structured cash flows buyer's guide-4

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Predictable Income Predictable Income Fixed Returns Fixed Returns Flexible Terms Flexible Terms Structured Cash Flows Buyer’s Guide

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Page 1: Structured Cash Flows Buyer's Guide-4

Predictable IncomePredictable Income

Fixed ReturnsFixed Returns

Flexible TermsFlexible Terms

Structured Cash FlowsBuyer’s Guide

Page 2: Structured Cash Flows Buyer's Guide-4

The�market�for�Structured�Cash�Flows�

Since�the�existence�of�an�individual’s�ability�to�receive�a�income�stream�has�also�been�the�ability�to�sell�that�income�stream�for�a�lump�sum�in�the�secondary�market.��

Historically�such�transactions�have�only�been�available�to�banks,�hedge�funds,�foundations,�endowments,�and�other�institutions�who�realize�that�by�buying�income�streams�at�a�discount�to�their�present�value�they�can�achieve�returns�typically�much�higher�than�alternate�fixed�income�products.�In�the�past�few�years,�however,�due�to�innovations�in�risk�management�and�price�leveraging�the�market�to�purchase�these�discounted�income�streams�has�expanded�to�now�include�individual�“retail”�buyers.��

What�is�a�structured�cash�flow?�

A�structured�cash�flow�represents�a�qualifying�pension�plan,�structured�settlement�annuity,�or�other�such�income�stream�sold�for�a�lump�sum�cash�payment�at�a�discount�typically�to�cover�an�unexpected�life�event�or�finance�a�new�life�opportunity.��Representative�pension�plans�include�those�from��employees�of�the�federal�government,�branches�of�the�U.S.�military,�and/or�certain�corporations;�and�structured�settlement�annuities�come�from�highlyͲrated�insurers�such�as�New�York�Life,�Metropolitan�Life,�John�Hancock,�Liberty�Life,�Pacific�Life,�and�others.��

Structured�Cash�Flows�are�made�available�for�sale�by�the�original�income�recipient�for�a�lump�sum�cash�payment�at�a�discount.�These�income�streams�pay�the�buyer�a�fixed�payment�amount,�for�a�fixed�period�of�time,�resulting�in�a�fixed�annual�effective�rate�of�return.�

Typical�purchase�prices�and�terms��Purchase�prices�start�at�$35,000�and�can�go�as�high�as�$250,000�or�more.�Many�buyers�choose�to�build�a�portfolio�of�Structured�Cash�Flows�to�add�diversification�and�meet�their�desired�total�purchase�price.�Payment�terms�can�range�from�three�to�thirty�years,�but�are�most�often�five�to�eight�years.�The�interest�rate�is�represented�as�an�annual�effective�rate�of�return�compounded�based�on�the�time�period�over�which�payments�are�made�(monthly,�quarterly,�or�annually),�and�is�recorded�to�an�accuracy�of�three�decimal�places.�

Legal�structure�of�the�transaction�

The�seller�of�the�structured�cash�flow,�through�a�signed�agreement,�grants�the�Seller’s�Agent�the�authority�to�sell�the�income�stream�on�their�behalf�for�a�preͲnegotiated�price.�Once�a�buyer�has�been�found,�the�original�income�recipient,�or�seller,�is�selling�a�fixed�payment�arising�from�a�certain�structured�asset�to�the�buyer�for�the�designated�payment�term.��This�is�accomplished�through�a�dually�executed�Contract�for�Sale�of�Payments�document.�

Page 3: Structured Cash Flows Buyer's Guide-4

Prior�to�closing�the�seller�must�execute�and�send�verification�that�directs�the�pension�plan�or�insurance�company�to�now�divert�the�income�stream�to�the�designated�servicing�company,�who�in�turn�sends�a�new�distribution�to�the�buyer.���Process�to�purchase��Once�a�buyer�has�been�identified�who�would�benefit�from�owning�a�specific�structured�cash�flow�the�process�to�purchase�is�as�follows:��

Documents�received�by�buyer�at�closing��

x Sales�Assistance�Agreement.�x Photo�identification�of�seller.�x Purchase�Application.�x Dually�executed�Contract�for�Sale�of�Payments.�x Security�Agreement.�x Limited�Durable�Power�of�Attorney�granting�the�designated�servicing�company�the�right�

to�accept�payments�directly�from�the�obligor.�x Seller’s�Affidavit�of�Marital�Status,�and�if�married�a�Spousal�Consent�Form.�x Purchase�Assistance�Agreement.�x Pension�contract�or�benefits�letter�stating�the�seller�is�entitled�to�the�income�stream.�x Seller’s�credit�report.�x Amortization�Schedule�depicting�payments�sold�to�buyer.�x Proof�of�life�insurance�policy�with�Collateral�Assignment�to�buyer.�x Payment�Change�Verification�showing�evidence�the�income�stream�has�been�diverted�to�

the�designated�servicing�company.��

Step�1•Buyer�signs�and�returns�to�Transaction�Assistance�Team�the�necessary�documents�to�purchase�a�specific�structured�cash�flow.

Step�2•Buyer�places�purchase funds�into�escrow�pending�buyer's�final�approval�of�transaction�upon�receipt�and�review�of�closing�documents.

Step�3•Closing�documents�are�sent�to�buyer�for�review�and�final�approval�of�transaction.�Buyer�has�3Ͳday�review�period�with�full�right�of�rescission.

Step�4

•Once�buyer�approves�transaction�seller's�proceeds�are�sent�to�their�bank�account,�income�stream�has�been�diverted�to�designated�servicing�company,�and�a�new�distribution�is�sent�to�buyer�for�each�payment�period�of�the�designated�term.�

Page 4: Structured Cash Flows Buyer's Guide-4

Transaction�Assistance�Team�

As�the�transaction�facilitator,�the�Transaction�Assistance�Team�is�responsible�for�the�overall�business�and�operations�of�the�sales�process.�This�includes:�

x Entering�into�a�Sales�Assistance�Agreement�with�seller�to�facilitate�the�sale�of�their�structured�cash�flow�in�return�for�a�preͲnegotiated�lump�sum�cash�payment.�

x Assigning�a�buyer�to�buy�the�structured�cash�flow�at�an�agreed�upon�sales�price�and�corresponding�annual�effective�rate�of�return.�

x Safeguarding�the�buyer’s�purchase�funds�through�an�escrow�account�until�final�approval�and�closing�of�the�transaction.�

x Completing�the�Contract�for�Sale�of�Payments�in�coordination�with�the�designated�servicing�company.�

x Overseeing�the�sales�due�diligence�process�as�set�out�in�the�Buyer’s�Purchase�Assistance�Agreement.�

x Closing�the�transaction�and�providing�a�set�of�closing�documents�to�the�buyer�containing�all�documents�as�set�out�in�the�Buyer’s�Purchase�Assistance�Agreement.��

�Risk�Factors�

Please�ask�your�financial�advisor�for�a�copy�of�the�Disclosure�of�Risks�Statement,�and�consider�carefully�the�risks�involved�before�purchasing�a�structured�cash�flow.�Buyers�of�Structured�Cash�Flows�also�receive�an�Option�To�Purchase�Defaulted�Structured�Asset,�issued�by�Performance�Arbitrage�Company,�Inc.�(PAC),�which�defines�the�terms�under�which�PAC�will�purchase�a�nonͲperforming�structured�cash�flow.�Please�ask�your�financial�advisor�for�a�copy�of�the�Option�Agreement�Election�Form�which�outlines�the�aforementioned�terms.�

�Purchase�fees�and�expenses��The�buyer�is�not�charged�any�additional�fees�or�expenses�when�acquiring�a�structured�cash�flow.��The�price�a�buyer�pays�for�a�structured�cash�flow�and�the�corresponding�annual�effective�rate�of�return�constitute�the�net�price�and�the�actual�effective�rate�of�return�the�buyer�will�earn.�All�associated�underwriting,�legal,�escrow,�closing�fees,�and�the�Option�to�Purchase�Defaulted�Structured�Asset�are�paid�by�the�Transaction�Assistance�Team�out�of�the�net�difference�between�the�price�at�which�it�enters�into�a�Sales�Assistance�Agreement�with�a�seller,�and�the�price�at�which�it�is�sold�to�a�buyer.�The�Transaction�Assistance�Team�also�earns�a�fee�that�is�paid�out�of�the�net�sales�proceeds.�

�Income�tax�considerations��The�tax�you�pay�on�your�structured�cash�flow�depends�on�the�jurisdiction�of�your�citizenship,�the�jurisdiction�of�your�residency,�and�U.S.�tax�laws.�The�Transaction�Assistance�Team�expresses�no�opinion�on�your�tax�obligation�and�recommends�you�consult�your�tax�advisor�accordingly.����

Page 5: Structured Cash Flows Buyer's Guide-4