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La Bourse  /  Volume I  /  Nº I.06  /  Workbook — the student

WORKBOOK — THE STUDENT

Chapter I.06 · Bringing the Money With You

For the person studying this alone, or in a seminar, with no balance sheet to raise against yet. You are not too early. Almost nobody learns to read a term sheet before they need one, which is precisely why so few people can read one when they do.

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WHY THIS WORKBOOK IS DIFFERENT

The chapter was written for someone who has a result and needs to fund it at ten times the size. You may have neither the result nor the ten times.

What you can have — this term, at no cost, from public filings — is the skill the chapter is actually made of: the ability to look at a pile of money and see where each part of it stands when something goes wrong. That is one skill, it transfers completely, and it is astonishingly rare in a room.

Everything in this chapter is documented in public. Regulation A offering circulars are on EDGAR. Guarantee programme fees are published by the agency. State revolving fund intended use plans are posted by every state every year. Blended finance transaction data is compiled and released. You have the same primary sources a treasurer has, and more time to read them.

So you will do what the executive does. You will simply do it on documents anyone can download and on a system small enough that you control it.

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PART ONE — DISCOVERY

Days 1–30: find capital that is already patient

Exercise 1.1 — Read a real offering, end to end (3 hours)

Go to the SEC's EDGAR full-text search and pull the Iroquois Valley Farmland REIT Soil Restoration Notes offering documents, or any Regulation A offering by a mission-driven issuer. Read the whole thing. Not the summary — the whole thing.

Then answer, in writing, without looking anything up a second time:

1. What is the coupon range, and what determines where in the range an investor lands?
2. What are the terms offered, and what does the issuer gain from the longest one?
3. Where do these noteholders stand if the company fails? Find the sentence.
4. What is the money actually used for, and what is set aside for something other than the return?
5. What does the risk factors section say that the marketing does not?

Most people have never read a financial instrument in full. After one, you will notice that the document is largely a description of what happens in bad weather, and that the return is the shortest part.

Exercise 1.2 — The concession, computed (45 minutes)

Find today's five-year Treasury yield from the U.S. Treasury's own daily yield curve — the primary source, not a news summary. Then compute:

  concession (bps)  =  (Treasury yield − note coupon) × 10,000
  annual subsidy    =  concession × amount outstanding

Do it for a $10 million note programme at a 2.0 percent coupon. You should find roughly 200 basis points and $200,000 a year of subsidy that appears on no grant budget anywhere.

Write one sentence answering: who is paying that, and what are they buying?

Exercise 1.3 — The appreciative capital interview (45 minutes, with another person)

Find someone who has lent money, guaranteed a loan, co-signed a lease, or backed a friend's business. Ask exactly this:

"Tell me about a time you stood behind somebody financially and it went well. What made you willing? What did you need to know? What did it actually cost you in the end — and what did you think it would cost you at the time?"

Then stay quiet. Take notes on the conditions of willingness, not the outcome.

You are assembling the real answer to the question every chapter of this volume eventually asks: what makes capital willing? It is almost never return. It is almost always some combination of comprehension, position and duration.

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PART TWO — THE ARITHMETIC

Days 31–45: learn to price before you ask

Exercise 2.1 — Reproduce the chapter's figures (2 hours)

Do not take the numbers on trust. Open lib/verify/I_06.py, read it, then compute these independently — by hand, in a spreadsheet, or in whatever language you use.

1. The blended cost of funds. 10 percent at 0.00, 20 percent at 2.00, 70 percent at 6.00. Confirm 4.60 percent. Then recompute with the senior tranche at 7.50 and confirm 5.65.
2. The first-loss expected cost. $10 million book, 0.58 percent annual net charge-off, three-year average life, $1 million tranche. Confirm $174,000 of expected loss, $826,000 returned, and 1.74 cents per dollar mobilised.
3. The exhaustion multiple. At what multiple of the historic loss rate is the tranche consumed? Confirm 5.7.
4. The guarantee, annualised. $4 million, ten years, 8 percent, 80 percent guaranteed, 3 percent upfront and 0.55 percent renewal. Confirm 83 basis points, and make sure you can say why the average outstanding balance is the right denominator.
5. The sustainability-linked break-even, with and without utilisation.

Then do the thing that matters most: find one figure in this chapter you can check against an outside source, and check it. The compliance-cost assumption is the obvious place to start, because it is labelled as an assumption. Go and find what a limited assurance engagement on a KPI actually costs. If you find a real number, you have improved this chapter, and you should say so in your seminar.

Exercise 2.2 — Build a stack for something you can see (90 minutes)

Choose a real thing of real size: a student society buying equipment, a co-op house needing a boiler, a friend's small business needing a van, a community garden needing a polytunnel.

Build the four-layer stack on one page.

  layer            who, by name       amount     cost     position
  first loss       ___________       ______     _____    absorbs first
  patient          ___________       ______     _____    absorbs second
  senior           ___________       ______     _____    absorbs last
  guarantee        ___________          —       _____    across the senior

Name real institutions. A local community foundation. A credit union. A parent. A university hardship fund. The exercise is not fantasy finance — it is the habit of asking who could afford to be last here, which is the question almost nobody asks.

Then compute the blended cost of funds and compare it to what the thing returns or saves.

Exercise 2.3 — Find the honest negative (30 minutes)

The chapter's honest negative is the sustainability-linked loan below its break-even. Write, in your own words, why it is included and what the chapter would be worth without it.

Then practise the move. Take the instrument in this chapter you find most appealing — most people choose first loss — and write the strongest honest case against it. Not the weak version. The version that troubles you: correlated losses, illiquidity, the moral hazard of a lender who knows it attaches at thirty percent.

If you cannot write it, you do not yet understand the instrument well enough to recommend it.

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PART THREE — DREAM AND DESIGN

Days 46–70: build the apparatus

Exercise 3.1 — The present-tense description (60 minutes)

Write 500 words describing, in the present tense, an economy in which the four-layer stack is ordinary. Not "there would be" — "there is."

Constraints, and they are the whole exercise:

• Describe one specific Tuesday in one specific institution.
• Include a number somebody computes as a matter of routine.
• Include one thing that is still difficult and remains difficult.
• Include what happens when a facility loses money, because it will.

The last constraint defeats most people. A description of a financial system that has no failure in it is not a description of a financial system.

Exercise 3.2 — Write the residue clause (90 minutes)

Build the most valuable artifact in this workbook: one paragraph of contract language.

Write the clause that returns the unused reserve to its provider at maturity. It must say:

1. What the reserve absorbs, and in what order.
2. The maximum — reserves are never uncapped.
3. When the residue is determined, and the date it is returned.
4. Who computes the losses, and by what method.
5. What happens if the facility is extended.

Then give it to someone else and ask them to break it. The fifth point is the one most drafts omit, and it is the one that gets litigated.

You will not enjoy this exercise while you are doing it. You will find, some years from now, that you can do something in a room that the people around you cannot.

Exercise 3.3 — The one-page stack (45 minutes)

Practise the artifact that ends the ninety days. One page: the layers, the names, the amounts, the blended cost of funds, the net return, and the margin computed twice — once on quoted rates and once with the senior tranche 150 basis points higher.

Give it to one person who knows more than you and ask a single question: "What would you want to know that isn't here?"

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PART FOUR — DESTINY AND DELIGHT

Days 71–90: make it hold, and enjoy it

Exercise 4.1 — The revolving model (60 minutes)

Build the five-cycle model yourself, in a spreadsheet, from scratch.

  corpus after a cycle = corpus × (1 − cumulative losses)
                                × (1 + lending rate × years − admin × years)

Start at $1 million, seven-year terms, 4 percent lending, 0.58 percent annual losses, 1 percent annual administration. Confirm cumulative lending of about $6.89 million over five cycles with a corpus of about $2.11 million at the end.

Then find the failure point: hold the lending rate and raise administration until the corpus shrinks. Write down the administration rate at which it turns. That number is the real constraint on every revolving fund in the world, and almost nobody who runs one has computed it.

Exercise 4.2 — The irreversible commitment (this week)

One thing that cannot be quietly undone. In this chapter's register, the natural candidates are small and real:

• Open a savings vehicle with a standing transfer and a stated purpose.
• Lend a small, genuinely at-risk sum to someone you believe in, on written terms, with a date.
• Post a small guarantee for a society, a co-op or a friend, in writing.

Make it small enough that a total loss changes nothing material, and real enough that a total loss is genuinely possible. You cannot learn this from the outside and it is much cheaper to learn it now.

Exercise 4.3 — Delight, on purpose (ongoing)

There is a real and specific pleasure in a well-drafted clause, and you will not believe that until it happens to you.

Keep a single page — one notebook, one file — of clauses you admire. A definition that does exactly the right work. A waterfall written so clearly a stranger could administer it. A risk factor written honestly.

Write one sentence: the part of this I look forward to is ___. If you cannot complete it, you are reading documents for information rather than for craft, and the craft is where the compounding is.

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THE TERM PROJECT

One piece of work, carried the whole way

Choose a single real thing that needs capital and that you have genuine access to — a student society, a co-op, a community group, a small business run by someone who will talk to you — and build the stack for it, all the way.

Deliverables.

1. The capital map (800 words). Every source of capital within reach of this thing, by name, with what each one could afford to be: first, second or last. Name at least two institutions you had not heard of before this term.
2. The loss assumption (1 page, sourced). What losses should be expected on this book, and from what real history. Name the source. A loss assumption with no named source is the single most common failure in this whole field.
3. The stack (1 page). Four layers, real names, amounts, costs, blended cost of funds, net return, margin computed twice.
4. The residue clause (1 paragraph), drafted and broken by a peer.
5. The ask (1 page, delivered). Given to one real person who could actually say yes. Whether they say yes is not the assessment.
6. The reflection (600 words). What you expected, what happened, what the gap tells you about how capital actually decides.

How it is assessed. Not on whether the money was raised. On whether the arithmetic was honest and reproducible — whether a reader could rebuild your blended cost of funds from your own page, and whether you reported the stressed margin even when it did not flatter your proposal.

A stack that does not clear, computed honestly and reported anyway, is a first-class piece of work. A stack that clears on rates nobody quoted is not.

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SELF-ASSESSMENT

Score yourself honestly. This is for you.

The two that matter most are the fourth and the sixth. Everything else can be learned in a month. Those two are dispositions, and dispositions take a term.

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CARRYING IT FORWARD

You will not be assembling a facility for some years. What you will have, if you do this properly, is:

• One financial instrument read in full, which is one more than most graduates.
• A blended cost of funds you can compute on the back of an envelope, stressed, while somebody is still talking.
• A capital map of your own region, naming institutions most people in it have never heard of.
• One small, real, irreversible position where you stood behind something.

That last one is worth more than it sounds. The person who has actually been last in a waterfall, even for a small sum, asks entirely different questions for the rest of their life. It is also the cheapest tuition available anywhere, and you can pay it this month.

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APPRECIATIVE QUESTIONS FOR YOUR SEMINAR

1. When has someone in this room stood behind another person's risk, and what made them willing? What did it actually cost, against what they expected?
2. Which institution near this university could afford to be last in a waterfall — and how would we find out what they have said yes to before?
3. What is already working about how this group finances the things it does together, and what makes it work?
4. If every person here left with one honest loss assumption, properly sourced, about something they care about — what could this group fund in a year?