Bonds as a collateral for loan

[Maarten Stevens]

Hi Everybody,

I am currently working on pre-arranging financing for my first deals. As I am currently not living in the countries where I want to execute these deals (Eurozone and Turkey) , I am limited in conventional mortgage possibilities. I do have some cash (say, 500kEUR) to put into the deal.

I had a discussion yesterday with a financial advisor, who floated the following possibility:

- Use 500k cash to buy bonds, which render a ROI of 3-4%.
- Banks would be willing to provide a loan with the bonds as a collateral, up to ~70% of the value of this collateral.
- The interest on the loan could be as low as 1-1.5% currently (= Euribor + 1%).

Now, sounds interesting, but I am unfamiliar with this type of structure. My questions:

1. Is this something heard of in the industry?
2. What are the risks? I see that the value of the collateral (=bonds) could go down and then the bank will probably ask me to top up the collateral.
3. I don't fully understand how the received interest on the bonds could be higher than the paid interest on the loan. Even if there is currently a spread between the 3-month Euribor and Bonds, is this sustainable?
4. Would a deal like this be better than just putting up the cash directly for the property?
5. Any further matters to be aware of? and where can I find more info?

Thanks a lot!