Why Should Your N.R.A. Clients Borrow In The US?

At first blush many international clients will ask the same thing. 

The answer is simple, it's the QEB.

Many US banks now provide deposit and investment management services for citizens of other countries.  Because of its proximity, our more stable and growing US economy, and to accommodate their payment process for "importing business materials" many business owners (e.g.; car dealers, beverage bottlers, pharmacy chains, commodity exporters) situated in Latin America keep significant $ denominated deposits in US banks.  Importantly, most of these clients also maintain personal $ denominated deposits and investment accounts.  Often times these personal assets are "held" in offshore trusts, or personal investment companies (PIC).

While the legal ramifications of pledging these offshore investment assets must be thoroughly investigated by bank counsel competent with regard to the holding entities' legal jurisdiction, borrowing opportunities that will provide the client with "Quantifiable Economic Benefit" (QEB) often go unidentified.  In a recent article posted here I enumerated several International High Net Worth Client "Observable client Behaviors" (OCBs) that could lead to QEB through borrowing.  One of those OCBs relates to this situation.

 Do your clients own operating businesses that borrow in their home?

Have you reviewed the latest balance sheet and income statement of every operating company your client owns and that has a deposit account with your bank?  If you see "in-county" debt on a client company's balance sheet you can likely provide the client with QEB by taking advantage of historically low US interest and inflation rates by transferring their business borrowing out of their home country

 Using their Trust or PIC held investment assets as collateral and borrowing at a US bank where the credit facility's interest rate will be indexed to LIBOR with a spread favorably affected by the liquid collateral will almost always reduce the client's net interest cost.   In this scenario their PIC or Trust becomes the "in country" company's "lender." The client an then control the operating company's interest rate and repayment terms such to create the maximum QEB for the client's family.

Below is a chart showing the most recent inter-bank interest rates and core inflation rates in selected Latin America countries as reported today by Trading Economics.com. As you can see, the rate the US bank charges for its "secured" borrowings is likely to be significantly less that rate the operating company is paying for its commercial credit needs in most Latin American countries.

Clearly there are other considerations! 

 

On the positive side:

• Borrowing in the US will aid the client and their family maintain a level of privacy that is highly valued by High Net Worth Latin American clients
• The client can now set the interest rate charged by the "lender" (Trust or PIC) to its operating company and thereby exert control over jurisdictional  taxable profits 
• The PIC or Trust can set the interest rate such that it creates positive arbitrage over the rate it pays the bank and the the interest paid by the operating company is earned by the non-taxed offshore entity. 
• The client can keep his investment assets fully invested rather than periodically withdrawing and reinvesting to augment or accommodate business cash flows
• The client can expand this strategy to accommodate direct payment to its company's vendors in situations where local currency exchange to a "vendor acceptable currency" is restricted or limited (a good topic for expansion in future articles)

On the negative side:

• The operating company's country of domicile may require government registration of all debt to be repaid in a foreign currency inviting unwanted scrutiny
• The operating company and/or the client PIC or Trust may incur additional legal costs

My experience tells me that in most situations the positive QEB significantly outweighs the potential negatives and this advice will solidify and/or strengthen your relationship with your international N. R. A. clients.  International clients are traditionally "fee only" or fee mostly" and this approach to developing interest income will broaden each client's value to the organization.  Further, it will aid your business development results as the "in country" business community is often close knit.
If you'd like to discuss this concept or other Strategic Credit Solutions designed specifically to stimulate borrowing and its resultant interest income don't hesitate calling me directly.

Stay tuned and "follow" me on LinkedIn for the next Strategic Credit Solution aimed at stimulating borrowing by your N. R. A. clients that will provide then with QEB.

Your "likes, comments, and shares" are greatly appreciated.

Mark S. Johnson - Strategic Credit Solutions
404-909-5167

mark.johnson@strategiccreditsolutions.com
@creditstrategic