Structured products, Branch 6 and Lombard loans: a winning combination for a company’s cash management

Cash management

In an environment of low or even negative interest rates, the management of a company’s cash flow is a strategic topic for treasurers, CFOs and business leaders.

We can adopt a more sophisticated management strategy when it comes to long-term cash, targeting investment solutions that deliver consistent returns and protect all or part of the capital invested. In order to meet these specifications, investors may be interested in structured products, among other solutions.

These products typically combine derivatives such as options with more traditional assets such as equities or bonds. The objective is either to reduce or eliminate the risk associated with these financial instruments or to improve their return. The investor and their advisor will freely define the level of capital protection (protection at maturity of all or part of the initial capital invested), the underlying (equities, bonds, indices, commodities, etc.), the maturity and the level of return distributed. Among structured products, we can cite the examples of structured products known as “capital guaranteed at maturity” or “yield” products that guarantee the investor the fixed payment of income most of the time in the form of coupons or dividends but with a partial guarantee of the initial capital. From a tax perspective, income and capital gains will be fully taxable for corporation tax unless invested in structured products through a Luxembourg “multi-vehicle” endowment contract (Branch 6).

The Branch 6 contract

The Early Decisions Department (SDA/Services des Décisions Anticipées) confirmed the tax regime for this type of capitalization contract at the end of 2021. Tax is payable only in the event of partial or total surrender, and the taxable base is the difference between the surrender value and the amount of the premium paid. In the absence of redemption during the life of the contract, there is therefore no taxation. Like a securities portfolio, this contract may be invested in structured products, but this must be done via a discretionary management mandate within a Internal Dedicated Fund (FID / underlying assets of the contract).

Lombard loan

To face sudden cash need  or to support new investments, the company that has invested its cash in a capitalization contract may have an alternative solution to redemption. Such a solution will also avoid destabilising a long-term management strategy at an inappropriate time. To do this, the company taking out the capitalization contract will provide it as collateral to obtain a lombard loan. The bank that will take this contract as collateral and will also be its depositary and manager.

The amount of the loan will generally be equal to 50% of the assets of the capitalization contract. The granting of the loan will of course be subject to a case-by-case analysis of the assets pledged as collateral and the client’s ability to repay the debt.

The intervention of Banque Havilland

Our team of asset management experts can help you manage your assets, including structured products. This support will be carried out in close collaboration with our credit specialists in order to offer you the global solution that is best suited to your needs.

Bastien Perrine
Director of Professional Services, Private Banking
Banque Havilland

( source: La Libre (French version))