One of the most common ways to attract additional funding for the acquisition of securities is REPO transactions.

 

A REPO transaction is a transaction where a client sells a certain number of securities to a bank at a certain price (Sales Price) for a certain period with an obligation to repurchase them at a pre-agreed price (Repurchase Price) on a certain date in the future (Repurchase Date).

 

The head of the Brokerage Division of PNB Banka Jurijs Hristoļubovs informed that the said service was very popular among PNB Banka’s clients, too: “It is worth mentioning the difference in the clients’ approaches. Some clients do not want to sell their securities that bring additional profit. Others may not be comfortable with the current sale prices but they need funds to develop their business (for instance, working capital to buy goods) or for other needs. Many clients need access to instant liquidity with understandable risks and rules. Some clients, when attracting additional funding, strive to acquire securities for the amount that many times exceeds the amount directly invested by them, i.e. without attracting 100% of capital to cover the transaction (which may not be there initially), whilst it increases yield of investment”.

 

According to Jurijs, in the calculations one has to take into account the interest paid to a bank for the use of funding and be aware of the possibility of fall in the price and value of securities: “The bank’s rate is easy to calculate. As regards risks, our team is always ready to present the relevant information”.

 

Jurijs has also reminded that only those clients who have been assigned the status of a professional client may use REPO transactions.

 

“In addition, it is worth mentioning that, when a client attracts funding from a bank using REPO transactions, all the dividends and coupons are payable to the client, and this is a great advantage since the client does not freeze its cash flow from the securities. The client pays fixed interest, which, by the way, is currently not high at the bank. However, we must admit that today the market is not lavish in its yields. Still, PNB Banka’s professional team of brokers is always ready to provide a client with information on available securities with certain parameters (currency, yield and others)”, noted Jurijs.

 

• rapid receipt of liquidity;
• possibility to increase profitability;
• attractive rates and amount of funding;
• receipt of coupons and dividends from the pledged securities;
• wide range of securities for funding.

 

 

Issuer:	Bond A	Bond B
Rating:	BB	BB
Maturity:	23.05.2020	23.05.2020
Coupon rate:	7.88%	7.88%
Price:	100%	100%
HC:	0%	30%
BANK credit:	0%	70%
Trade volume, USD:	300,000	1,000,000
Fee for trade:	-240	-800
Bank Loan:	-	700,000
Client's investment:	300,000	300,000
Credit rate,%:	-	5% (total)
Credit fee per year, USD:	-	-35,000
Coupon per year USD:	23,640	78,800
Client’s Profit USD:	23,640	43,000
Client’s Yield,%:	7.80%	14.30%