A question we often get in securities lending is about recourse versus non-recourse loans. Specifically, the question is why would we get a recourse loan if we can get a non-recourse loan. Non-recourse means if the loan goes into default the client can just walk away and only surrender their shares. Great, right?
Not necessarily.
For many clients, the non-recourse loan is the right choice especially if they are unsure of the company’s prospects for the future, need the cash for their business desperately or are using this as part of a multi step exit strategy out of the stock.
Since those 3 describe many of our clients, then who would recourse be good for?
1) Controlling interest- When a client has a controlling interest and anything that can be examined or construed as a sale of shares taking them below 50% ownership and thus losing that control
2) High Capital Gains Tax Jurisdictions- the verdict is still out on the taxability at the introduction of a securities loan. In a non-recourse loan the securities are only physically transferred away but all other aspects of ownership remain in tact. See where your country falls on this list here.
If these 2 things are important, then recourse if available if the best choice. Next post will describe some of the differences in more detail.
Stu
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