The term securities-based lending (SBL) refers to the practice of making loans using securities as collateral such as equities, commercial paper, bonds and hedge funds. Securities-based lending provides ready access to capital that can be used for almost any purpose such as purchasing a property.
Securities-based lending can be an exceptionally useful tool in the mortgage process for high net worth individuals, specifically when those individuals hold an equity position in a single stock position.
Lenders in this space provide funding while using any investments or securities that a borrower might have.
The loans are typically used in a mortgage to provide a chunk of deposit bringing down the overall upfront capital required from the borrower.
Funds can also be used for home renovation or to allow investors to take advantage of time sensitive opportunities.
How the loans workAlmost any security can be pledged to a lender in return for capital, as long as they are unrestricted, unencumbered and can be freely traded, this includes equities (specifically single stocks), mutual funds and fixed income or bonds.
Some investments can be trickier to leverage such as private share holdings – and most lenders won’t accept certificated shares.
However, each case is viewed on its merits as different lenders specialise in select asset areas providing borrower different funding solutions.
For example, Lombard loans are a form of securities-based lending offered by institutions primarily private banks.
Lenders offering Lombard loans will usually only accept investment-grade and liquid assets for security, while niche lenders can provide loans for other forms of assets specifically focusing on single stock positions and more illiquid securities.
Securities-based loans can be accessed on investment portfolios from around £1m, and there is no maximum limit on the size available.
Benefits of using a single stock loan
In situations where a borrower’s wealth is not liquid, the loans can be exceptionally useful. Some of the benefits include:
- Using a securities–based loan means a borrower can tap into their wealth to buy a property – without disrupting long-term investment strategies
- Asset allocation remains in place while the loan provides the required funds for the mortgage
- Securities-based loans offer liquidity fast with terms typically received within 24 hours and completion within 10 days
- Investors can leverage loans, which give additional capital without selling securities, to seize opportunities or meet large financial obligations
- The loans are a cost-effective avenue for accessing money; there are no set-up fees and only the funds you use incur interest charges
- Securities-based lending is usually cheaper than other forms of credit, such a second mortgage
- In some circumstances, a securities-based line of credit can be structured in a tax efficient way, which may allow borrowers to more effectively grow and preserve wealth
- Taking the loan instead of selling assets can mean investors may be able to avoid significant tax charges. This is not intended to provide tax advice; borrowers should always seek professional advice from a qualified financial planner regarding tax
- Risks of using a single stock loan
- Although securities-based lending can be a win-win for borrowers and lenders under the right circumstances, it does come with certain risks.
The key risks are:
- Borrower and counterparty default risk
- Operational risk
- Cash collateral reinvestment risk
- Capital strength and effective collateral management are essential for agent lenders to fulfil their obligation under an indemnification.
Operational risk can be mitigated by agent lenders through a robust operating framework, global scale and a comprehensive understanding of transactional flows.
Beneficial owners who accept cash collateral should ensure that investment professionals are engaged in securities lending transactions, monitoring how risk is managed and cash collateral is invested.
Agent lenders directly contribute to strong risk management through the account structure, transparency, performance reviews and control the agents employ.
As such, risk management must be at the forefront of what agent lenders are providing to clients, and must deliver a program that is transparent and understood deeply by both parties.
Costs of securities-based lending
Securing capital through these loans can be one of the most cost-effective ways of raising liquidity.
Interest rates typically start as low as 3% which can be structured monthly, quarterly or annually.
Where there is limited hedging on the loan, borrowers can expect to pay higher interest rates – up to 15% in cases where there is no hedging.
Risks of investments are taken into account, with securities listed in more stable trading environments such as Europe, the US and parts of Asia tending to be more desirable.
The currency in which the loan is provided will also affect costs, for example, Euros, US Dollars are currently attracting much lower rates.
Pledging investments to a lender
Securities are pledged to a lender under varying terms that will outline what the borrower can and can’t do with the investments.
In some cases, control of the investments may be relinquished, however, the equitable ownership of the assets is typically retained by the borrower.
It is important to note that securities-based lending can be non-recourse, whereby the lender’s only source of recovery is the borrower’s collateral, without the borrower having further liability in the event of a default.
In the event of a margin call, borrowers have the flexibility to use cash or marginable securities to replenish any falls in their collateral value in an agreed cure period, counteracting any sell outs of their equity positions. However, should a borrower fail to cure a margin call, then a sell-out of the position would occur.
Using a securities-based loan
Enness works with trusted partners that source securities-based loans on the very best terms for our clients.
As with Enness, our partners find and source the appropriate lender through extensive connections.
Creative solutions are provided for each client and tailored to their individual circumstances which allow borrowers to make the most of their wealth when financing a property.