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The Managed Variable Rate Demand Note, or MVRDN, is an attractive new type of financial instrument that brings with it many of the best attributes of conventional Variable Rate Demand Notes (VRDNs) while adding innovations that improve upon performance expectations and purchasing efficiencies. With 7-day liquidity and money market compatible characteristics, the MVRDN becomes an exceptional addition to any investment portfolio that requires a marked degree of liquidity as a cornerstone component of its overall operation. An MVRDN, when issued consistent with prescribed practices, establishes a baseline expected rating of A1/P1 (subject to actual rating review) and operates within 2(a)(7) investment guidelines. It does all this while offering a slightly enhanced base yield when compared to comparable instruments in the marketplace. Additionally, because of the targeted application of Note proceeds by its Issuers in the market, it is positioned to eventually create an opportunity for the possible distribution of performance-based supplemental premium payments to its Subscribers.
Specifically, the typical MVRDN Issuer is a credit-worthy investment manager or fund that is utilizing the MVRDN as a less expensive source of credit when compared to conventional credit instruments or leverage facilities. As such, MVRDN Note proceeds are intended to be applied by the Issuers to support the potentially enhanced performance of a mainstream or alternative investment fund. Such an application makes the high-volume issuance of MVRDNs the norm rather than the exception. In most cases, MVRDN Issuers will schedule single Note issuances to complement current equity available as a portion of their current value of assets under management. Thus, the principal amount of MVRDNs scheduled in a given Note Series issuance is expected to be not less than UD$100 million and as much as US$1 billion, dependent upon demand and capacity of the Issuer’s underlying investment strategies. The MVRDN is a pioneering highly liquid credit instrument in this arena and affords significant advantages to both its Issuers and Subscribers alike in its market application.
Like the CVRDN, the MVRDN applies a standard set of offering document templates and terms that gives the MVRDN a universality of format amongst its respective Issuers that is not otherwise enjoyed or directly controllable in traditional VRDN issuance practices. Each MVRDN Issuer subscribes to a consistent issuance process that causes each individual Note Series offering to share a common documentary foundation. This eases the Subscriber’s review process related to each MVRDN issuance, thereby increasing overall purchasing efficiencies to the Subscriber. Before entertaining an offering of MVRDNs, the document templates, Guarantors and financial participants involved with the issuance will have been pre-approved by the potential pre-qualified Subscriber base. Once an investor or Subscriber has reviewed and approved the master MVRDN documentation through its credit/legal department and assured that the underlying guarantors for a particular issuance are on the Subscriber’s “approved list”, a Subscriber can be confident that a sanctioned MVRDN issuance will meet its investment criteria, regardless of Issuer identity and nature of use of proceeds. The MVRDN affords the luxury of consistency.
In evaluating potential MVRDN yields, however, advantages of the MVRDN over currently available comparable instruments are evident. As issued, the MVRDNs offer superior yields when compared to similar short-term instruments without diminishing the investment grade credit rating or increasing perceived risks associated with the operation of the instrument. Just as a CVRDN, the MVRDN 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-type products. Moreover, although not currently offered by MVRDN Issuers, the MVRDN is constructed in such a way as to account for the future addition of a performance-based premium feature that may be activated under prescribed conditions which could generate as much as 50 basis points of additional premium to the Subscriber. The premium component, if activated as envisioned, would be based on a portion of the underlying performance of the Issuer’s investment portfolio. Such a superior base yield and possible premium are offered with good reason. The Issuers of the MVRDN have the opportunity to enhance their yields by benefiting from more attractive borrowing rates than are available to them through the use of conventional credit and leverage models. Moreover, the slight enhancement to interest rates and the possibility of a premium will potentially better the attractiveness of the instrument upon initial placement, enhance its appeal upon any possible remarketing, and increase the chances of investment retention when compared to similar VRDN investments.
Lastly, the MVRDN is designed for high-volume issuances. The MVRDN potentially affords a new avenue to satisfy the high debt and leverage appetites of alternative and conventional investment portfolios and funds. It enables lower-cost, bulk capital raises by Issuers that have a consistent and predictable need for debt capital to correspond to and enhance available equity capital. In large part, the MVRDN becomes a vehicle of choice to permit an Issuer to outsource its credit needs directly to the capital markets, thereby decreasing its costs of leverage and increasing its credit efficiencies by expanding the base of qualified financial institutions that may take up a supporting role in its business model. MVRDNs are issued in a highly controlled manner to afford the Subscriber with the luxury of potentially benefiting from the Issuer’s investment strategy while being somewhat agnostic to its nature. The MVRDN acts as a financial “step-down transformer” for risks associated with the alternative investment space, making passive involvement therein suitable for investors that subscribe to mainstream, short-term institutional investment profiles.
Base returns and short-term liquidity consistent with the operation of a traditional VRDN, coupled with possible premium activations based upon underlying investment performance, differentiate the MVRDN from other investments in its class.
If you would like to learn more about how the MVRDN 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.
NOTICE: Managed Variable Rate Demand Notes are offered for sale to qualified purchasers solely by FINRA Member Firms.