Comptrolling function - verifying trust

Queued Soft Loans are repayable based on ability.  It is important to lenders that whim or choice not determine ability, and important that lenders need not request payment to obtain it.  Comptrollers ensure this in addition to preventing corruption of the enterprise.

Comptrollers are 3rd parties appointed when the enterprise becomes a Natural Finance Comptrolled Organization (NFCO).  The comptroller organization is appointed for "life".  The comptroller organization has control over all enterprise financial accounts.  It must sign off with enterprise officers on every major expense.

The comptroller's authority over future projects and expenses is based only on whether they compromise survivability of the enterprise.  He guards over high, potentially preferential, payments, and ensures that new project funding covers a portion of related ongoing expenses (6 months worth for example).  The strictness of the comptrolling function on management depends entirely on the health and success of the enterprise.  Companies in the startup phase, or with higher debts than assets have tight controls.  No revenue means management cash salaries are at their minimum levels, while they rise to their maximum when operational earnings reach 10% (or natural rate if lower) of outstanding soft loan principal.

NFCOs have 2 distinct stages in their lifetimes.  The transition occurs when secured and unsecured QCSL investors gain certainty of payment.  Defined as the point when all investor QCSL holders are projected to be paid in 5 years.  After the transition point, the focus or primary mandate of the comptroller becomes ensuring that purpose-holders (other than management) have their promises fulfilled.  It is possible for the enterprise to slip below the transition point, in which case the primary comptrolling mandate shifts back to investors.  Purpose holders care about total compensation, as compared to cash compensation that concerns investors.

The investor benefit of comptrolling is the superior certainty that enterprise revenue is diverted to repaying them, together with expense control.  Far superior to management employed auditors.  This is in addition to the certainty in priority of payment of natural finance QCSLs.

The management benefits of submitting to comptroller authority are in attracting investors, paying them less due to lower risks, and having a secure attractive currency with which to influence suppliers, project partners, and with which to influence social groups to become purpose-holders.  The manager gains the freedom to found companies without any out of pocket investment, earns comfortable to high salary when corporation is profitable, and gains ultimate freedom after company passes the transition point.

Maximum management cash salary ($100K) at 10% return to investors is justified in that an enterprise achieving such a return is naturally successful regardless of the market forces determining the natural rate for the enterprise.

Chartered public accountants in their audit role of a corporation differ substantially from Comptrollers.  First, the Agent-Principal problem exists with CPAs.  They are hired by management to project a perception of honesty and solvency to outsiders such as shareholders and tax authorities.  They can be fired if they are unwilling to confirm management's desired perceptions.  Bernie Madoff gave the impression he was audited, for example.  GAAP rules allow auditors leeway in interpreting corporate cashflow optimistically for investor perception, and pessimistically for tax authorities. Comptrollers have authority over the corporation that auditors don't.  There is no corporate right to fire them.  Cash-basis accounting determines all decisions.

Enforced Ability-based Soft Loans = Natural Finance Soft Loans

Enforced Ability-based Soft Loans is a more technically specific description of natural finance soft loans.

google and wikipedia tell us that Soft Loans have already been defined as:

"a loan with a below-market rate of interest. This is also known as soft financing. Sometimes soft loans provide other concessions to borrowers, such as long repayment periods or interest holidays. Soft loans are usually provided by governments to projects they think are worthwhile. The World Bank and other development institutions provide soft loans to developing countries."

 Enforced Ability-based Soft Loans are loans without fixed date or amount repayment terms, based on the ability to repay, but mandatory repayment when the ability is present.  I could argue hijacking the word "natural loans", on the basis of the natural mathematical efficiency of enforced ability-based soft loans, but it would confuse.

Stock vs Cash Dividend - The 3rd choice

Variable Dividends (or Fixed Yield Dividends) are a cash dividend that is equivalent choice to a fixed fractional stock dividend.  A fixed fractional stock dividend of 1/10th or 1/40th of a share has a variable cash dividend equivalent of 1/11th or 1/41th of the stock's market value.  The cash value of the dividend is variable with the stock price, which makes the dividend yield fixed.  So even if corporations don't pay as high a dividend as shareholders deserve, they can pay more when stock price is doing well, and less when it is doing poorly.  So can afford a higher target payout ratio, and smooth out stock price fluctuations by providing investors with a mechanism to hold low and sell high.

While all investors should be disappointed with management's primacy of self agendas over their contractual mandates, I recognize that there are far greater evils in this world.  Living with the reality of corruption of mandates to shareholder value,  and deceptions to investors regarding shareholder rights, the continued health and capitalization of the corporation does benefit other direct stakeholders (management, employees, customers).  Yet a higher target dividend payout is possible through variable dividends without compromising the health of the company.

A 3rd choice is possible to boost target payout rates much higher.  Issuing a loan option instead of or in addition to the cash dividend option provides a way for the company to issue high dividends without reducing corporate assets at all.  Issuing a loan, retains the same earnings power for the company.  The interest benefit is a shareholder benefit if the loan is issued as a dividend.

A queued soft loan is a superior alternative in every way to a bond loan for both investors and the honest fair-minded corporation.  Soft loans have a certain priority to payment that can not be worsened for investors, and so corporations can benefit from lower financing costs associated with providing a better valued security.

To boost payout the highest, a cash dividend choice need not be offered.  If the company is debt free, then a QSL vs stock dividend choice results in a virtually immediate cash payment to some of the loan dividend choosers.  the company can pay its earnings towards the new QSLs immediately.

To price the QSL dividend choice benefit, the principal amount is equal the cash dividend equivalent to the fixed fractional stock dividend (1/11th stock price if fractional stock dividend is 1/10th of a share).  The interest rate could be bid on, but that requires logistical support.  In healthy public companies, because QSLs guarantee no dilution of payment priority to the loan holder, every loan has an estimated organic (from operations) payment date.  Organic expected payment date can be used to set the Dividend replacing QSL interest rate to match the government bond rates of similar duration, adding a premium of, say, 20 basis points per expected year of repayment.

A high dividend choice not only allows a naturally efficient mechanism to separate shareholders into those that want to determine purpose of the enterprise vs. those that simply want financial benefit from the enterprise, but it also helps expedite purpose-aspirational shareholders to takeover the company without paying market premiums for it, but in a fair way to all other shareholders.  By bidding on dividend increase projects through QSLs, purpose aspirational shareholders encourage the corporation to boost dividend payout even more, and provide the benefit aspirational dividend choosers with cash payments.

A typical target dividend payout ratio for mature healthy public corporations (that pay dividends) is typically 50% of earnings.  It is 75%+ for Canadian Income Trusts.  When Income Trusts have poor performance periods where there payout reaches 100% of income, their market capitalization tends to drop below their book value, and yields go higher than P/Es.  The market is scared of high payout ratios, mostly because of fear that fixed dividends will be reduced rather than the fear that bankruptcy becomes imminent.  A variable dividend can allow the income trust to pay according to target earnings, and can payout 90%-100% of those earnings targets, because when it falls behind, it will naturally drop in stock price, and pay out less.  Their dividends become self adjusting.

Because of the obvious appeal of high dividend corporations, and the announced intentions of industrial icons (Bell Canada) to convert to Income Trust structure, the Canadian Government has effectively banned income trusts starting in 2011.  Variable dividends will allow converted Income trusts and  those corporations that wanted to be income trusts to boost payouts within management agendas.

Queued CAPPED Soft Loans -- management protection

Queued Capped Soft Loans (QCSLs) are QSLs which are capped at a natural (arbitrary, but humanly digestible) 200% of original principal (for investor QSLs.  Employee cap is 300%).  A QCSL security can never receive total lifetime payments over 100% of its original purchase price.  A trade on the RE does not reset the cap, but a trade on the POE does create a new QCSL for the investor.

This is 3rd part in series of posts on Soft Loans part1, part2

The cap serves to protect both management from usury, but also all investors queued behind other loans (nearly all of them).  Usury is a genuine social harm.  Protecting people from accepting a loan for 50% interest does them a favour.  If you are in a position of a debt that will result in your murder if not paid, then you over promised in borrowing.  If death or harm could be caused by other means (lack of medical procedure), then the lender should be considering the benefits of charitable gift rather than usurious loan.

An equivalent security to a QCSL would be a QSL with an insurance policy (by company) that would pay investor all accumulated interest above the cap.  By having the investor self-insure the incredibly expensive and inefficient bureaucracy of a 3rd party insurance provider analyzing the investment, determining a premium, including an expected profit in its premium for adopting the risk, and aggravating the world with additional service offerings.  Self-insurance also protects against any incomplete insurance coverage such as non-payment conditions or lapse in premium payments.

An investor could purchase equivalent insurance product through 3rd party or as a derivative, that would pay him all gains lost due to cap, but doing so is absurd.  Expensive, but also being paid an eventual 100% return on an investment is unlikely to be considered harmful, and through the Soft Loan Exchange, the investor can cash out at any time.

The important investor benefit of QCSLs (capped) is that it allows investor decisions under certain worst case scenario.  If an investor is about to buy into the existing queue or future operations, then knowing that the company has $5B in existing QCSLs, then he knows with certainty that he will be repaid double or his annual bid rate if the company makes $10B (or more) of operational profit in its lifetime.

The main protection for purpose holders is that runaway debt becomes less likely.  Those behind investors in priority need the hope of one day being paid to continue striving for purpose.  Caps help maintain the possibility.

The main appeal to investors of QCSLs is the certainty of priority.  All unsecured QCSL holders can never have some other investor gain higher or equal payment priority than them.  All secured QCSL holders cannot be displaced by any future projects or asset acquisitions.  By contrast, in traditional finance, a 10 year bond holder is susceptible to any hair brained scheme by management to expand or to sell to a leveraged buyout scheme, and shareholders are susceptible to much worse dilution or management salary increases and risk taking.

QUEUED Soft Loans - enhancing predictability

Queued soft loans (QSLs) are soft loans that are setup in ordered payment priority.  All principal and interest of the first loan is repaid before any payment on the next priority loan is made.

This a followup to recent Soft Loans introduction.  Part 2 of 3.

The distinct advantage over traditional bond-loans are that there is certainty of leverage for the investor.  If you have no debt whatsoever, and high income, you could get a small loan at the lowest possible interest rate if you promised not to get any other loans.  That promise is never made or asked for, so lenders are forced to assume you may get a lot more debt later, and price their loan more expensively.  With QSLs the leverage rate at the time the loan is made is known precisely, and can never worsen for that investor, and improves every time another investor is paid.  The lender can furthermore estimate a date he will be repaid based on expected operational profits.

A Queued (capped) Soft Loan Regular Exchange (RE) is a market much like stock or bond markets where individual traders may buy and sell specific QSLs.  It is almost always a bad idea to buy a QSL for more than its accrued value, because it can always, and often, be paid off early.  The RE exists to help QSL holders to cash out at less than full promised returns, by offering up his QSL.  The company is unaffected financially by these trades and need not be involved in the exchange.  The RE collects a commission on these trades.

A QSL Perpetual Offer Exchange (POE) is typically offered by the same organization running the RE.  It allows any entity the opportunity to buy into the queue of soft loans (at the end) by accepting the natural bid rate which is a small increment below the queue's natural rate (which is the average interest rate in the queue).  The proceeds from the new buyer go directly to whichever investor is at the head of the queue.  The POE does not collect regular fees on these trades, though is part of Comptroller entity fee based duties.

A QSL Future Operations Market (FOM) is a market where investors and the company agree on funding the company's future weekly operations and special and new projects.  For weekly operations the company is forced to accept bids at the natural rate, and use any excess revenues (over reserve of usually 1 month) to repay QSL queues.  For projects, the company may arbitrarily set a maximum interest rate that it will accept initiating the project for.  Potential investors may make a standing bid for the next weekly operations slot at the natural rate at time of bidding, and if so their bid may be accepted even if the natural rate falls below that bid (and there are not enough better bids).  It is yet to be determined if investment banking fees will be incurred in this market.  There are comptroller fees for reviewing and packaging projects for offer, but weekly operations are included in standard comptroller duties.

QSL holders have some options to faciliate reinvestment in the company, whenever they are about to be paid for their loan:  1. They may guarantee an accepted bid in the company's next Future Operations Market auction at the natural rate.  2.  They may repurchase into POE at a slightly advantaged average of the natural bid rate and the natural rate, and 3.  If (and only if) their QSL rate is below the natural rate, they may pass on being repaid.  Choosing instead to continue maintaining their safe position at the head of the queue, while accruing interest.

The natural rate is the average interest cost to the company.  By allowing automatic bids below the natural rate to be accepted, the interest cost to the company tends down, and individual investors are repaid much more quickly than they would if only organic (internal to company: revenue surpluses) payments were made.
By allowing for programmed orders from QSL investors, the natural rate can rapidly cascade down as a result of improved outlook in the company.  For example if 100 investors are each willing to lend $1000 to the company at 9%, but the company only needs a total of $100K in financing, then the negotiated rate could be closer to as much as the company may bear (15% for sake of example).  But if 1 extra investor is willing to invest $1000 at 9%, then the natural rate will quickly cascade down to 9% because every investor who is offered repayment will choose to reinvest.

The unlimited supply of loans created by the POE satisfies the perfect competition ideals of Adam Smith, for enterprise financing.  Open loans, means that whoever provided the first acceptable finance terms doesn't forever encumber the enterprise with high rates.  (Investors who prefer not offering open loans have free reinvestment options).  Expensive loans can be easily replaced.  Its an advantage to investors as well because in a $100M project, putting in the first $10M is much more risky than putting in the last $10M.  Namely, the risk that the other $90M won't be raised, or incur delays.

Part 3: Capped QSLs

Introducing Soft Loans - A new corporate security

Natural Finance uses Queued Capped Soft Loans.  This is first of 3 part post series.  This is meant as a concept introducing post, but the official statring point is here .

Purpose Holders of a traditional corporation are its shareholders.  Management has a duty to maximize shareholder value.  The Founder of a corporation typically conceptualizes and executes its function through management of it, but if he needs more money than he is able/willing to risk, he must, most commonly, negotiate away much if not most of the purpose-holding to stock investors.  If it is most of the purpose-holding, then he completely loses control of his concept and mission for it.  If it is less than most, then stockholders are helpless captives to nearly every management whim.

Soft loans are loans with no fixed date/amount repayment terms, but rather based on ability to pay.  They are similar to royalty streams with the major exception that they expire as soon as all of the principal and interest is repaid.  They are much more similar to interest accruing accounts payable, or a promise to suppliers to pay them when some sales are made.  Soft loans are transferable the same way any lender could assign your borrowing obligations to be paid to someone else.

From an investor perspective, a soft loan must have tight accounting controls that prevent the borrower from interpreting or managing his "ability to repay" obligation.  The lender never wants to have to call and request for payment time frames.  These trust issues explain why soft loans have traditionally been unpopular for lenders. When trust is verified, soft loans are much less risky than owning minority stock.

The capitalists role is to get a return of and on his capital.  The most direct way is through loan interest.  His role is not to interfere in how to provide that return, or demand and delude himself into promises of unlimited returns on his capital

Queued Soft Loans have significant advantages to both minority stock or bonds/traditional debt to investors (details comming).  soft loans share bond-loans predictability of repayment.  While bond predictability is affected by likelihood of default projections, soft loans are not only necessarily less likely to default (details comming), but have an expected date of repayment, which usually, even when it misses expectations does not affect the return to investors.  Stock returns have no tangible predictability.

From management's/purpose-holder perspective, soft loans have the same benefit as share capital in that you never have to consider paying them back unless you are able to, and the advantage over bond-loans that you are never forced to pay unless you are able to.  When trust is verified for stakeholders, and controls on management spending and salaries in place, soft loans become an enterprise currency, where suppliers, customers, and employees can be provided with assets with much more tangible value than stocks or options.  Tangible value that is much less affected by unknowable management possessed information and competencies.

Part 2 Queued Soft Loans