Hey guys, sorry it's taken me a couple days to follow-up. Here are the official answers for Darryl's questions, given to me directly from the firm. Hope this helps...
Before I respond to the questions below I need to state that while the Lender can advance 95% against certain government securities like Treasuries, in most cases they cannot advance 95% against a stock or mutual fund. There are hedging methodologies which exist which may enable a client to achieve higher advance rates against certain securities which can be hedged but these are specific to each transaction and can ONLY be discussed with the licensed fund manager at the institution prior to loan inception.
Q1. Are the assets moved into a holding account so the asset cannot be sold/traded, and does the owner retain ownership?
A1: The assets are moved to an account in the borrower's name to The Lender. The pledged assets cannot be removed until the lien is lifted which happens when the loan is repaid- but the client can continue to trade his account with the advisor at the institution so long as the trades do not break any loan covenants. As an example, if one of the pledged assets is a stock which received a 75% advance rate, the borrower could not likely trade or swap that for an asset with a lesser release. Because all of these loans are specific to the exact composition of the portfolio, this must be discussed in detail with the fund manager at the institution prior to initiating the loan. This is a regular brokerage account so yes the client retains all ownership and privileges therein.
Q2. Is there a PPP?
A2: There is no prepayment penalty for floating rate loans and there IS a breaking fee for fixed rate loans as with all Lenders. Discussions at to exact breaking fees and fixed rate structures must be discussed ONLY with the fund manager at the institution.
Q3. Are the payments made monthly or quarterly?
A3: Monthly but could be set up quarterly for fixed rate loans.
Q4. They can really use IRAs? Typically, these cannot be moved and there can be tax implications by doing so.
A4: A borrower CANNOT use an IRA in this program- however there are structures which exist which may enable a client to transact a loan with this program if properly structured with his/her tax advisor. As we are not licensed tax advisors we will not respond to how this can be accomplished but we can refer you to licensed professionals for further discussions on this topic.
Q5: What does the lender allow for market fluctuation before they make a call for the borrower to bring in cash? What if they lend 80% against a stock and the stock has a bad month and drops 25%?
A5: As you imply the loans ARE CALLABLE, the call strike price can only be determined after the portfolio is underwritten and must be discussed only with the licensed fund manager and the client. That said the call is typically at or near the LTV but this is ONLY a guideline and not a rule and must be discussed with the client and fund manager prior to loan inception.
Q6: A lot of other programs like this allow brokers to charge up to 5 points on the back. How much does this lender allow?
A6: Zero- other lenders using transfer-of-title programs generate trading profits using the client's assets during the loan term which is why there are restricted if any prepayment options and other limitations to liquidity.
Q7: What is the minimum stock value they will lend against and what is the required daily trade volume?
A7: The minimum loan amount is $100k so the minimum pledge amount should be at least $150k. While we can transact in slightly smaller amounts the interest rate difference is notable under $100k (rates go from 30 day LIBOR +5 (currently 5.27%) to Prime + anywhere from 3 to 5% making the highest interest rate around 8.25%..The stock must be at or near $10 per share with $1MM per day in trading volume.
We would like to note some procedural steps at this time. All of these questions are good and relevant, but you might notice that some of the questions need to be answered in certain cases by the fund manager. Prior to any client speaking to the fund manager three things must happen:
1. We must receive a current brokerage account statement to verify ownership of the collateral and for purposes inherent to the underwriting process.
2. We must complete a compliance due diligence check on the borrower as requested by our institutions. The information on the account statement is usually sufficient for this but if require further information we will contact the referring broker and/or client as needed.
3. The client must execute the term sheet/application/fee agreement. This document does not obligate the client to complete the loan but does affect acknowledgement of certain required borrower affirmations, fees and non-circumvention.
Tags:
