Cash-strapped council funds mega-projects via art assets

How by reimagining current funding methods -one art-asset-rich but cash poor council uncovered the true value that lay hidden within its idle art assets

On the BBC's website within their Entertainment and Arts section an article was published on the 4th of Sept, 2015, in which it was reported that many UK councils own art collections. The article highlighted the fact that most of these publicly owned pieces of art were not even on public display, meaning in effect that no public benefit is derived from their existence. The article further revealed that the council with the most valuable art collection was Manchester City Council where it was reported that: "Amongst local councils, Manchester City Council owns the most valuable collection of 46,347 pieces, worth some £347 million".

Doing more with less

The current austerity cuts being imposed on council budgets means that
they are having to do more with less. This in turn has resulted in many councils exploring even more imaginative ways to finance the necessary public services they are charged to deliver. One such example is councils setting up council-owned building companies with which to deliver their own local house building programmes.
 
Against this background of important local projects being increasingly undertaken by councils themselves, one financially astute council has discovered a highly cost-effective alternative form of debt-free and investor-fee financing for mega-projects such as (though not limited to) house building to meet current and future demand.

Art-driven alternative funding

Although this principal-protected alternative funding solution does require a cash investment from the council in order to achieve its debt-fee and investor-fee mega-project financing. They used an attractive non-cash alternative option available to cash-strapped councils that are art-asset-rich but cash poor. It worked like this:
 
A share capital investment of US $13,400,000 was placed into a self-funding mechanism called the Accelerated Growth Strategy Investment (AGSI). This was done via a UK-based private investment company (PIC) being the investment vehicle, conducting the 22 month alternative project financing transaction for the council. If a council did not have the US $13,400,000 required then their art could be used instead.   

Art assets monetized

The PIC introduced the council to their instantly recognisable partner, the financial services division of one of the world's foremost auction houses, so that their art collection could first be monetized (i.e. converted into cash via a one year non recourse loan secured against the art, with no requirement to sell any part of the collection). This was done on the understanding that this art loan would be fully paid off (for the council) by the PIC via a balloon payment (principal plus accrued interest) that is paid directly to the council in month 10 of the transaction.

A "non recourse art loan" means that the credit rating of the borrower is irrelevant because the loan is secured exclusively by the value of the art serving as collateral.
In the event of default no other assets can be claimed by the lender to satisfy the debt.

How much can an art-asset-rich council borrow?

The loan amount is determined as a percentage of the total low auction estimate of the collateral, as advised by the valuation specialist of the auction house's financial services division. Generally, they lend about 40-60% of the estimated total low auction estimate of the art proposed as collateral.

Can the council retain possession of the art?

This will depend on each particular circumstance. In certain jurisdictions, the PIC's affiliated lender may allow the borrower to remain in possession of the pledged art but the option may not be available in other locations. In the case of this particular council they were permitted to retain possession of their art collection.
 
Moreover, because the lender believes that the exhibition of collateral can have a very positive impact on the value of the borrower's art, and as such, they will always try to accommodate exhibition requests as much as possible. Such was the case with this council who partnered with a major gallery to hold an exhibition featuring its entire collection that formally had been locked away unseen by the public for over a decade.  

Principal-protection by insurance

The council invested their art loan in the AGSI that is principal-protected by an insurance policy issued in the council's name, underwritten by Lloyd's of London. This policy was issued to the council before any of their share capital investment funds were transferred from the account of the PIC to the global top-25 transaction bank in order to facilitate the funding transaction.

This thereby enabled the PIC to provide the council with a significant level of debt-fee and investor-free alternative project financing, generated via their affiliated trading platform who were contractually guaranteeing to pay the PIC a fixed rate of return so they could thereby pay the council (as their share capital investor) an eventual total of US $6,000,656,520 in non-repayable alternative project financing.          This financing then served to fund the council's chosen mega-projects, including their major house building programme in order to meet current and future demand. This was disbursed to the council in two instalments, the first being in month 17.5, and the second and final one in month 22.

The returns that were generated via compounding in the first 10 months from the principal-protected AGSI were more than sufficient to enable the PIC to pay back (on behalf of the council) the loan secured against their art assets. The PIC did this by making a balloon payment (principle plus one year’s accrued interest) to the council in month 10. The council used this lump sum to repay the art loan at term, so at this point they were debt-free and their art collection reverted back to being free and clear of any lien.

Thereafter all returns generated and paid to the council in the subsequent 12 months of this 22 month project financing transaction were making a contribution to their investment's absolute profit returns. This was paid to the council via the previously mentioned 2 instalments in month 17.5 and month 22, which was and continues to be used to finance the building of new homes using new capital that is non-repayable. 

A peek under the alt-funding bonnet

The trading strategy that generated the mega-projects funding which was employed by the PIC's affiliated trading platform, who are working with a global top-25 bank, is not based on any kind of speculation-driven trading to generate a profit per trade. It is instead based on an "arbitrage trading strategy" meaning no buy-sell (trade) takes place unless there is a pre-contracted exit buyer in place who has agreed to pay a fixed higher price for the €100M and up face value financial instruments being traded. This thereby locks in a predetermined guaranteed profit per trade, and by repeating these trades back-to-back on a weekly basis, a fixed monthly rate of return is generated.
 
This is then compounded monthly from month 3 to month 10, thereby generating a further enhanced fixed rate of return to the PIC. This was more than sufficient to enable them to pay the council, as their share capital investor, the agreed equity returns in month 17.5 and month 22 with which to far more cheaply finance the council's necessary mega-projects.

Stage two's bank-secured funding

It took 10 months to ramp up the initial share capital investment into enough capital to enter the second stage of this funding transaction. Hence, the 22 months was comprised of an initial 10-month period to complete stage one of the funding process, followed by using the resulting US $500,054,710 proceeds to then enter stage two which took 12 months to complete, thereby taking a total of 22 months.

Once the PIC was at this higher US $500M+ principal investment level in stage two, the monthly trading returns were much higher and included 3 more contracts being entered by the PIC at the US $2bn entry level in the 12 months of stage two of the funding investment, made possible by the PIC reinvesting part their initial profit returns into these larger principal sized 10-week contracts. As the PIC's returns in the second stage of this 22 month funding transaction were guaranteed by a global top-25 bank, so too were the council's 2 funding instalments in month 17.5 and month 22.

Mega-grant to fund mega-projects

Because the 10 month art loan was paid off by the PIC and not out of the council's coffers, the council had the benefit of accessing this new capital with which to finance its chosen mega-projects, such as building houses, without incurring any long term debt, nor having to give up any equity stake in the project to outside investors. This means the council ultimately incurred no cost to obtain this extra US $6,000,656,520 in project funding as it was not required to be repaid because it was derived from their share capital investment returns in the PIC, not from any kind of loan. Hence their US $6,000,656,520 in funding was in effect a grant to the council.

Council tax increase: cancelled!
 
Because there was no impact on the council's budget, they didn’t have to increase council tax rates in order to carry out their mega-projects (e.g. their house building programme). All of which  was made possible by the council monetizing idle art assets and using the proceeds to acquire 13,400,000 X $1 shares (US $13,400,000) in the PIC so they could in turn conduct this alternative project funding transaction for the council.

Flexibility on tap to fund priorities

Of course, building thousands of new homes is but one way the AGSI's resulting mega-grant has been applied by this remarkable EU-based council. In fact, this forms only a part of their combined project-pipeline of 60 mega-projects totalling £4,631,440,583 (US $6,000,656,520) that have now been funded due to the council's participation in this alternative funding solution. That is to say, each project now has a funding allocation backing it even though currently not all are at the shovel ready stage. Their projects include (though are not limited to) hospitals, schools, road and rail links, and plans are being considered for a deep water port and an airport. The point is, the council has considerable latitude in how they spend their mega-grant because it represents investment returns, not a specifically purposed loan.

"No free rides available on the coattails of visionaries"

We interviewed this discerning EU council leader on the condition that both he and the council's anonymity be maintained. He explained that this privacy is due to both client confidentiality rules and the bank-regulatory non-disclosure clauses inherent in these alternative funding contracts which can result in the cessation of trading if breached. Hence, neither current or past participants nor the PIC offer references or testimonials regarding their successfully completed transactions. Instead, all participants are able to fully authenticate their own non-public transaction for themselves to their complete satisfaction, and it is on this basis that they can then make their own fully informed decision whether to participate or not. The council leader mused candidly that: 
 
"There are no free rides available on the coattails of visionaries who prudently did what was asked of them to secure privileged access to the highly specialised private financial market that makes these transactions possible. No one wants to lose their hard won, highly advantaged place at the table by being kicked out of their trade mid-transaction simply to satisfy the curiosity of an unqualified third party who is not willing following the same compliance regulations. Moreover, most people's disbelief is sufficient to ensure this private financial market remains just that, so it is likely that only the most financially savvy councils will take part and thereby benefit".

A boon for council lead mega-projects

It has now been established that a superior alternative funding solution does exists for judicious councils wanting to do more with less by significantly reducing the cost of financing their mega-projects thorough the more creative use of their idle art assets.   
 
One-time limited window of opportunity

If this is you, then you might be interested to know that the PIC's founder/CEO is Colin Blanchard, who has 20 years of experience in this highly specialised alternative funding area. He is reachable at cblanchard@cautusassetmanagement.com. As this offering is subject to change or closure without notice once fully subscribed, he can assist financially discerning and cooperative public sector project owners in getting their funding application fast-tracked through the regulatory compliance process, leading to a face-to-face meeting between the project owner, the PIC's CEO, their affiliated trading platform's director and the facilitating global top-25 bank.

To review the PIC's 8 page explainer containing the full details of the terms and procedures necessary to apply for funding under the PIC's AGSI, visit www.agsi.cautusassetmanagement.com. It is available as a post published on their website or alternatively you can download the PDF vision of the explainer from their website.
IMPORTANT NOTICE: The private investment company described in the above article for regulatory reasons can only work directly with the project owner, which in the case of a council means the council leader or mayor with legal authority to invest council assets so if this is not you please have only the council leader contact the PIC.

MARKUS WESTINGHOUSE  - IRELAND