Borrowing from investors - Posted by DAuten

Posted by David Butler on May 02, 2007 at 10:49:59:

Hello David,

This is how we do it in my investment analysis:

We match the terms on our private credit lines with the terms of the note(s) purchase. We don’t have any “lock-out” provisions, or prepayment penalties in our lines of credit, so we always have the option of paying down principal at our discretion. When we do so is a function of what we call “tuning” our portfolio… what is the best use of the discretionary funds at that point in time? That is what determines any accelerated paydown on our underlying LOC’s.

Not certain what you mean by “… work to improve an move your inventory in the shortest time possible?” within the context of your first question? While the two are not mutually exclusive, they tend to reflect differing objectives on your part?

Generally, you want to have your objectives in mind when you buy the notes in the first place. Are you buying to hold as an investment? Are you buying to quickly turn around and resell for a quick profit? Or are you buying to hold and improve, with the objective or reselling down the road for a bigger profit (and/or to keep the money “working” longer).

Each of these objectives lead to some different decision making on how you structure the note purchase itself, and how you structure the underlying credit you will be using to purchase them. Also keep in mind two critical elements as well: 1) what does the investor providing the funds, prefer; and, 2) regardless of what he prefers, he wants to keep his money working as long as possible, and earning as much as possible, all other things being equal.

As to how we price note portfolios…

  1. if ten notes or less, we generally will price individually…

unless we can visually see that they are all very similar in nominal interest rate, remaining balance, and remaining term. If that is the case, then…

  1. we will use straight WAC/WAM (Weighted Average Coupon; Weighted Average Maturity) measurement;

  2. If their are more than 10 notes, we generally go right to pricing through the WAC/WAM model. However, if any of the three primary variables (rate, term, remaining balances) are too divergent from each other, we break the porfolio down further before doing a WAC/WAM analysis. Essentially, we would group the notes into smaller “bundles”, and run separate WAC/WAMS on each of those bundles, then sum the totals to determine our offering price.

Hope that helps, and Many Happy Returns.

David P. Butler

Borrowing from investors - Posted by DAuten

Posted by DAuten on April 30, 2007 at 19:40:20:

When borrowing from investors to purchase notes, do you match the terms, as
far as number of months or do you except shorter terms and work to improve
and move your inventory in the shortest time possible?
What about portfolios with a wide range of payments due, do you average them
out or use the lowest amount of payments due?