Highlighting one of our referral partners today, check out our podcast that Stu did with Chris Handley of the Snowball Creative Group on Corporate Branding. Or if you like streaming radio better, look up StuLustman on BlogTalkRadio.
Southern Lending Solutions
When discussing recourse loans within the framework of securities lending, we have to understand who is most likely to offer such a program. Many firms offer securities lending including:
Banks
Brokerage firms
Trusts
Hedge Funds
Insurers
Private Equity Groups
So who is most likely of this group to offer recourse? The bulk of the money is made in securities lending for the lender by trading in and out of the shares and with recourse, since ownership and title stay in the client’s name, the ability to sell the shares is eliminated. This instantly eliminates Private Equity groups and Hedge Funds.
So we must need a group where actually having the assets, even if in someone else’s name, still benefits them. Does this sound familiar? Your bank deposits are in your name but the bank still gets to use them for their capital needs, known as required reserves allowing them to lend more money. The same is true of an insurer but instead of required reserves its called statutory capital. So banks and insurers do it and perhaps some brokerages might if they leave these securities out of their own proprietary trading accounts, which happens but is unlikely. As for trusts, whether they work in recourse lending or not is on a case by case basis.
So if recourse and ownership/title matter to you, look for a bank or insurer or a firm that works with one.
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
The US has the most mature and active capital markets structure in the world. This is no big surprise, of course, but there are a lot of established markets elsewhere in the world. We know the whole manufacturing base for the world seems to have shifted to China, but their capital markets are relatively young. In the Far East, Hong Kong, Japan, and Singapore all have more established and more actively traded markets than China in terms of their capital markets.
Not only that, each stock exchange has its own rules and each nation has its own rules. For example, if you own stock from one the countries I have listed so far, do you know which country doesn’t allow for shares of its companies to leave the country? Hint: It’s an island nation. Not much of a hint since Hong Kong, Japan and Singapore are all island nations right?
These rules that place limitations on movement or transfer of stock are known as restrictions. Some restrictions are not an issue in a securities loan and others are.
Stu
MSCI Barra is barometer and provider of tools for the worlds emerging exchanges. Among many of its responsibilities is the the tracking of foreign indexes and providing metrics for savvy investors. MSCI touts a long history of the worlds markets and indexes along with sophisticated software systems to project trends in the global exchanges. In addition to providing real time data, MSCI Barra also holds conferences and web based seminars to educate investors the worlds markets.
Southern Lending Solutions
Todd Rome
What is LIBOR and why do we use it?
LIBOR stands for London Interbank Offer Rate. It’s London’s equivalent of the Federal Funds Rate, the rate where banks lend overnight or short term to other banks. Just like the Prime Lending Rate is used with US banks for the establishment of their lending rates, LIBOR is used in the UK and frequently in other areas like parts of Western Europe.
Our primary funding resource is based in Western Europe so most of their payments out and payments in are based on LIBOR. Thus, our rates are based on LIBOR. LIBOR has rates for 1 month, 3 months, 6 months, and 1 year. We use the 3 months (90 day) index.
Today, 90 day LIBOR is at 0.28% and since our rates are based on a premium of 25-250 basis points (.25%-2.50%) over 90 day LIBOR that means clients are getting rates starting at 0.53% with a max of 2.78% over 3 yrs.
Stu
I thought I’d get away from the mechanics that show the flexibility and effectiveness of this program to use an example of how a company would use the program.
Imagine a tech company based in Singapore that works all over the world. They are a small, profitable public company on the main Singapore Stock Exchange. They see an opportunity to grow by engaging in a new market to sell their products and services, that market being India. The company needs $$ to advertise, market, open an office and put feet on the ground in the new market so it can bring in new business. Like many market expansions, the payback and profit wouldn’t be right away. In fact, their own analysis says it will probably take 3-4 years before all the upfront costs are absorbed and profit and positive cash flow generated from this market. Singapore participates in DTCC so their shares can qualify for our program.
The options for this company currently include:
1) Bank loan
2) Private Equity Investment called a PIPE
3) Secondary Stock Offering
4) Loan on Securities
Option 1 is out since if that was a possibility they would have done so already. Options 2 and 3 are 2 methods that work but do the same thing, reduce the current shareholders (that usually include upper management) percentage of ownership through dilution.
Option 4 does none of these and allows both the CEO and CFO (both of whom are major shareholders in the company) to pledge their shares in return for the funds required for the project. The lack of reduction of equity stake is especially attractive since the CEO and CFO are on the inside of the firm and believe this new market can increase the stock’s value by 50-200% over the next 4-5 yrs. They are in position to execute the growth program and believe in their abilities and the future growth prospects of the company.
Stu
The Depository Trust & Clearing Corporation was created to automate the process of clearing and settling of securities and other assets. In 2008, DTCC settled more than $1.88 quadrillion in securities transactions. The DTCC nvworks with over 110 different countries outside of the US. Prior to its creation, the transfer of securities was a labor intensive and cumbersome process involving bureaucratic red tape and redundant security procedures. Messengers hustled along the floors the worlds stock exchanges with envelopes tucked under their arms with the words “urgent delivery” stamped across them. The contents……..precious shares of company stock. The creation of the DTCC has enabled securities transactions all over the world in a safe and automated environment.
Todd Rome
Do you have full representation in foreign markets? Today’s economic climate has left many businesses scared to expand overseas . This may be the perfect time to seize the opportunity. Since most countries are excited to work with American businesses and the US dollar, exploring international opportunities may be just the action needed to set your business apart from the fray. As stated in previous posts, many US Companies have already exploited the opportunity of research and development in emerging countries. The cost for doing research is often cheaper and encourages commerce with foreign markets. Countries with new or growing markets represent an opportunity for American companies that lack direction.
