The CVRDN is built to support an anticipated credit rating of A1/P1 (capped), subject to actual rating of each offering by a major rating agency. While still seeking to maintain this investment grade rating quality, the CVRDN pays out its interest component monthly on an interest-only basis at a variable rate that floats an estimated 10 to 20 basis points over traditional VRDN rates. The Issuers of the CVRDN are not paying this premium rate due to any inferior characteristic of the CVRDN when compared to the operation of similar instruments. Instead, they are willing to pay it in order to better assure consistent placement of their substantial offering values with qualified institutional Subscribers, dis-incent optional tenders of large blocks of CVRDNs during the life of the Notes, and reward a Subscriber’s purchase of instruments in larger minimum pieces/blocks and denominations; USD1,000,000 minimum investment piece and USD100,000 increments/denominations thereafter.

Third, and as touched upon briefly above, the CVRDN is designed for high-volume issuances. The minimum endorsed principal amount of CVRDNs to be issued by an individual Issuer is an estimated USD40 million and is expected to average an estimated USD150 million per issuance. Through the CVRDNs incorporation of an alternative guarantee structure in support of the principal portion of the Notes upon issuance, the CVRDN is able to be utilized as a means of enabling lower-cost, bulk capital raises by Issuers having capital intensive business models with consistent demand for credit or debt financing. Such an approach does away with the highly granular financing model that is passively endorsed by the use of the conventional credit-enhanced VRDN. The CVRDN is not issued solely in support of the deployment of Note proceeds in favor of a singular underlying project. Rather, a single Note Series is issued in support of the continuing debt capital requirements of the Issuer’s related operating company, and then subsequently accessed or drawn as needed on a project-by-project basis. This approach affords the Issuer much greater flexibility in allocating proceeds previously raised at market and reduces issuance costs when compared to conventional practices.

The CVRDN is designed to enhance returns and purchasing efficiency for its qualified Subscribers. It builds upon the strongest and most attractive attributes of the conventional VRDN while bringing greater opportunity home to both Issuer and Subscriber alike. It fosters growth in the letter-of-credit-backed and credit enhanced segment of the investment marketplace. It pays superior interest rates. It is an exceptional supplement to mainstream thought in the short-term investment and money market institutional investment community.

If you would like to learn more about how the CVRDN could make an exceptional addition to your firm’s investment portfolio, please submit a Subscriber Inquiry by clicking below and tell us about your needs.