The concept of having an independent guarantor of a royalty investor’s principal is new and is a work in progress. The goal for companies seeking capital through the issuance of royalties in obtaining the independent guarantee of the investor’s principal is to both encourage the investor to buy the royalty and also to justify being able to pay a lower royalty percentage of revenues to the risk-mitigated investor.
If the payment terms of the royalty were guaranteed and were similar to those of government agency obligations, we anticipate the royalty’s income yield would be higher than that of the government agency’s obligation, reflecting the difference in liquidity and credit of the guarantor. If the guarantor’s obligation was either endorsed by a financial institution or collateralized the fixed return of the royalty would be somewhat lower than a royalty with an unsupported guarantee.
Of course, we are only considering the case of the investor’s guaranteed return of the purchase price of the royalty being assured, and not the investor benefit of ongoing revenue sharing providing totally risk free and expected growth of income.
Non-guaranteed royalties issued by established, revenue-generating companies can possibly be expected to return to investors something more-like 300% of the government interest rate yield. The royalty investor returns from pre-revenue, early-stage companies will be very much higher than those from companies already having revenues and correspondingly have higher investor risk levels.
The guarantor of the investor’s principal will be paid a fee by the royalty issuer. This fee will be a cash payment made at the time of the transaction, plus a royalty equal to the difference between the amount paid to the guaranteed royalty investor and that which would have been paid to an unguaranteed investor. The overall deal is intended to reduce the royalty issuing company’s cost of capital and to mitigate the risk for the investor.
The terms of the guarantee will be decided as the issuer, investor, and guarantor agree. These terms will include specification of the following:
Amount of payment – to be the difference between the investor’s cost of the royalty and the royalty payment received by the investor prior to the time of payment.
Time of payment – number of months the royalty rate may be applied to the projected revenues or a number of months agreed. The guarantor’s payment shall be immediate or within an agreed period of the payment date.
The guarantee can be either a periodic or a final balloon payment. Alternatively, it could be a minimum payment every quarter or a minimum payment by the end of an agreed period.
The guarantee can be fully or partially collateralized or simply backed by the “full faith and credit” of the guarantor.
Royalty issuing companies will also most likely have an issuer’s right of redemption allowing them to redeem all outstanding royalties at a valuation negotiated at the time of the creation of the royalty and known by all of the parties.
In summation of the above and in contemplation of the possibility of risk-mitigated royalty investment, we suggest that it is a rare opportunity for investors to have the ability to profit with little or even no risk of capital loss. Once understood and practiced, more privately-owned companies will be more fairly financed and investors will be able to obtain higher returns while assuming less financial risk.
Arthur Lipper, Chairman
British Far East Holdings Ltd.
+1 858 793 7100
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