How it works
Securities information is provided from the borrower (A recent monthly statement works best)
The loan-to-value ratio and the interest rate are determined by what securities are pledged. The more liquid and actively traded the securities are the higher the loan-to-value ratio and the lower the interest rate
A Term Sheet/Loan Commitment is then issued.
Borrower reviews and approves the Term Sheet/Loan Commitment.
A conference call is placed between the borrower and lender to answer any questions.
The Pledged Agreement and Contract are forwarded to the borrower for signatures.
The securities are then transferred to the lender's brokerage account.
Lender tracks the closing price of the shares for 3 days to obtain an average price.
The loan is then disbursed based upon the loan-to-value previously agreed upon.
Borrower makes Interest-Only quarterly payments.
During the loan term prepayment of the loan is not allowed.
Any dividends from the securities are credited to the quarterly interest-only loan payment first and any excess is returned to the borrower.
Default trigger is set at 80% of the loan amount not 80% of the securities value like typical margin loans. For example: securities value of $1MM. loan of $800K, default trigger at $640K (80% of the loan amount) If the securities value fell bellow $640K the borrower could walk away from the obligation of payment of the loan and keep the original loan proceeds ($800K) or contribute cash or securities to bring the value back to $640K. The borrower could forfeit the collateral. Unlike margin loans this is a non-recourse loan so there is no personal liability should a default on the loan occur.
At the end of the loan term the loan is paid in full and the same amount of shares originally pledged are returned to the borrower.
The loan may also be extended or refinanced.
The time frame for funding may be as little as 5-7 days.