So in our last post, we started the discussion of Recourse vs Non-Recourse lending within the framework of a Securities Lending program. To review or if you missed it, check it out here.
Why would someone take recourse and more responsibility over the repayment of a loan when they don’t have to?
1) Ownership/Title: Some control positions (when an insider owns a controlling stake in the company) are reliant upon ownership not changing so they continue to own their 51% of the firm instead of the transfer dropping their stake to 49% or 47%. In a recourse loan, the ownership does not change and the shares are physically moved to a bank/brokerage or other account staying in the client’s name. Many clients don’t care because their firms need the cash but control positions do so that’s how we accommodate them.
Unlike in a non-recourse loan where lenders freely trade in and out of the stock and often become something like a market maker in the stock, in a recourse loan they don’t freely trade the shares.
So how does a lender make money without trading the shares? Since interest rates are typically very low, its not on the payment stream. The one way a lender makes money in a recourse loan that they don’t in a non-recourse loan is that they might actually lend the stock out to another institution for the purposes of hedging or to cover options expiration’s or cover an existing risk in their own trading account. This is a big difference between recourse and non-recourse and many firms are OK with this and some are not.
Stu
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