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Stock Loans FAQs, Asset Based Loan, Securities Loan (Page 1 of 3)
F.A.Q. Stock Loans and Asset Based Loans
What is a Stock Loan?
Non-Recourse Stock Loans by definition is a loan against the value of a stock or portfolio of stocks whereby the shareholder (OWNER) can borrow up to 80% of the stock value (in some cases higher) of the portfolios market value “without selling the shares”. Like a home equity loan for stocks but much better. You borrow against the appraised value of the portfolio and pay a below prime interest rate for the term of the loan. And then at term end you either pay off the loan and receive your stock back with any stock appreciation, refinance the loan, or if the stock price has fallen below the LTV amount, forfeit the shares without paying back the loan (non-recourse) with no liability or effect on your credit rating.
What stocks are eligible for a Stock Loan?
Any publicly traded security are eligible. Stocks, bonds, mutual funds, ETF’s (exchange-traded fund), ADR’s (American Depositary Receipt), Penny Stocks (stocks on the pink sheets or bulletin board stock), Foreign Stocks and Bonds are ALL eligible. Typically, we look for a minimum $50,000 daily trading volume for each publicly traded stock.
Am I personally liable for this loan?” or “Can the company come after me on this loan if I do not make payments?
NO, this is a “non-recourse” loan; the lender cannot come after you personally. There is NO personal liability associated with the stock loan. The only security for the loan is the stock and the only recourse the lender has is against the stock. You have NO personal liability exposure.
Is the loan reported to the credit bureaus or reporting services?
NO, the Securities loan is not reported to the credit bureaus and there is NO public record of this loan. Even if you elect to walk away from the loan and default because, for example, you have more money then the stock is worth, it is NOT reported.
Are non-U.S. securities allowed to be used as collateral in stock loan transactions?
Yes. Some non-U.S. securities are allowed to be put up as collateral. Some of the other countries include Canada, UK, European countries, Japan, Israel, Australia, India, and Korea, to name just a few.
What are the Loan to Value (LTV) percentages for the loans?
The LTVÃÆââââ¬Å¡Ã¬Ã¢ââ¬Å¾Ã¢s vary depending on the quality of the securities being collateralized. With high quality large cap stocks you can expect LTVs up to 80% (sometimes higher) while with small cap or pink sheet (penny stocks) securities the LTVÃÆââââ¬Å¡Ã¬Ã¢ââ¬Å¾Ã¢s will be more conservative and lower. This means it can be as high as 80% LTV but can be Lower. It depends upon the quality and type of security owned. Each loan is evaluated on a case-by-case basis. The highest LTVs are offered to high quality securities such as Blue Chip stocks.
How are the stocks evaluated?
Stability, trading volume and share price are factors in determining the interest rate, term and Loan to Value. Good stocks, like good investments, always get the best terms. Typically, we look for a minimum $50,000 daily trading volume for each publicly traded stock. The most attractive interest rates and terms and conditions are available to those stocks with good strong and steady volume and price, and low volatility. Prices over $5/share typically get best prices as long as volatility is low and volume is strong and steady. Strong and steady volume is highly prized as it allows some predictability. The leading indicators when determining the eligibility of a stock as collateral are going to be exchange, volatility, share price, liquidity, trends, filings, short term trading volume and long term trading volume.
Securities Lending in the world of Financial Services
In the world of finance, Securities Lending simply means the lending of stock or securities by one participant to another. The basic terms of that loan are administrated by a lending agreement, which compels the borrower to provide to the lender some form of collateral, such as government securities, cash, or a letter of credit, equal to or higher than the value of the securities that are lent.
The lending agreement is a legal contract that is duly enforceable under applicable state law, as per the agreement. The participants agree upon a set fee, figured as a percentage charged annually based upon the aggregate worth of those securities that are loaned, as payment for the loan.
Should the accepted mode of collateral be cash, the fee can be in the form of a rebate, which would signify that the lender would receive all of the total accruing interest on said cash collateral, but will pay the borrower an agreed upon interest rate.
Securities Lending is essentially an over-the-counter market, involving the lending and borrowing of securities, mainly for the objective of hedging short-sale positions. The Securities Lending players involved frequently include foundations, pension funds and mutual funds, which loan their security holdings to qualified borrowers, such as hedge funds, option traders and additional asset managers.
All parties will usually rely heavily on their own intermediaries to negotiate their transactions and manage individual risk. Many also rely on Risk Management Software as additional assurance that they are fully covered in their transactions. More and more, investors and traders alike depend more each day upon financial services technology and specifically Risk Management Software for this purpose.
Standard & Poor has introduced an innovative index sequence intended to track the average cost involved in borrowing U.S. equities. This will be the very first public index that will make available to everyone valuable insight into the average expense related to the Securities Lending market, as calculated via the weighted average rebate per all equity constituents in the S&P 500, MidCap 400 and SmallCap 600.
Data quality involved is improving, along with several other financial services technology markets as well as Risk Management Software. In fact, during recent years, market transparency has amplified because of the appearance of data aggregators whose job is collecting transaction data and providing data back to those contributors. Standard & Poor is currently trying to deliver further transparency to the financial services technology market.
Collateral management is the practice of confirming, agreeing, and advising regarding collateral transactions. Collateral refers to property or assets offered for the purpose of securing a loan or other form of credit. Collateral will only be subject to seizure upon default on the loan. Collateral Management is in charge of reducing the credit risk involved in unsecured financial transactions. The lending parties in transactions have actually utilized collateral for hundreds of years for the purpose of providing necessary security against any possibility of default in payment.
Collateral is utilized predominantly as mutual insurance in many over the counter financial transactions in the contemporary banking industry. Collateral Management has swiftly evolved in the past 20 years along with escalating utilization of modern technology, aggressive pressures amongst financial institutions, and the expanded risk created by the widespread use of secured asset pools, leverage and derivatives. Consequently, Collateral Management now includes various multifaceted and interconnected functions as well as improved legal safeguards with the use of International Swaps and Derivatives Association collateral agreements.