Equity Collateralized Loan
This program is designed for a forward thinking investor who wants to retain the future ownership of their assets as well as leverage the present value of their securities for immediate cash needs. Benefits and terms of the loan include:
- Low interest rates — usually between 3% to 5%
- Rates are fixed — usually between 3 to 5 years but may go longer
- High loan-to-values — up to 80% - much higher than banks and brokerage companies can offer
- Loans are interest only — principal payment at maturity - loans can be refinanced or extended
- Loans are non-recourse — giving the borrower the opportunity to "walk away" if the collateral falls below a set floor amount
- Loans are "non-purpose" — they can be used for virtually any borrowing need (except for placing in a margin account)
- Borrower maintains beneficial ownership — borrower keeps all upside market appreciation. In addition, borrower receives credit against their interest payment for all dividends or interest on bonds. An added benefit is that the lender is responsible for taxes on the dividends during the loan term. It is a loan (not a constructive sale) per section 1058 of the Internal Revenue Code.
- Loans can be funded in 5-7 business days
- Loan fees will vary depending on the size of the loan and will be disclosed at the time of the loan proposal
A securities loan is not a margin account. These loans have significant advantages over conventional margin loans.
The lender will first determine the viability of the loan and then calculate a loan-to-value ration and the interest rate, based on an assessment of both short-term and long-term risks. Eligible securities include stocks, bonds, and tradable mutual funds. Retirement accounts (401K) are not eligible.
Before a loan can be funded, a "strike price" (the per-share price recently traded to determine the value) must be set. The lender uses a fair and equitable three-day average pricing model for every loan it transacts. The strike price is based on an average of the closing prices of the collateral for three consecutive market days; beginning with the day it is transferred to the lender.What happens during the loan term?
- The borrower makes quarterly interest payments to keep the loan current.
- The lender sells some or all of the stock position from the outset, which allows the lender to hedge and repurchase the shares during the term of the loan.
What happens at the end of the loan term?
- The borrower pays the loan back and the lender transfers back to the borrower the same number of shares pledged as collateral for the loan.
- However, depending on what the borrower's financial needs are at the time and how the borrower's collateral has performed during the loan period, there are a few other options available:
- The term of the loan can be extended upon mutually agreed terms.
- In the event of portfolio growth and upon mutually agreed terms, the loan can be refinanced at the end of the term.
- In the event of substantial decline in the market value of the collateral, the borrower can simply walk away from the loan with no additional expense because it is a non-recourse loan.
A typical loan structure:
- 20,000 shares of stock valued @ $50/share = $1,000,000
- Loan to value determined to be: 75%
- Loan amount proposed: up to $750,000
- Term: 3-5 years
- Interest rate paid quarterly @ 3% to 5%: Quarterly interest payment of $5,625 to $9,375
- At end of loan term and providing all interest payments are made, 20,000 shares will be returned to the borrower in exchange for the borrower repaying the $750,000 principal loan amount
