Do you find yourself struggling with how much of your portfolio should remain in stocks versus other investments, such as real estate, small business or bonds
What if …
Do you find yourself struggling with how much of your portfolio should remain in stocks versus other investments, such as real estate, small business or bonds? What if you didn’t have to choose? What if there were a way to hold on to some of your stocks and still free up cash to invest in other areas?
This is exactly the idea behind a new wave of stock loan programs being developed internationally. Asia, Europe and North America are leading the way in underwriting these types of Stock Loans.
Custom liquidity solutions for shareholders, company founders, valuable assets and private stock holders. Investors, insiders, officers, directors and company owners with stock-heavy portfolios seeking diversification are good candidates for stock loans. Stock loans can allow stock holders to borrow between 40-80 percent of the value of the stock, and they offer a great deal of flexibility and tax savings.
Most have no margin calls, and the money can be used for anything except purchasing more stocks.
Stock loans are non-recourse loans, so the only collateral is the stock itself; the borrower’s credit and possessions are not at stake. The loan works as a built in hedge for the borrower’s stock; if the stock drops, the borrower can simply walk away. Borrowers can use the loans to diversify into other types of investments while maintaining many of the benefits of holding the stock.
Here’s How it works
Depending on the stock and the loan type, a borrower can get anywhere from 40 to 80 percent loan to value (LTV), according to Scott Messier, co-founder of Numerian Capital, Inc.
Stability, trading volume and price are factors in determining the LTV and overall deal factors, Manny Singh, co-founder for Numerian Capital, Inc., said.
The exchange on which the stock is traded also plays a role; stocks trading on major exchanges generally get from 50 to 80 percent LTV, Singh said.
Stock loan companies may charge fees in the form of interest and loan origination fees upfront. Origination fees are typically from 3 to 5 percent and interest rates for stable major stocks can vary from 4 to 11 percent depending on the type of loan, term and overall sector Messier said.
Borrowers can make interest payments monthly or allow interest to accrue to maturity, adding to the balance of the loan on a monthly basis, Messier said. Most borrowers pay off the interest at the end when they pay off the balloon style loan, he said.
Most all of Numerian Capital, Inc. loans are written with the accrual option, and borrowers can decide whether to make interest payments, Messier said. “It’s a super flexible program.”
Loan terms can be from “two to ten years, and the borrower determines what loan term they want,” Singh said.
The most popular loan lengths are two, three and five years, Singh said.
Depending on the loan type, loans are usually at least $100,000 and can go up to as much as 10-Million. On occasion, exceptions can be made, but it takes the same amount of “time and energy” to do a smaller loan, so most funds prefer larger ones, he said.
Stock loans are “a way to get liquidity from your equities today,” Messier said. Loans can be funded quickly: within 24 hours or up to a week, depending on the company. The loan process is simple, the borrower submits a standard Loan Intake Form and it’s followed up by a non-binding Term Sheet.
Once the Term Sheet is signed, Loan Docs can go out the same day. The real process begins when the borrower deposits the stock into the lender’s chosen custodian where it is checked for liens and cleared to fund. The loans have no margin calls, so borrowers need not be concerned that their loan will come due before it is scheduled to do so. If the stock drops, the borrower is not responsible for coming up with the difference in value.
Borrowers can walk away from the loan without any credit damage or retribution from the stock loan company.
“There is no collateral other than the stock that the lender takes. So you don’t lose your house or your car or anything like that; it’s simply the stock that’s used as the foundation,” Messier said.
Borrowers have the freedom to use funds for almost any purpose they wish other than purchasing securities, “whether they want to make home improvements, whether they want to put the money back into their company, whether they want to pay off debt,” Sheldon said.
Many borrowers use the money to invest in other ways and diversify their portfolios, with “real estate being one of the really good ones to balance the volatility of stocks,” Messier said. Stock loans are a way for investors to fund riskier investments for which it is difficult to find financing, such as foreign real estate.
Stock loans allow stock holders to “use that cash elsewhere and still retain the full upside capital appreciation of the stock in the future,” Messier said.
Borrowers are not selling the stock, so they receive many of the same benefits that they otherwise would, Singh said. For example, the lender passes any dividends produced by the stocks on to the borrower.
Unless the borrower opts for a capped loan and agrees to set a maximum yearly percentage for potential appreciation, the borrower also retains full capital appreciation.
What happens to the stock?
During the course of the loan, some stock loan companies may use hedging strategies to protect the stock and its value. The hedging strategy is agreed upon in the loan terms; borrowers are aware of the strategy being used with their stocks. Some companies may do nothing except keep the stock in a joint account and do nothing with it unless the borrower defaults on a payment.
In the safest loans, the company insures the stock position and has a guaranteed buyer for that amount at a specific time in the future.
“Once we’ve insured the possession, we have essentially created a fixed asset from a variable asset, and then we access our line of credit, borrow cash against the fixed asset and give it to the borrower,” Messier said.
Other hedging strategies can include staying long on the stock and actively trading the stock, Messier said. It all depends on the security, the price, the float and the daily trading volume and market cap.
Choosing a company
The biggest risk for borrowers lies in choosing a fly by night dishonest company with zero credibility . In order for a company to provide a loan, the borrower must transfer the stock shares over to the stock loan company. The company then (usually 2-3 days) funds the loan within a short period of time.
“The risk is that you give me your shares and I don’t…give you the cash, and I sort of disappear,” Messier said. The other risk is that “you come to pay off your loan and I don’t give you your shares back because I’ve disappeared,” he said. Always, Always read the loan docs and Make Sure you are dealing with a good company. Best signs are to look at the website, LinkedIn, and ask for referrals, if necessary.
For this reason, choosing a company with a solid track record is crucial. Borrowers should look for a company that will explain the pros and cons of its products and that is open with its track record and references, Messier said.
Messier recommends looking for a company that provides a timely response on rate quotes, term sheets and that has “everything spelled out” for borrowers. Borrowers should learn how the company monitors the stock activity and watch for hidden fees and closing costs, he said.
Numerian Capital, Inc. can provide access to direct lending for securities, Assets and Special Situations.
Please feel free to contact Scott Messier @ firstname.lastname@example.org or call him at 307-278-1059. Or if you want to receive a quick quote, please fill out this Stock Intake form by clicking here- “Stock Intake Form”