Self Liquidating Loans

Self liquidating loans were a hot topic among offshore investor types a few years ago. They disappeared for while but have made a resurgence over the last 18 months (or so).

What is a self liquidating loan? That is a good question. Here is how they claim it works: You find a large offshore bank that will lend you $100 million. This $100 million is kept in secure offshore investments that produce an annual return of 10% (meaning a $10 million per year income from the loan).

The loan charges 7% per year and only uses $8 million of that $10 million cash windfall. This is where it gets screwy. The bank now has you liquidate (or close out) the loan. They figure that you would have made $300 million off the loan in thirty years and only paid out $240 million over that same 30 years.

This would (in theory) leave you with a $60 million difference and the bank will discount this amount and give you $5 million. Credit or collateral are not important, since this is done in only a few weeks and you never touch the money until the end.

I'm sorry, but I don't know of a bank that is going to loan anybody $100,000,000 or pay you future interest on money that you never owned, invested or controlled.

Self-Liquidating Loans are like Roll Programs. Everybody knows a friend of a friend that has done one but nobody who did one personally.

Matt Gagnon