PiPEs/Structured Equity Financing

February 7, 2011 / admin posted in PiPE/Structured Equity / No Comments

Here at SLS, we have one equity offering where borrowing or otherwise taking on debt for your assets is not required. This is our PiPE/Structured Equity Program. We get many questions about this program so this is an introduction to it.

How does it work?

Publicly listed companies here in the US or in many markets around the world that do not qualify for our Securities Lending Program due to price or volume limitations in how their stock trades are good candidates for this program.  It is essentially a cash for shares program and most of the time those shares are newly issued or taken out of existing Treasury stock or both.

Investment funds all have a specific purpose or mandate that guides how they invest their money. We currently work with two who have the preference of doing equity investments into companies that are already publicly listed and trading on their stock exchange.  In return for these investments, a couple important things happen including:

  1. Our clients get the cash they need to help them grow
  2. Our investment funds get to put their dollars to work
  3. Our clients get their money with no strings. They do not have to give up any board seats, managerial control or make any major shifts in corporate direction and strategy
  4. Our investment funds get a chance to get in early on a potentially long term and profitable investment
  5. Our clients do not have to do this program and screw other shareholders in the process.  Meaning that with most deals there is a slight discount to market rate for the shares issued to the investment funds but not severe discounts so that its to the detriment of other key shareholders, including current management.

What’s The Process?

First, some standard information on the company and its stock is submitted and usually within 3 business days (often sooner than that), a Term Sheet will come back to the client outlining what one of our investment funds is willing to offer.

Second, Client negotiates and agrees to terms and due diligence starts.

Third,  Everyone waits.  Yeah No Kidding, we all do.  What we all wait for is the SEC (or equivalent for Foreign Markets) filings to be made and to go through and be enacted.  In the US, that often means a filing of an S-1 or S-3.

Fourth, Client gets their money and the investment funds get their shares in amounts and tranches per the agreements.

Stu Lustman

Southern Lending Solutions

Securities Lending VS. Traditional Banking

February 5, 2011 / admin posted in lending / Comments Off

I get asked on a regular basis where our funding comes from. No matter how many times I explain that our money comes from a Global Hedge Fund people insist on asking if its from a bank. I thought I would dedicate this post to that very topic.The one thing that has continued to stall the economy is the same thing that continues to make this program of lending against securities prosper. The banks just don’t want to part with their money!  That’s a generalized statement, and of course the banks do still lend money…..to the Rockefeller family.

For many businesses, turning  to a bank is just not an option.  Securities lending in today’s economy means that publicly traded companies can take on a non-recourse loan and have the collateral that sits otherwise dormant in their coffers put to good use. Since the securities themselves are the collateral, it puts a business in a very good position to continue and run their day to day operations without having to liquidate their remaining cash holds to complete this type of loan.  One upside to this program that I have spoken of very little in the past, is that it allows the company owner or share holder to receive their securities back in the same if not better condition than when they originally pledged the shares. A responsible lender will make good use of those securities by making thoughtful and intelligent trades causing the stock to appreciate over the loan repayment period. As the banks continue to lend money to only the wealthiest and an air of uncertainty continues to plague the financial landscape, other forms of lending will continue to be needed. I believe for this very reason that regardless of how the banking industry fairs securities lending will be here to stay for quite some time.

Todd Rome
Southern Lending Solutions

Return of Shares Process Part 2

January 17, 2011 / admin posted in Uncategorized / Comments Off

So we know from Return of Shares Part 1 that the lender will always keep some stock in inventory and trade in and out of it and that’s how they make their money. So what happens at the end of the term?

1) If stock has been steady of rising, the client can extend the loan for another year
2) Client can get all stock returned to them
3) Client can get combination of stock and cash returned to them
4) Client can get all cash returned to them

These 4 options are subject to the principal payoff being made.  This is also where the Collar comes into play. Here’s an example:

Stock moves up from $1 to $2 over the 3 year period. The collar is 150% so that means that $1.50 per share is returned to the Client in any of Options 2,3, or 4 above with the remaining $0.50 per share going to the Lender.  Some Lenders do a split or other participation of upside profits and others do not. In this case, the Lender is keeping 100% of the upside about the 150% Collar.

Stu Lustman
Southern Lending Solutions

The Importance of Custodian Banks

January 4, 2011 / admin posted in finance / Comments Off

In Securities Lending, Custodian banks play a very important role. They look out for the client’s shares in case something illegal or undesirable (like a bankruptcy) happens to the lender or other counter party in the deal.  Here’s a great definition of custodian bank , thanks to Wikipedia.   The safeguarding of assets and the management of the settlement of the shares vs. cash are the primary roles of the Custodian and it’s for this reason we only use large global banks for this like EFG Private Bank, Credit Suisse, Citi or HSBC.

Many clients ask us about the safety of their shares given the fraud in the marketplace and the fact that many of our lenders are private companies and it’s this safeguarding done through the Custodian Bank that helps to put their minds at ease so they can move ahead and get funded.

Stu Lustman
Southern Lending Solutions

Asian Stock Exchanges Lead The Way

September 12, 2010 / admin posted in finance / Comments Off

At one time many of the stock exchanges in Asia including:  Hong Kong, Taiwan, and Singapore were once seen as emerging markets and to a degree, they still may be today. This has changed over the years as many US and Canadian businesses have set up shop in these up and coming countries.  The Singapore and Hong Kong Exchanges have become more transparent, offer longer trading hours, and provide more flexibility with clearing and settlement. Many international brokerages and banks such as Goldman Sachs and Credit Suisse see these countries as growing players in the securities market and have focused much of their attention to supporting that growth.

Todd Rome
Southern Lending Solutions

Return of Shares Process Part 1

September 7, 2010 / admin posted in lending / Comments Off

The bulk of our loans are non-recourse and our anecdotal evidence tells us at least 75% of these deals end up in default (usually an elective default by the client as in ‘my shares have dropped by X% so I’m going to elect to take the money I’ve gotten and not pay you back’).

If this is true then how are the shares managed when it is being treated like a loan and our clients want the shares back?

After the initial selling of some of the position upon closing, the lender typically holds some of the stock in inventory.  Active share management takes place at the 6 month mark. At this point, the client has made 2 quarterly payments on time and the lender treats it as a loan from here instead of a multi step, multi year exit strategy out of the stock.

The active buying and selling of shares takes place here and in essence the lender becomes a market maker in the stock.  This means our lender is holding some in inventory at all times as well helping to provide liquidity for the stock by filling some of the buy and sell orders.  In fact, there are often cases where the lender will actually hold more than 100% of the funded amount in their inventory meaning they have bought not only enough to provide shares to return but additional shares as well.

Stu Lustman
Southern Lending Solutions

Securities Lending w/Recourse: Who Does It?

September 2, 2010 / admin posted in Uncategorized / Comments Off

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.

Stu
Southern Lending Solutions

The Recourse Loan in Securities Lending

August 30, 2010 / admin posted in finance / Comments Off

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

Southern Lending Solutions

Recourse or Non Recourse Loan in Securities Lending

August 27, 2010 / admin posted in lending, Uncategorized / Comments Off

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

Southern Lending Solutions

Foreign Market Exchange Rules and Restrictions

April 22, 2010 / admin posted in Uncategorized / Comments Off

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

Southern Lending Solutions

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