Private Placement Programs

History of Private Placement Programs

Since the 1990s, trading with bank instruments is a well-established part of the global economy. The world's largest holding companies issue blocks of debt instruments such as Medium Term Notes, debentures, and standby letters of credit.

The genesis of this marketplace was the 1944 Bretton Woods Conference, attended by 730 delegates of the 44 allied countries of World War II. The conference's purpose was to establish a stable system of international finance. It is the system used today and economic stability is still the impetus for the operation of these transactions. These transactions started over fifty years ago and they have grown and continuously modified to meet modern needs and standards.

Widespread Use of Private Placement Programs

The Bretton Woods Conference was held on July 1st, 1944, with more than 700 participants representing 44 countries coming together and advocating for the establishment of an international banking system. International leaders have decided to adopt the US dollar as the standard global currency for international trade. It was backed by gold, which was the most stable currency at the time. The adoption of the US dollar as the standard currency of international trade was the milestone that triggered the development of the banking instrument market.

To further solidify the universal acceptance of the U.S. Dollar as the standard world currency, the Bretton Woods Conference had to fix the price of gold backing the U.S. Dollar per ounce. The United States did not possess enough gold to continue stabilizing international economic expansion.

The US Treasury had to find a solution to continue creating US Dollars, that’s why it created financial instruments, mainly Medium Term Notes (MTN)* , which were sold to major global banks.

Once the Federal Reserve cashed out the sale of the financial instruments in dollars, they were able to reintegrate into targeted segments of the global economy in accordance with the US Treasury and policies determined by the G-8 countries.

The world’s biggest banks exchanged their financial instruments and PRIVATE PLACEMENT PROGRAMS (PPP) were born. Initially they were only for banks and governments, but this market gradually opened up to well-qualified individual investors.

* Medium Term Notes are negotiable debt securities that accrue interest. They are issued by governments or companies in international debt markets, to finance their medium and long-term capital needs.

What is a Private Placement Program?

Private Placement Programs are high-profit investment programs. They are safe, private, “invitation only” trading programs for financial instruments (especially MTNs) offered by the world's leading banks to help their clients finance capital investment, expansion, and specific projects.

Investors first buy these instruments early after issuance with a significant discount from their nominal value. Afterwards they are sold in the secondary market at a higher price. The difference between the purchase and selling prices is the investor's profit. PPPs are offered only to customers with high purchasing power and such transactions may only be carried out by licensed dealers.

For example, you as an individual can agree to loan $100 to a friend with the understanding that the interest for the loan will be 10%, resulting in a total of $110 to be repaid. Effectively, you have created $10, even though that money can not be seen initially. Banks do this sort of lending every day, even though the amounts run into the billions of dollars, with the amounts of interest involved, and potential profits in the PPP market, correspondingly higher. PPPs involve trading these discounted bank-issued debt instruments which defer payment obligations, or debts.

The PPP market is changing and it is no longer limited to governments and MTNs. It is common practice for large, stable companies of all types to issue their own debt instruments.

Every day, the world's major banks issue billions of dollars worth of instruments such as Medium Terms Notes (MTN), Bank Guarantees (BG), and Stand-By Letters of Credit (SBLC), many of which are sold on the secondary market at discounted prices.

All trading programs in the PRIVATE PLACEMENT PROGRAM area include trading with discounted debt notes. Furthermore, in order to bypass the legal restrictions, this trading can only be done on a private level. This is the main difference between trading with PPP and "normal" trading, which is highly regulated. PRIVATE PLACEMENT level business transactions are free from the usual restrictions in the securities market. It is based on reliable, essential, special relationships and protocols.

However, none of these programs can be started unless there are sufficient funds to support each transaction. The banks need to “share the wealth” by allowing private investors to participate in the investment, in order to help the bank increase its own investment reach.

Process of Profits of Private Placement Programs

Here is a hypothetical transaction.

  • A program accepts 72% of the nominal value of an MTN (for very large quantities, the price may be below 50%) and a sale price of 80% to the covenantee. However, the difference of 8% points is not yet the profit of the program. This profit is first shared with the Federal Reserve Bank (FED) at a rate of 50:50, where deviations are also possible. Then, after deducting the bank charges, the program usually shares it with the investor at a rate of 30:70, the program takes 30% and the investor takes 70%. Excluding bank charges, the investor has 2.8% of the nominal value. Although your actual investment results vary and depend on the individual transaction, these example numbers are all realistic of past transactions.
  • Assuming 40 trading weeks per year, the investor earns 112% per annum. That means, two transactions per week and 224% per year.
  • In fact, in MTN this trade is done several times a day (3-4 times a day or even more) for 40 bank weeks per year. For a total of 40 bank weeks of 4 trading days, 2 transactions per 2% commission per transaction, a total yield of 640% is derived, based on the capital provided (blocked fund). In fact, the total return is higher.
  • The secret lies in the rate of turnover, that is to say the speed of the same investor fund is used and returned repeatedly. Programs that buy back property and sell back immediately to export to the secondary market are the fastest operating performances.
  • The profits are paid to the investors every month. The investor determines the account to which the revenue will be transferred. Program banks offer a discontinuation of revenue for a deduction. The investor is solely responsible for the correct taxation of the investment income.
  • The process that we explained above is a short simplification for illustration purposes. In fact, the trade is much more complex.