What are Self Funding Instalment Warrants?
They are structured similar to ordinary instalments. The biggest variation is the treatment of dividends. SFI holders are entitled to dividends however the cash component of a dividend will be used to reduce the loan amount rather than being paid in cash to the holder.
The loan amount for a Self Funding Instalment will generally increase once every 12 months, as funding costs are added to the total loan. Hence, over the life of the SFI, the loan amount will periodically decrease due to the payment of dividends from the underlying instrument, and increase by the amount of funding costs. Ideally the loan amount progressively reduces over the life of the SFI due to regular dividend payments exceeding interest and borrowing charges.
It is envisaged that during the life of the SFI the loan amount will decrease where the dividends outstrip the annual interest payments to the loan, representing a positively geared investment.
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