Credit Structuring

Assisting With Your Cashflow Management

Often credit can be incredibly valuable to fill a gap between receipts. Recently a client had a requirement to purchase a property for another family member, and didn’t really want to sell investments to fund the purchase (often driven by market considerations and tax implications of selling). Having set up a borrowing line at the point of making their liquid investments we had instant access to a borrowing facility at incredibly cheap rates, and it was only outstanding for a few weeks until the family member had the funds to repay. This effective “overdraft” against investments means that our typically entrepreneurial clients do not feel as negative towards making investments as it does not deny them the options to jump when opportunities present themselves.

Non-Standard Balance Sheets and FX Management

Another client was seeking a mortgage to purchase a ski chalet in Austria. There was already a mortgage on the property with an International Bank and the client wished to “take over” the mortgage as part of the purchase. Unfortunately, despite tens of millions of wealth, his taxable income streams were negligible having been structured through director's loan repayments – all very legitimate and above board but not very banker friendly in terms of proving ability to service a large loan. Thankfully we are able to speak “bank” so, despite the client being declined before our involvement, we were able give the lender comfort that the balance sheet was completely understood and that the analysis of the dividend capacity of the operating businesses meant that the loans could easily be serviced via payments back to the director. Credit sanction was achieved. With bank systems following an ever more “standardised” process our clients find the time it takes to explain their non-standard balance sheets and cashflows to banks is hugely expensive in terms of opportunity cost.

Fancy a property in Spain, France, Italy or the US but don’t want to purchase very expensive currencies at a time when GBP is suffering BREXIT weakness? From mid 2015 to mid 2018 a €2m property went from costing £1.40m to £1.82m. Even if the local property market was flat that was a £0.42m increase in cost just via currency. By borrowing the currency required debt can create an excellent hedge against the currency swings. The client can either repay the debt from the ultimate sale of the asset (thus never having had to convert) or can switch the debt back to GBP or repay from GBP if the exchange rate moves back to a rate they find attractive. We helped a client do just this for a purchase on Cap Ferrat.

Tax efficiency: In certain circumstances debt can still have very legitimate and approved tax benefits. Whether borrowing in personal name, Trust or Corporate, the debit interest can in certain circumstances be used to offset taxes on incomes and profits. This means the effective cost of the debt is even cheaper in net terms. There are also certain overseas instances where debt can mitigate foreign taxes, eg where wealth taxes are charged on the net rather than gross assets in a country. The client with a property in Cap Ferrat similarly benefited from this usage.

Gearing: Lastly clients who know debt well are versed in the impact of gearing. As ever, gearing an investment does nothing more than making a good investment better and a bad investment worse. For those clients who know how to manage the risks of gearing (especially understanding how the debt – and more importantly the lender – act in times of distress) then gearing can be a valuable tool when employed correctly. We assist a number of clients in managing their gearing facilities with 3rd party banks.

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