Early maps of the Atlantic Ocean indicated that far to the west, out of sight of land, not only was there a terra incognita but a place where dragons resided. In private lending, the most fearsome terra incognita is usually the covenant section of a credit agreement. Most borrowers focus on key terms, such as cost, tenor, amortization, and repayment options, but not covenants. This reflects the fact that covenant structures for personal loans are not standardized, except in the case of short-term bank loans, mortgages, margin loans, etc. Covenants are perceived as the “dragons” of personal finance.
Most covenant structures are modeled on bank loans and are designed to restrict or constrain the borrower from taking actions that might endanger the interests of the lender. In addition, the penalties for “tripping” a covenant generally tighten the constraints, at best. At worst, they simply force the repayment of some or all of the loan proceeds.
Not so with New York Private Finance. Our covenant structures are different in principle and in practice from those described above. First off, when we propose covenant structures, we do so not with the intent of constraining the borrower but rather, with an eye to protecting his/her interests. We usually require some minimum amount of liquidity and maximum amount of indebtedness, with our goal being to ensure that the borrower avoids being caught in a liquidity trap. As our ultimate goal is to enhance the borrower’s wealth creation activity, limiting their ability to do so makes little sense, but we do not want them to be so aggressive as to risk their ability to service their debts and thereby limit their own wealth creation.
Furthermore, we put no covenants on the wealth creating assets that collateralize the loan. Our relationship is with the owner of the assets that have been pledged, so we do nothing to constrain the activities of those who manage them. Far to the contrary, our loans help “ring fence” our clients from the real dragons of finance.
Please contact us to learn how we can help.
