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Many investors have come to us asking
about Commercial Paper. Naturally they are interested in the high
yields we have spoken about, but often ask, What the heck is Commercial
Paper? For those clients that are unclear about certain investment
terms, I am providing an explanation that should make things somewhat easier.
.
Bonds
or Longer-Term Fixed Income Investments
.
For starters lets discuss what are known
as fixed income investments. Fixed income normally refers to things
like bonds, certificates of deposit or any type of investment whereby you
are basically putting your money on deposit for a fixed period of time
and for a fixed rate of interest. A bond is a type of fixed income
investment and is in essence a loan. When you purchase a US government
bond, you are loaning the government your money for a fixed time period
and for a fixed rate of interest. When you purchase a corporate bond,
from a company such as Pepsi or IBM, you are loaning that corporation your
money in the same fashion. The term Bond is used when talking about
a loan that is greater than one or two years. Most bonds are issued
for five years, ten years, twenty-years and so on up to thirty years. When
watching the financial news you will often hear the term US government
long bond. They are talking about 30 year US government bonds.
.
Interest from a bond investment is normally
paid every six months to the investor. At the end of the bond time period
or when it matures, the principal amount is returned to the investor.
As an example, if you invest $100,000 in a five-year bond at 6%, you will
receive two interest checks every year, for a total of $6,000 every year
that you own the bond (one check every six months for $3000). After
five years, your $100,000 is returned to you. Interest on a bond
is normally paid out every six months, but there are some bonds that pay
interest monthly. It can be difficult to purchase long-term bonds
in the Dominican Republic because many companies are fearful about borrowing
money at a high rate for a long period of time. Just like investors
who are looking for a mortgage, they do not want to be locked into a high
interest loan if rates should go down in the future. Locking in a
high rate over a long period of time is very good for the investor, but
is not favorable for the entity borrowing the money.
.
Commercial
Paper or Shorter-Term
Fixed Income Investments
.
Commercial paper is in effect a very
short-term bond, usually for any period less than one year. When
talking about commercial paper investments, we are in fact discussing a
type of short-term investment for 30 days, 90 days, 180 days or any time
frame that is one year or less. Most investors that understand a bank certificate
of deposit can relate that to a commercial paper investment. The
difference of course is that you are loaning your money directly to a company
and not to the bank. In essence it can be said that you are by-passing
the bank because in reality banks that offer money market accounts or savings
accounts are purchasing commercial paper with depositors funds and keeping
the spread between what they really earn and what they pay the depositor.
.
Most of the commercial paper issued in
the Dominican Republic is for a minimum of 90 days. Investors that
make this investment are in effect loaning their money to a company for
a short-term need. Interest is usually paid monthly with a commercial
paper investment and at the end of the 90 days, the principal or initial
investment is returned to the investor. When we work with our clients
that are interested in the higher yields found in Dominican Peso Investments,
we have made special arrangements with the brokers we work with so your
monthly interest is automatically credited to your Dominican Peso Bank
Savings Account. This way this is no hassle cashing your monthly
interest check and you always have access to your money via your ATM card
(which can be used worldwide at any bank machine that is a member of PLUS
or CIRRUS). The commercial paper can also be registered in your name
directly or if you prefer, in the name of your corporation, foundation
or trust.
.
Why
are the Rates Higher in the Dominican Republic?
.
Money is a commodity, like oil, silver,
bananas or coffee. When it is in short supply, the price goes up.
The price of money is interest rates and when it is in short supply, interest
rates are higher. This is the situation in the Dominican Republic
and elsewhere. Many companies either need money for a short term
need or they do not want to issue longer term bonds and would prefer to
continuously re-borrow every 90 days at the prevailing rate. The
thinking behind this is that the company will not become locked into a
very high rate on a long-term basis if the interest rates come down.
Part of this business philosophy has come about because rates in the Dominican
Republic have in fact come down from a high of over 30% a few years back.
.
Some companies do have a need for US
dollars in order to trade with the United States. Since there are
often not enough dollars in the banking system, companies must attract
individual investors by offering a better rate of return than can be found
elsewhere. An example of this can be seen with Reid & company,
a 50 year-old Dominican conglomerate that happens to have a vehicle and
heavy-duty equipment distributorship. They recently offered up to
a 14% interest rate for 90-day commercial paper in US dollars so they could
re-stock their inventory. Since the car manufacturers in Detroit
want to be paid in dollars, not pesos, they needed to borrow US dollars
for this purpose. Investors therefor had an opportunity to take advantage
and get a good rate of return from a large and well managed local company. The interest rates of course will change
weekly, depending upon the market and demand.
.
How
Do We Work with our Clients?
.
We have relationships with a number of
banks, brokerage firms and mutual fund companies. In the case of
commercial paper offerings in the Dominican Republic, the firms that we
do business with keep us informed regarding that latest opportunities that
are available, so we may in turn inform our clients. We also review
these offerings and select the opportunities that offer the best rate of
return with the minimum amount of risk. It is fair to say that all
investors are interested in receiving a good rate of return, but also want
to make sure their interest will be paid on a timely basis and that their
initial investment will be returned when stated. This is our goal for our
clients when reviewing potential offerings. In addition, clients
know that we are here to protect their interests exclusively and have no
vested interest in seeing investment money directed to one particular offering
or one particular firm. There is no other firm we know of that works
this way in the Dominican Republic, or attempts to protect foreign clients
in this regard.
.
When a client wishes to make a commercial
paper investment, we need to know how the ownership should be titled and
what the interest payment instructions are. Commercial paper in US
dollars, for example, pays monthly interest in dollars. Interest
checks are drawn off a US dollar bank account in the United States, so
investors have no problem cashing their checks. As an alternative, we can
also arrange for the clients check to be sent to their foundation or company
bank account in Panama. Regarding Dominican Peso investments, we can arrange
for a local savings account in Santo Domingo with one of the local banks.
This feature offers our client tremendous convenience because, by special
arrangement, the brokers we work with will offer direct deposit service
for monthly interest payments. When the commercial paper matures,
the client can either re-new for another 90 days or request that the principal
be deposited also to their savings account. For clients that live in the
Dominican Republic or abroad, access is their money is always possible
through their bank ATM card. Current Interest Rates for Commercial
Paper in Dominican Pesos range from 14% to 20%, depending upon the company,
length of the investment and also the amount invested. Deposits of RD $1 Million pesos (about US$ 35,000)
will always pay a higher rate than the minimum deposit of RD$ 100,000 (about
US$3500).
.
Current Interest Rates for Commercial
Paper in US Dollars range from 4% to 7% depending upon the company, length
of the investment and also the amount invested. The higher rates
are available with deposits of US$ 50,000 or more.
.
Interest from US Dollar Commercial Paper
is tax-free in the Dominican Republic. Interest from Dominican Peso
Commercial Paper is tax-free depending upon the amount invested.
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