Stronghold has designed a private-sector 21st Century Brady Bond like debt restructuring program to address state & municipal issued non-performing loans. The program requires no government or tax payer guarantees & can supply states & municipalities a grace period to weather the COVID-19/economic crises.
The solution
Affects the true sale (full risk transfer) of non-performing loan portfolios held by institutional investors at price levels otherwise unavailable and provides for a single creditor with an interest in the stewardship of the non-performing loans in cooperation with states and municipalities to avoid defaults.
The occasion is piled high with difficulty...
Senate Majority Leader Mitch McConnell said Wednesday he favors allowing states struggling with high public employee pension costs amid the burdens of the pandemic response to declare bankruptcy rather than giving them a federal bailout….
“You raised yourself the important issue of what states have done, many of them have done to themselves with their pension programs,” he said. “There’s not going to be any desire on the Republican side to bail out state pensions by borrowing money from future generations.”…
Bloomberg
22 April 2020
State and municipal governments do not have access in these times to Fiscal, Monetary & Macro-Financial, or Exchange Rate & Balance of Payments policies available to nation states.
Addressing the extent of the current crises will require more: defaults, massive bailouts, debt forgiveness, and/or untried strategies. Where would that come from when the nation as a whole faces its own economic downturn?
21st Century Private Sector "Brady Bond"
The occasion is piled high with difficulty, and we must rise — with the occasion. As our case is new, so we must think anew, and act anew.
…, we cannot escape history. We …, will be remembered in spite of ourselves. No personal significance, or insignificance, can spare one or another of us. The fiery trial through which we pass, will light us down, in honor or dishonor, to the latest generation. … The world knows we do know how to save it. We -- even we here -- hold the power, and bear the responsibility. … We shall nobly save, or meanly lose, the last best hope of earth. Other means may succeed; this could not fail. The way is plain, peaceful, generous, just -- a way which, if followed, the world will forever applaud, and God must forever bless.
Lincoln
Message to Congress, 1862
Stronghold has developed a 21st century private sector Brady Bond like State & Municipal Debt Restructuring Program designed to address state and municipal issued non-performing loans (NPLs).
The solution:
Affects the true sale (full risk transfer) of NPL portfolios held by institutional creditors at up to PAR and
Establishes a single creditor with an interest in the stewardship of the NPLs in cooperation with issuers to avoid defaults and stabilize economies.
Private-sector solution — The Program requires no government, or tax payer guarantees.
Augmenting Policy Responses — The Program augments conventional policy responses by suppling a value proposition for creditors and debtors otherwise unavailable.
Path forward — The solution provides debtor states and municipalities and their institutional creditors a clear path to normalize the situation.
Background — Stronghold originally developed the solution as regulatory capital relief, to strengthen individual insurance company and bank balance sheets.
What the solution can do for the debt of a single bank or insurer, it can do for a state or municipality.
What the solution can do for one state or municipality, it can do for all of them.
Program
An institutional creditor purchases a Stronghold designed bond, a senior fully secured debt instrument of an insurance company.
Following the sale of the bond, the issuing insurance company:
Establishes reserves (in trust) which legally & economically defease principal and agreed interest obligations by means similar to those applied in collateralized insurance and reinsurance agreements — real assets in place to meet the contractual obligations of the instruments at the contracted time — to support the program’s embedded credit insurance and
Purchases NPLs from the same institutional investor at up to the original basis of the NPLs.
The former creditor realizes a stronger balance sheet the day of closing, effectively spreading the NPL risk across (up to) the nominal maturity of the Stronghold designed bond (30-50 years).
Stewardship
Applied systemically, the issuer: (1) becomes the sole holder of the NPLs simplifying the process of working with states and municipalities to address the outstanding liabilities and (2) can extend considerations to the states and municipalities that can enable these governments to manage their recovery.
As economies stabilize and recover any commensurate appreciation of the NPLs in custody of the issuer can deliver enhanced yield to the purchasers of the instruments.
Outcome
The solution:
Strengthens institutional creditor balance sheets and
Supplies state and municipal governments time to recover.
Next steps
Nothing stands in the way of deploying this solution at a scale commensurate with the challenge.
No other solution addresses the interests of all stakeholders as effectively.
A small team (legal, accounting, regulatory treatment) can quickly assess the approach.
Stronghold can provide additional a detailed accounting and regulatory treatment of the instrument (A Discussion of Accounting Considerations for Stronghold Designed Protected Cell Issued Bonds) under NDA.