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The first thing I ask every client that comes to me about their entering into a Private Placement Trade is; "What bank is holding the assets on which the collateral for the trade will be based?" Most of us know that banks are not all created equally. Some are small some are large and some have a great credit rating and some not so great.
Regardless if it is cash, a bond or some other bank instrument that the bank's client has on deposit or in safe keeping with the bank, that asset is credited on the bank's books as being the bank's asset. Most banks can gain a credit leverage of at least 10% of the actual value of the assets that are in their bank. Banks have credit ratings just like individuals and an important aspect of their credit rating is based on the assets in their banks times the leverage gained on those assets. And herein lies one of the biggest obstacles to getting a PPP successfully into trade. The bank does not want to send the SWIFT for the client. It is the last thing they want to do. To do so immediately erases that credit line off of their books. They will try to control the client in a multitude of ways. They will lie to the client and say it can't be done. They will steal from the client by charging ridiculously high prices for the SWIFT, sometimes millions of dollars. They will do everything in their power to keep that SWIFT from going through. They will pretend like it is lost in the system, they will say it is worded wrong. The list is endless what some bankers will do to keep that SWIFT from going out. If the banking client is not strong and lets the bank officer walk all over him, the deal can be doomed to failure. Do not let the bank officer intimidate you. Remember you are his client. You are the one with millions of dollars in his bank. He has to kiss your behind not you his. Sorry to be so crude. But it is the flat out truth. You must not let the client control the circumstances. If you have to say to the banker. "Look you WILL send that SWIFT or I will take every penny out of your bank and never do business with you again!, Furthermore I will tell all of my wealthy friends and acquaintances how you treated me". Sounds tough, but it is YOUR money and YOUR profit from the PPP trade program that is at stake here.

A couple of years ago a Russian gentleman came to me with a 10 billion dollar BG from a bank in Azerbaijan. He wanted to place this into a trade. Everything went well until the very last step - the requirement for the bank to send the MT-760 to block the funds in favor of the trader. No amount of cajoling, bribing or begging on the part of the client could get the bank to send that MT-760, even though everyday they said they would send it. We spent three weeks in this suspenseful state with the bank. The lender with the credit line for the trade agreed to accept this bank instrument and they even agreed to accept the bank in Azerbaijan that issued the BG (at least temporarily). That was not the problem at first. It was simply that the bank did not want to send the MT-760 and was too embarrassed to tell the client why they would not do it.

After a little research (that admittedly should have been done before this point) it was discovered that the bank was already in litigation with two other clients regarding BG's that went into trade and the bank refused to stand behind the collateral when it was necessary to call the assets by the trader. These law suites lowered the credit rating of the bank to a "D" and if the bank had sent the MT-760 for our client the bank's credit rating would have been wiped out completely because the moment they would have done it the bank's would have lost 100 billion dollars off of their assets which was something they could not afford to have happen.

A key element in the success of any PPP trade is the bank. If you have a BG or other bank instrument issued by a top 50 world bank the quality of the bank should not be an issue. These banks have a lot of assets and sending an MT-760 for billions is not going to significantly affect their credit rating. Furthermore, banks like HSBC or Barclays deal with MT-760 and all kinds of Swift messages everyday.

Even if a lesser bank did issue the MT-760, it will not necessary be accepted by the trader. If the MT-760 is for an amount that is, for instance, 25% of the entire net worth or more of the bank's assets, how secure do you think the trading platform is going to be with that? I dare say, not very. A call on that collateral could bankrupt the bank.
An even more complicating situation is if the asset for the trade which is being held in safe keeping by the bank is an instrument that is not generated by that bank such as a historical bond or other hard assets. A safe keeping receipt and an MT-760 is the same as the bank vouching for or standing behind the value of the asset in the bank. If the value of that asset has not been ascertained by a creditable appraising source, the bank is not going to endorse it by sending a SKR or Swift blocking the funds because the moment it does the bank takes responsibility for the value of that asset.

Of course the best asset to take into a trade is cash in the bank. Cash is king. No one can dispute the value of cash unless it is issued by a really week government or Disneyland. Most trades will only want to take American dollars or Euros into a trade platform. So if a client has something else he may be asked to convert his money before entering the trade. The second best asset is a bank issued instrument by a top 25 bank such as HSBC or Barclays or the Royal Bank of Scotland, etc.

Where it can get dicey as far as the collateral is concerned is when the client comes in wanting to place historical bonds, gems, or other hard assets or some unusual bank instruments issued by a third party into a PPP trade. Theoretically, anyone can issue a bond, individuals, corporations or sovereign nations. It is not so much as "who" issues the bond, but rather what is standing behind that bond. If you are Microsoft or a huge company issuing a bond, chances are those bonds are worth something. If you are Joe's Tuna Palace and Eatery, you may want to be suspicious about the value of these bonds. The best bonds are issued by strong governments and are gold backed.
Nevertheless bonds and off beat instruments need to be verified as to their authenticity and value. In the case of Mexican historical bonds for instance, there is a Mexican government agency known as Hacienda who hires people known as Peritos who are responsible for evaluating bonds that bond holders or potential traders, buyer or lenders bring to them. They will issue a report with their seal and this is accepted by banks, lenders and anyone who needs the verifications that these bonds are real, owned by the person who claims to own them and have a certain value.
Earlier this year an American client came to me who is the CEO of a bank in Chile with bonds which were issued by his bank and backed by in-ground assets. Specifically, a gold mine his bank owned. He said he could bring us as many bonds as we need to enter into a PPP trade. He said if we did not have enough to meet the Loan to Value requirements for the trade he wanted to obtain he could print more bonds off of his desk top printer. This sounds strange and bogus, but actually except for the possibility of easily counterfeiting a bond like that, it is legitimate. The problem with these bonds was the asset that they were backed by. Most traders will not accept bonds that are backed by something that is not easily liquidated and lets face it, the bank standing behind the asset is not going to hire a bunch of miners to dig the gold out to liquidate the assets. Or even want to be put into a position of having to sell the gold mine to recover their investment. So apart from the importance of the bank that is vouching for the collateral, the verified and appraised value of the collateral itself is primary.

A few months ago another client came to me and wanted to enter into a trade using a court judgment that he won. We needed a little comic relief on that day and this man generously supplied it. Ask yourself, how liquid is a court judgment?

Consider these things seriously when coming to the trade facilitator, lender or the buyer before bringing an application into the process. If you do, and if you follow these guidelines, you will save yourself a lot of time and disappointment.