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.

Stu
Southern Lending Solutions

Why would someone take recourse and more responsibility over the repayment of a loan when they dont 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 dont care because their firms need the cash but control positions do so thats 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 expirations 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

Southern Lending Solutions

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

Southern Lending Solutions

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

Southern Lending Solutions

Todd Rome

Southern Lending Solutions
Todd Rome

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

Southern Lending Solutions

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

Southern Lending Solutions

The Depository Trust & Clearing Corporation

Southern Lending Solutions

Todd Rome

Todd
Southern Lending Solutions