We recently launched a new legal structure called Borrower Payment Dependent Notes, or BPDN, for certain investment offerings. In this article we will define what a borrower payment dependent note is and how it functions in a standard Yieldstreet offering.
What is a Borrower Payment Dependent Note?
Borrower Payment Dependent Notes (BPDN) are debt obligations of YieldStreet that are tied to the performance of a loan made by YieldStreet. BPDN helps YieldStreet structure debt transactions more efficiently by allowing for a greater number of investors in a given transaction, and lower minimum investments.
What is the Legal Structure of Borrower Payment Dependent Notes (BPDN)?
Yieldstreet’s BPDN structure does not have the same member limitations as investing directly in a Special Purpose Vehicle (SPV), and will permit Yieldstreet to have more than 99 participating investors in BPDN offerings.
For each BPDN offering, a new SPV will be formed as a wholly-owned subsidiary of the BPDN Issuer (i.e. the Issuer will create Series 1 SPV). That SPV exists to fund, acquire and originate a loan with a borrower, or enter into a participation agreement directly with the originator of a loan.
The BPDN Issuer will then issue a Borrower Payment Dependent Note associated with that specific SPV (i.e. Debt Note 1) and Corresponding Asset directly to investors (the debt note holders). Once the investment is fully allocated and funded on the Platform, the BPDN Issuer will pledge 100% of its equity in the SPV to the Trustee under the Indenture (a formal legal agreement) for the benefit of the associated debt noteholders.
What Rights Do Investors Have in This Structure?
Just like with the SPV structure, the BPDN structure operates independently from YieldStreet. If YieldStreet were to go bankrupt, the Trustee can foreclose on the collateral of the associated SPV and the BPDN noteholders would own the equity associated with that SPV.
In this scenario, there would essentially be a foreclosure on the asset (i.e. the equity in the SPV) and noteholders would convert their debt notes to equity in the SPV. Once converted, investors would have the right to elect a managing member or servicer just as they would with the SPV structure.
In a scenario where an Originator or Borrower experienced a default, the same servicing standard would occur as it does in an SPV structure. The Indenture sets forth a servicing standard which essentially requires the servicer to use commercially reasonable efforts to service and collect the Corresponding Asset. In the event of a bankruptcy or insolvency event with respect to the BPDN Issuer, the Trustee will step in as paying agent under the notes.
How Do Payments Work?
Payments for each debt note are tied to the performance of the Corresponding Asset, i.e. the loan or participation interest owned by the associated SPV. Payment flows from the Borrower to the Originator/Lender, to the associated SPV, then to the BPDN Issuer, and finally to the associated Debt Noteholders (investors).
Unlike a SPV offering that issues a K1 for tax filing, BPDN offerings will issue a 1099 tax form.
This communication and the information contained in this article are provided for general informational purposes only and should neither be construed nor intended to be a recommendation to purchase, sell or hold any security or otherwise to be investment, tax, financial, accounting, legal, regulatory or compliance advice. Any link to a third-party website (or article contained therein) is not an endorsement, authorization or representation of our affiliation with that third party (or article). We do not exercise control over third-party websites, and we are not responsible or liable for the accuracy, legality, appropriateness, or any other aspect of such website (or article contained therein).
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Yieldstreet provides access to alternative investments previously reserved only for institutions and the ultra-wealthy. Our mission is to help millions of people generate $3 billion of income outside the traditional public markets by 2025. We are committed to making financial products more inclusive by creating a modern investment portfolio.
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