« Posts tagged recourse lending

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