The EFH Blog

 

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By Al Christy

This July, Equities First Holdings conducted the first EFH Executive Lending Survey. In it, we asked 400 current and former officers of U.S. public companies about their borrowing activities, their thoughts on the lending environment, and which vehicles they used and recommended.

I'm very encouraged to report that nearly three fifths (57%) of participants would recommend a securities-based loan to a friend for business or personal use, and overall 87% were familiar with the financing option. Nearly one-fifth (19%) of the executives we spoke to have actually pursued a securities-based loan.

The graph to the right shows which options were pursued. Over a half of those surveyed (53%) executed a loan or other financing option in the past three years. The top loan uses were a personal loan from a bank (23%), a second mortgage (17%), and a refinance with cash out (16%).

Looking at future lending, in the next twelve months, 29% of the respondents said that they plan to obtain a personal loan from a bank, 21% plan to refinance with cash out, and 17% plan to obtain a credit card loan as methods of financing, all increases in these categories.

Compared to the more traditional lending vehicles, a securities-based stock loan provides the borrower with lower interest rates and a higher loan-to-value (LTV) ratio. For individuals and institutions seeking a loan for a business or personal loan, this type of loan can provide greater flexibility and downside protection from the current volatile market.

To view the full survey results, please click here.

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Helping a CEO Grow a Business

At Equities First Holdings, one of the most rewarding parts of our business is the ability to help people grow their business. Often, borrowers come to us because they have just sold their company, taken it public or want to want to start a new venture altogether, however, they find that their liquidity is tied up in their stock portfolios.

Since getting a traditional bank loan is not as simple as it once was, more and more borrowers now look to stock-based loans as a way to fund their business growth. As The Wall Street Journal recently reported, four times as many borrowers took out loans backed by their stock portfolios in 2013 compared to 2012.

Earlier this year, a CEO of a leading British independent oil and gas exploration and production company approached EFH. He wanted liquidity to fund the purchase of additional shares of his company. He successfully entered into a loan facility with Equities First Holdings and transferred about 7.5 million shares as security for a three-year loan.

Conducting a stock-based loan with EFH allowed the CEO to strengthen his company's position in the marketplace both financially and operationally.

A key advantage that the CEO had in choosing Equities First Holdings as a stock-based lender is the firm's ability to operate internationally. With representatives across Europe, Asia and Australia, we offer our borrowers expertise in their home countries. We conduct 70% of our business outside the U.S., and accept stock listed on dozens of exchanges worldwide as collateral.

Using OTC Bulletin Board Stocks as Collateral

 

In 2013, more than 90 billion shares traded on the Over-the-Counter Bulletin Board (OTCBB),, representing nearly $34 billion in transaction value. More than 3,000 securities are available there, including many low-priced equities.

These numbers demonstrate significant investor interest in these shares. However, investors in this market must also consider that OTCBB stocks often cannot be used for a margin loan.

A stock loan from EFH offers an alternative for investors and executives holding a large position in OTCBB issues, who are looking for liquidity yet see the longer-term potential in a company trading there. Unlike margin eligibility, OTCBB stock held by EFH as collateral requires only a minimum daily trading value of $50,000. 

As the lender, EFH will run an analysis to confirm eligibility and calculate a loan-to-value ratio for the shares pledged as collateral – which can be as high as 50-60 percent. Borrowers can choose to use loan proceeds for personal or business use, and won’t have to worry about a margin call should the value of their security fall. At the end of the loan term, which is generally three years, the borrower can reclaim the collateral in the form of an equivalent number of shares as the original loan or initiate a new loan.

If the stock being held as collateral declines in value during the term of the loan, the borrower may decide to keep the borrowed funds, and “walk away” since stock based loan. 

So for investors who have a portion of their overall portfolios invested in low-priced OTCBB equities, considering a stock-based loan to create liquidity may be an effective alternative.

Is a Stock-Based Loan Right for You?

There are several times in an entrepreneur’s life when he or she must make critical decisions about the future of his or her investments. Taking a company public, selling a company or making the decision to switch fields are just some of the milestones that an entrepreneur faces. 

After taking a company public, a current or former company executive who holds many shares of their company’s stock often needs access to liquidity for a variety of reasons. They may wish to diversify their holdings or fund a new venture. However, selling their shares is sometimes not the ideal option as it can signal a lack of confidence in the company and create an impact on the stock’s value.

If much of your wealth is tied up in company stock, you may want to consider the option of a stock-based loan as a way to gain access to liquidity. Unlike a margin loan, a stock-based loan is non-purpose, and can be used at the discretion of the borrower on anything from reinvestment to diversification to paying off debt.

Let’s take a look at how some Equities First customers used stock-based loans as an alternative lending solution.

    • Dan – Dan is a Midwestern entrepreneurial investor who took his company public in the early 2000s. He needed access to liquidity in a tight time frame to finance a new oil and gas venture. He turned to a stock-based loan with EFH because he wanted to be absolutely sure that he had the opportunity to get his stock back at the end of the loan cycle.  To read more about Dan’s experience doing a stock-based loan with EFH click here.  

    • Greg – Greg is a West Coast-based Internet entrepreneur who successfully took his Internet company public. After going public, he decided to pursue the interest that he always had in real estate investments. In order to fund his new venture, he turned to a stock-based loan with EFH, and now owns over 100 pieces of property in Arizona. To read more about Greg click here.

    • Bob – Bob is a financial adviser to non-profit organizations. When his New Orleans-based client of thirty years was hit by the destruction of Hurricane Katrina, he needed to advise them on how to gain liquidity fast to rebuild their infrastructure. After being turned down by several banks for loans, Bob met with EFH and came up with a stock-based loan plan that helped the organization get back on their feet. To read more about Bob click here


Why Should a Financial Advisor Recommend Stock-Based Loans?

Mitigating a client’s risk and presenting balanced opportunities for growth are priority goals for any financial advisor. To earn their keep, financial advisors need to stay on top of regulations, tax codes and emerging vehicles that may be a good fit for client portfolios. One such option that warrants attention are stock-based loans.

For current or former company executives who hold shares and are seeking liquidity, stock-based loans present a flexible and sound option, especially when selling shares is not preferred or can signal a lack of confidence in the company’s future. As opposed to margin loans, stock-based loans provide several options that should appeal to any financial advisor:

Flexibility – A stock-based loan is non-purpose, and the proceeds can be used entirely at the borrower’s discretion.

Cost – Compared to margin-based loans, interest rates on stock-based loans carry much lower fixed rates.

Low Risk – Another key advantage of stock-based loans is their ability to protect the borrower from marketplace fluctuations. Since the borrower has the option to walk away from the loan itself at any time while retaining the initial loan proceeds, a stock-based loan acts as a hedge against stock devaluation.

Equities First Holdings has been helping financial advisors understand the benefits of stock-based loans since 2002, providing their clients with valuable options to limit risk and facilitate growth in even the most difficult economic conditions. 

Unlocking Liquidity with a Stock-Based Loan

People ask me every day why stock-based loans offer a better solution to traditional bank, margin and other personal loans. Well, here are a few examples straight from our past clients of how stock-based loans offer the borrower greater flexibility when they need capital quickly:

• A recent borrower realized that a stock-based loan would be ideal due to its unrestrictive, non-recourse nature and low fixed-interest rate (significantly lower than bank loans) over the course of the loan.

• Another borrower said that while he needed capital for other investments, he wanted to be absolutely sure he could get his stock back at the end of the loan cycle. In fact, many of our clients use stocks in companies that they played a major role in starting and taking public. Most of them believe in the growth prospects of their company's stock and want to stay invested for the long-haul. In this case, the investor took out the loan and made another investment in a successful venture.

• Another client said that a stock-based loan through EFH it is a great financial tool. It has allowed him the necessary funding to take advantage of new investments for growth.

• In one situation, a non-profit organization used stock in the organization's retirement fund as collateral for a loan. In that case, the funds were not needed for a number of years, which made them an ideal source of collateral over a relatively short three-year loan period.

• Several borrowers reported that a stock-based loan provides options that provide access to capital while potentially protecting the long-term value of investments.

• A borrower who is a corporate officer of a publicly-traded company said much of his capital is tied up in the company's equity, and a stock loan helped him avoid the sale of a large portion of his company's stock, which would signal a lack of confidence in the company and create questions in the market.

Emerging Markets and Stock Loans

From Asia to Africa, emerging markets are a hot topic. Emerging market countries are hubs for entrepreneurship, innovation and growth, with communities of bright individuals with ideas that they are eager to bring to market. According to Thomson Reuters data, in 2014, companies in emerging markets will continue to tap equity investors for capital, and will continue to take their companies public.

For example, in 2013, 30 Indonesian companies underwent IPOs, and in the same year, Turkish companies raised $27 billion through IPOs. After going public, some company officers may find themselves in a position where much of their wealth is tied up in company stock, and they need liquidity in a short time frame to fund other ventures. They may wish to pay off mortgages or other debt, or diversify their stock portfolios, reinvest in the company or even start a new venture in a completely different field.

At Equities First Holdings, one thing we found that unifies these company officers is that they believe in the future of their companies, and do not want to sell their shares. They search for an alternative that allows them to hold on to their shares, yet still gain access to a fast and efficient source of capital.

EFH's stock-based lending solution provides clients across the globe with a non-recourse loan with flexibility, low interest rates and a high loan-to-value (LTV) ratio, compared to other common options for alternative capital such as margin loans. Equities First makes the process of obtaining a stock-based loan fast and simple for international clients, as our experts have extensive knowledge of regulations abroad, which often vary from country to country.

While waiting for a traditional bank loan requires multiple credit committees and takes time in the underwriting a process, a stock-based loan is relatively quick and provides a simple solution for corporate officers hoping to gain liquidity from their stock shares. From term sheet to the release of funds, the EFH process usually takes about a week.

Since the founding of the firm in 2002, Equities First Holdings has more than tripled its international loan transactions using non-U.S. stocks as collateral, and now operates in several emerging market countries: Indonesia, Turkey, Philippines and Thailand, and our representatives are constantly meeting with executives and HNW borrowers from Southeast Asia to Eastern Europe to Oceania to familiarize them about our stock-based lending solution.

Stocks are Increasingly Used to Back Loans

In these volatile economic times, getting a traditional loan from a bank is still a challenge. With more regulation and stricter underwriting standards, securing a loan quickly can be daunting. As a result, The Wall Street Journal recently reported that a certain type of loan – the non-purpose stock-based loan – has been growing significantly in popularity amongst borrowers. In a stock -based loan, borrowers use stock in their portfolios as collateral to borrow large amounts, typically $250,000 and upwards. The non-purpose nature of stock-based loans gives the borrower the freedom to choose what they use the funds for.

Common uses for a stock-based loan include:

• Reinvestment in a business

• Diversification

• Paying off debt

• Mortgages

• Luxury goods

A stock-based loan can be highly useful to current or former officers of companies whose wealth is tied up in shares of their company. Many officers find themselves in a position where they want to unlock the value of their stock portfolio in order to gain liquidity for a variety of reasons, but they do not want to sell their shares, as they are confident in the growth of the company and the appreciation of the stock's value. Conducting a stock-based loan with a qualified lender like Equities First Holdings allows the borrower access to liquidity with attractive terms, and the loan process from term sheet to release of funds usually takes only about a week.

Both Morgan Stanley and Raymond James reported that in 2013, stock-based lending grew at a faster pace than other alternatives to traditional bank loans, including margin loans. According to Morgan Stanley's research, non-purpose loans have been rising at a roughly a double-digit rate for the past five years, while margin loan usage has decreased. Although margin loans allow individuals to borrow against the value of their stock in their brokerage accounts, they are not as flexible as stock-based loans, require a lengthy approval process, and the lender is free to sell remaining stock in the borrower's portfolio at any time to maintain a specific loan-to-value ratio.

An additional benefit of stock-based loans is their low interest rates. At Equities First Holdings, for instance, the current average interest rate on a stock-based loan is about 3% - 4%. By contrast, the national average rate for a home-equity line of credit is over 5%, according to HSH.com, the largest publisher of national mortgage and consumer loan information.

At a time when borrowing options are limited, a stock-based loan with EFH can give borrowers an innovative solution to their financial needs.

"In a tight credit market, stock-based loans allow borrowers access to liquidity to advance their business growth," said Al Christy, CEO of Equities First Holdings.

The Power of Stock-Based Lending

By Jeff Smith

Stock-based loans and margin loans are both facilities that allow individuals and companies to use stock as collateral. However, the two loan options vary significantly in both terms and flexibility. Let's see how they compare: 

Margin Loans

• Typically provided by a brokerage firm

• Borrower must be pre-qualified

• Must be used for a specific purpose

• Carry higher interest rates than stock loans

• Generally allow loans of no more than 50% of the stock's value

• Borrower is at risk of a mandatory margin call

Stock-Based Loans

• High loan-to-value ratio

• Lower fixed-interest rates than margin loans

• Proceeds can be used at the borrower's discretion (stock-based loans are non-purpose)

• Allow the individual to borrow up to 75% of the value of their equity

During a typical three-year loan term, market fluctuation is inevitable, but stock-based loans provide a hedge, as the borrower is lowering his or her investment risk in a downside market. The borrower has the option to walk away from the EFH loan at any point in the loan cycle—even if the stock's value depreciates, the borrower is able to keep the initial loan proceeds with no further obligation.

Another major advantage of an EFH stock-based loan is the ability to use the loan for any purpose. While margin loans are highly regulated by banks, a stock-based loan can be used by the borrower for any need, from paying off mortgages and debt to business growth and reinvestment.

When compared side-by-side, stock-based loans and margin loans offer similar outcomes. But only stock-based loans can provide the borrower with a significant degree of flexibility and power.

How to Use a Stock-Based Loan

 

Margin loans are constricting. They are highly regulated by banks and brokerage firms. To qualify, a borrower faces an arduous approval process, and there may even be a separate approval process for each loan. After the loan is complete, your lender may be free to sell remaining stock in your portfolio to maintain a specific loan-to-value ratio.

But stock-based loans are different.

A stock-based loan from EFH can be used without restriction for any purpose, from mortgages, business ventures and corporate investment, to personal travel. These non-recourse loans give the borrower freedom to use the funds in ways that address their personal needs. Stock-based loans also generally carry lower fixed-interest rates than bank or margin loans, as well as a higher loan-to-value ratio.

Eligible shares for EFH stock-based loans include equities traded on the NYSE, NASDAQ, Over-the-Counter Bulletin Board (OTC:BB), London, AIM, Hong Kong, Singapore, Australia, Canadian Exchanges, as well as the major European exchanges. To maintain eligibility, issues must trade a minimum of $50,000 daily.

Some common uses for a stock-based loan include:

• Retiring high-interest rate debt

• Bridging loans

• Refinancing margin accounts

• Financing projects

While these are the most common uses, stock-based loans are flexible enough to be applied toward a staffing budget, funding for a start-up business or simply a general need for capital in any industry.

There are almost no limits to how you can use a stock-based loan. An EFH stock-based loan can be executed in less than a week, putting cash in your hands when you need it most.

Global Demand for Stock-based Loans Fuels EFH Growth

By Jeff Smith

 

2013 was another very successful year for Equities First Holdings (EFH), as EFH's business grew by 45% compared to 2012 results continued our strategic expansion internationally. We want to thank our clients for their business and recommending us.

We continue to perform as fast growing financial services company, with a 30% average annual growth rate since our establishment in 2002. Serving our clients and providing them with a better and valuable lending solution is our main focus. This is the primary driver of our growth and what clearly separates us from competitors.

The demand for stock-based loans is growing across all borders and oceans. And with that understanding we accelerated our international growth through a partnership with Meridian Equity Partners, an investment and advisory firm in London and Sydney. Accepting stock listed on dozens of stock exchanges worldwide as collateral has allowed us to bring our innovative lending solution to millions of individuals, businesses, and executives of closely-held public companies. As a result of our rapid international expansion, 70% of loans were closed with parties outside of the US last year.

We doubled the size of our headquarters and client service center, and increased our total global workforce by 50% to manage this growth. Our professionals have extensive experience in customer care, operations and investment management. Our commitment is to ensure the client is highly satisfied through the lifecycle of the loan. Use for these loans vary, but many of our clients use their stock-based loan to invest in their own company.

Bottom line: EFH stock-based loans offer a fast and efficient approach to unlocking the value of a borrower's stock. We deliver much-needed capital quickly with high loan-to-value ratios and low fixed interest rates. 

Taken together, we see an exciting 2014 before us.

Pick Your Partners Wisely

By Jeff Smith

Whether you're starting a business or working with a lender to take out a loan, it's critical to choose a partner who's proven and reliable.

That's why we work with Ice Miller — our legal partner, and a 100-year-old nationally recognized law firm based in Indianapolis.

Ice Miller adds value to the Equities First Holdings brand and establishes a high level of trust. The firm brings expertise with its heritage. Before initiating a business relationship, it's important to select a partner who specializes in your sector and who can offer unique insights to your clients. This can mean a personalized approach to service, or simply keen insights amassed from years of experience.

Ice Miller works directly with high-net-worth individuals, publicly traded companies, commercial real estate firms and private equity firms. They're experts in the financial services arena and an ideal resource for our clients. Having a partner like Ice Miller helps EFH expedite the loan process, solidify its stability and lets us harmonize our thinking with our clients.

Define the characteristics and capabilities you need in a business partner. Make sure you choose a firm with specialized industry knowledge, as well as one that aligns with your mission and core values.

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The True Cost of a Traditional Bank Loan vs. a Stock-based Loan

By Jeff Smith

Investors can pay significantly more for traditional loans when compared to a stock-based loan. A personal loan from a bank typically carries an annual percentage rate up to 8.99%. Approval could require several credit committees and much more stringent underwriting criteria. A stock based loan requires very little in the way of underwriting since the pledged shares serve as the collateral for the loan. The typical time from term sheet to closing is less than two weeks where a typical bank loan can often take months. Where time is money when you compare the terms and timing of a stock-based loan to a traditional bank loan the savings can be substantial.

Stock-based Loans Step-by-Step

By Jeff Smith

The EFH process helps investors secure a non-purpose loan in only a few steps.

Within twenty-four hours of contacting EFH, a guaranteed term sheet is produced and delivered. Next, EFH calculates the specific loan value of the collateral stock from the three-day average of the equity's price. And in just five to seven business days, the borrower receives funding for their non-purpose stock loan.

Investors make quarterly fixed interest-only payments, which range between 2.5 and 4.5 percent. These low rates, combined with the highest LTV ratios in the industry, make EFH a premier choice for individuals and companies looking for more capital.

This is a step-by-step breakdown of the EFH process:

Step 1
Contact EFH with complete details about the proposed collateral and the proposal amount of non-purpose funding needed.

Step 2
Provide proof of ownership of your securities, bonds or options.

Step 3
Once the viability of the loan is determines, we'll calculate a loan-to-value (LTV) ratio and fixed interest rate based on an in-depth risk assessment.

Step 4
The borrower agrees to terms, signs all contracts and arranges for the assets to be transferred to EFH.

Step 5
Once the loan is repaid at the end of the term, EFH returns the identical amount of collateral to the borrower.

 

Using ETFs to Finance

By Jeff Smith

Investors seeking liquidity can find an effective cost of borrowing using ETFs as collateral. Similar to a traditional EFH securities-based loan, financing using ETFs offers attractive terms, such as a 75% loan to value (LTV) on a three-year term for qualifying ETFs. [View the full infographic]

Here's how it works: let's say John needs liquidity, but doesn't want to liquidate his ETF shares. He decides to use $1m worth of SPDR Gold Shares (GLD) as collateral. The shares are transferred to EFH for a typical three-year term. In return, EFH provides John with a 75% LTV, or $750,000.

For EFH, there's no restriction on how John uses the loan proceeds. He can use the funds to expand his business, pay off another loan, or even invest back into the market, keeping the loan shares as a market hedge.

If the ETF has dividends, many EFH contracts are written so that the interest rate cost for the loan matches the dividend, regardless of how that may vary. If the ETF doesn't have a dividend, the interest rate is typically 3%.

At the end of the three-year term, an identical number of ETF shares are returned to the borrower. If the ETF appreciated over the term, the appreciation is transferred back to the borrower. Returning to the $1m example: if the ETF shares increase by 10%, EFH will transfer the GLD shares, now worth $1,100,000, back to the borrower.

If the ETF depreciates, the borrower has the option of walking away and keeping the loan proceeds, or taking the shares back at the lower value. Using an ETF as collateral offers protection in case of such situations.

For example, say John decided not to liquidate his $1m worth of ETF shares or use it as collateral. If the ETF declined by 30%, the value of his shares would be $700,000 and he would have lost $300,000.

If John used his $1m worth of ETF shares as collateral, he would have received $750,000 in loan proceeds which acts as a hedge against any further decline. The EFH loan is non-recourse which allows EFH to only look to the pledged shares to satisfy the loan obligation.

Using an ETF as collateral is an effective tool for those seeking liquidity. It has the upside advantage if the ETF shares appreciate, as well as a degree of downside protection if the ETF shares depreciate.

Financing Options for Individuals and Business Owners

By Jeff Smith

 

According to a report put out by the National Federation of Independent Business in August, uncertainty over economic conditions remains one of the most severe problems for small-business owners. Regardless of the election outcome, uncertainty over business improvement and lending opportunities will remain. With traditional capital scarce, both business owners and individuals need to find alternative methods to gaining access to liquidity.

If you have a Securities portfolio valued at $200,000 or more, a securities-based loan might be an appropriate option for you. A securities-based loan uses equities as loan collateral for a typical period of three years. For example, an individual has stock in Company X and believes the stock will appreciate in the coming years. Rather than liquidate his position in Company X, the shareholder transfers the shares to the lender and receives the loan proceeds.

One of the most important features of a securities-based loan is the security that it brings. If Company X's stock appreciates during the loan term, the individual retains 100% of the market value at maturity. If the stock significantly declines, the individual can walk away from the loan and keep the original loan proceeds, with no further obligation.

This July, the EFH Executive Lending Survey was undertaken to gain insights into the lending patterns and vehicles used by current and former officers of U.S. public companies. Of the 400 executives surveyed, more than half (57%) would recommend a securities-based loan to a close friend. As seen in the graph on the right, 13% would recommend a securities-based loan for professional use only, 15% would recommend for personal use only, and 29% would recommend for both.

As discussed here, a securities-based loan offers greater flexibility and more attractive terms than many traditional vehicles, including lower interest rates. Whether to expand a business, invest in company inventory, or use the liquidity for personal reasons, the option of how you use the loan is yours.

A securities-based loan is also non-purpose, allowing the borrower to invest in what he or she might need, whether it is expanding a business or fixing the roof. Since the loan is also non-recourse, if the value of the security has a steep decline, the borrower has the option of terminating the loan, or keeping the loan proceeds with no further obligation. If the security appreciates, the borrower retains 100% of the upside market value after paying back the original loan.

In today's market, a securities-based loan provides flexibility and favorable terms. To learn more about how EFH holds and returns securities to borrowers, please click here.

Considering a Traditional Loan? Consider this Option.

By Al Christy

For individuals and businesses seeking working capital, a securities-based loan can provide greater flexibility and more attractive terms than many traditional vehicles.

As illustrated below, a securities-based loan offers a low, annual fixed interest rate—as low as 3%—typically over a three-year term. For a $500,000 loan, the borrower would pay $15,000 per year.

To compare, a borrower looking to obtain a $500,000 personal loan from a bank, if they qualify, would pay nearly a 9% interest rate (8.99%), which is 45,000 .

Our model allows EFH to execute a securities-based loan at attractive terms. With a traditional loan, a bank lends to an individual based on the individual's credit worthiness and income potential. Furthermore, traditional lenders may limit ways the funds can be used, such as buying a house or other substantial purchases.

With an EFH loan, an individual proposes collateral to be held by EFH for a set period, typically three years. The collateral can be equities, bonds, or options. EFH determines the viability of the loan and calculates the loan-to-value (LTV) ratio and the loan's fixed interest rate. Once the terms are agreed upon, the individual transfers the specific collateral to EFH. In turn, the individual receives the funding, typically within three days, which has no usage restrictions.

If the value of the collateral has a steep decline, the borrower has the option of terminating the loan, and keeping the loan proceeds without further obligation. If the stock appreciates, the borrower retains 100% of the upside market value. At the end of the loan, the borrower repays the loan; and EFH returns the same amount of identical collateral originally used. There are no fees and no closing costs.

You can learn more about the benefits of a securities-based loan by clicking here.

Benefits of a Stock-Based Loan

By Jeff Smith

Demand for securities-based, or stock loans is growing rapidly among institutions and individual borrowers. As of September 2012, EFH has seen the number of loan transactions increase by 17% compared to 2011, showing the vehicle to be a viable alternative to traditional lending sources.

In this global lending slowdown, a stock loan is able to provide attractive terms in all markets. For a small business owner here in Indiana to an international shareholder in Singapore, the EFH model provides the advantage of a low interest-rate, a high loan-to-value (LTV) ratio, and downside protection from the market.

In the EFH Executive Lending Survey, 400 current and former officers of U.S. public companies were asked to identify the most important feature of a securities-based loan. As noted in the graph to the right, nearly half selected the low fixed interest rates (typically 4% or less), and 34% selected the ability to receive up to 80% of one's securities' value in a loan.

To view the complete results of the survey, please click here.

A securities-based stock loan is also non-purpose, allowing the borrower to invest in what he or she might need, whether it is expanding a business or fixing the roof. Since the loan is also non-recourse, if the value of the security has a steep decline, the borrower has the option of terminating the loan, or keeping the loan proceeds with no further obligation. If the security appreciates, the borrower retains 100% of the upside market value after paying back the original loan.

In today's market, a securities-based loan provides flexibility and favorable terms. To learn more about how EFH holds and returns securities to borrowers, please click here.

EFH Executive Lending Survey: Summary Results

 

By Al Christy

This July, Equities First Holdings conducted the first EFH Executive Lending Survey. In it, we asked 400 current and former officers of U.S. public companies about their borrowing activities, their thoughts on the lending environment, and which vehicles they used and recommended.

I'm very encouraged to report that nearly three fifths (57%) of participants would recommend a securities-based loan to a friend for business or personal use, and overall 87% were familiar with the financing option. Nearly one-fifth (19%) of the executives we spoke to have actually pursued a securities-based loan.

The graph to the right shows which options were pursued. Over a half of those surveyed (53%) executed a loan or other financing option in the past three years. The top loan uses were a personal loan from a bank (23%), a second mortgage (17%), and a refinance with cash out (16%).

Looking at future lending, in the next twelve months, 29% of the respondents said that they plan to obtain a personal loan from a bank, 21% plan to refinance with cash out, and 17% plan to obtain a credit card loan as methods of financing, all increases in these categories.

Compared to the more traditional lending vehicles, a securities-based stock loan provides the borrower with lower interest rates and a higher loan-to-value (LTV) ratio. For individuals and institutions seeking a loan for a business or personal loan, this type of loan can provide greater flexibility and downside protection from the current volatile market.

To view the full survey results, please click here.

How Equities First Got Its Start

 

Al Christy 

In the mid 1990's, I had founded a mortgage banking firm that specialized in commercial, residential, and small business loans. In my experience, I found that there was a gap in the ways borrowers were able to obtain loans. The most common option was available through traditional commercial banks. However, approvals became much more difficult if there was a decline in the economy. The alternate option was a margin loan provided by a brokerage firm. A margin loan though wasn't always available to interested borrowers and had significant disadvantages, such as a margin call, if the stock lost value. There was a need in the market for individuals and businesses to be able to successfully leverage the equity in their portfolio and attain liquidity, whether for expanding a business, leveraging an investment or even personal use.

I founded Equities First Holdings in 2002 to provide a solution to this need. One of my first transactions was a loan to a family-owned apple orchard—at the time, the tenth largest producer in the country. It was on the verge of filing for bankruptcy. The family needed $3.5 million for their 24 growers and to keep the farm out of the courts. They had exhausted their commercial loans and had no alternatives for financing. Fortunately, they had stock holdings. Through Equities First, the family was able to receive the needed amount in 5-7 business days and save the farm. The orchard is still in business today.

While every story isn't as dramatic as the apple farm, we have made a meaningful impact on many clients' lives.

Throughout Equities First's ten-year history, we have worked with global financial services firms, leading asset management companies, investment banking houses, private equity firms, commercial real estate firms, small business owners, and ultra-high net worth individuals. Our unique loan process has evolved to provide the borrower an efficient and transparent opportunity to leverage their equity by offering lower and fixed interest rates, higher loan-to-value ratios, and greater flexibility than margin or traditional loans.

Types of instruments Equities First can collateralize

 

By Al Christy

Many times when I first meet a potential borrower they are unaware of how far they can leverage their securities. A securities loan allows the borrower to have greater flexibility to lend against either small cap stocks or even equities of any market cap that trade for less than $5.00, provided the shares have an average daily trading volume of at least $50,000 in trading value. On a selective basis, Equities First will also consider fixed income instruments as collateral. In contrast, an eligible security for a margin account needs to be marginable and trade at $10.00 per share or higher.

With a securities loan, virtually all types of securities can be used. U.S.-listed stocks, as well as shares traded over the counter, and those traded on most international exchange listed stocks are eligible. Equities First clients are based in the United States, and in many international markets, including Hong Kong, Singapore, Australia, Dubai and the United Kingdom.

Typically, the borrower comes to Equities First through a financial intermediary, such as their broker, attorney or tax advisor. Every transaction we complete is customized and private. As an example, Equities First was able to execute a series of loans that included up to 12 laddered loans of a particular security with one individual borrower. Furthermore, the borrower receives any future appreciation of the asset when the loan matures.

Equities First is able to provide rapid liquidity on many types of securities traded globally.

Our Comments on FINRA’s Prudent Warning

 

Al Christy 

In May 2011, The Financial Industry Regulatory Authority (FINRA) issued an investor alert on stock-based loan programs, noting that they can have potential risk concerns. We at Equities First agree with FINRA on the importance of our clients being aware of the details of our stock lending process and the potential consequences. Unlike some of our competitors, Equities First is dedicated to providing an in-depth loan agreement, and reviewing it with borrowers so that they are aware of what can happen during the process.

Below are some questions FINRA recommended investors ask, as well as our answers.

1. What happens to my stock once I pledge it as collateral?

Once an investor pledges his or her collateral, the assets are transferred to one of Equities First's global custodial accounts. For the loan term period, Equities First owns the collateral and has the authority to trade the stock, which in turn enables Equities First to offer lower-than-market interest rates and higher LTV ratios to its clients. At the end of the term, Equities First returns the equivalent number of shares to the investor.

During the loan term, Equities First provides statements every quarter that summarize the interest charge and any dividends to which the shares are entitled. The investor has the additional option to request the current valuation of his or her pledged agreement at any time during the loan term. For more information regarding how Equities First holds and returns stock that has been loaned, please see Jeff Smith's blog here, Managing Director at Equities First. (include hyperlink to "How Equities First holds and returns stock to borrowers" blog. )

Many of our clients choose a stock-based loan over other financing options due to the tax advantages. However, each loan situation is unique, and we recommend that all our clients speak with their tax advisors regarding any tax consequences.

2. What benefit does the promoter receive for recommending the program?

Most clients come to Equities First through a financial intermediary, either a financial advisor, attorney, or broker. If a broker refers Equities First to a prospective client, they are eligible for financial compensation. In our ten-year history, we have not mass advertised and instead relied on such brokers to promote our program. As you will see in the "Results" page of our website, available here, many of our clients have become repeat users.

Equities First is referred both by brokers and individuals who have completed transactions with us.

3. Does the lender have audited financials?

FINRA recommended potential investors to ask this question in order to assess the potential strength of the lender, and determine if it was capable of returning the pledged collateral back to the investor. As with any private company, audited financial statements are unavailable to the public, primarily for competitive reasons. However, here are some facts I can share with you:

1) In Equities First's ten-year history, we have always funded on time and returned the pledged collateral to the investor.

2) Equities First has completed over 600 successful loans in both the United States and international markets.

3) The completed transactions had loan amounts that ranged from $100,000 to $10,000,000.

How Equities First Holds and Returns Stock to Borrowers

 

Jeff Smith 

When a borrower sends Equities First the background information on a security he or she would like to use as collateral, we typically execute a quick turnaround and funding. Virtually all types of securities can be used as collateral, and there is no minimum per share price requirement for the stock.

Within 24 business hours of sending the information, Equities First determines the capability of executing the loan and calculates a proposed loan-to-value (LTV) ratio and fixed interest rate. Equities First can offer the borrower up to 80% of the value of their stock, and a low fixed interest rate, usually between 3% and 4.5%. By comparison, a typical margin loan offers only up to 50% of the stock's value and higher interest rates, usually 5% - 8%.

After reviewing and signing the stock loan and pledge agreements, the borrower sends his or her securities to one of Equities First's global custodial accounts. Once one of these large banks receive the stock, the borrower is funded within five to seven business days. The use of funds is completely at the discretion of the borrower.

During the loan term, Equities First has a buy/sell relationship with the securities using unique algorithms that trade the securities during the life of the loan. Equities First also has an evolving position where our firm will buy on lows, and we are always ready to return the asset at maturity.

Equities First provides statements every quarter that summarize the interest charge and any dividends to which the shares are entitled. The borrower has the additional option to request the current valuation of his or her pledged agreement at any time during the loan term. During this time period, the borrower makes quarterly fixed interest-only payments.

The stock-based loan is 100% non-recourse. In comparison, a margin loan is full recourse. For example, if the security decreases in value to a certain extent in a margin account, the borrower has to deposit additional money or securities. Since a margin loan is full recourse, the borrower may face fees and penalties if he or she does not deposit the additional funds. With a stock-based loan, the borrower may walk away from the loan with no penalties and no negative credit reporting. If the borrower wishes to ensure the return of the shares, Equities First works with the borrower to tender additional shares or cash.

At the end of the loan term, the borrower repays the loan in full and Equities First returns the same amount of identical collateral. In addition, all stock appreciation over the term is returned to the borrower. The entire process typically takes three years.

Bottom line: Equities First provides better rates, greater flexibility, and a faster transaction when the borrower needs it.

International Stock Lending


Jeff Smith 

Given today's global market, international exchanges are more accessible to investors than ever before. Since 2010, Equities First has tripled its international loan transactions using non-U.S. securities as collateral. In fact, over 60% of our transactions are made with shares that trade outside of the United States, on exchanges in Hong Kong, Singapore, Australia, the United Kingdom, Canada and Mexico. Most shares traded on non-U.S. stock exchanges are eligible for securities-based loans. With Equities First, international clients are given accessibility to worldwide markets.


Since over 60% of our business is non-U.S., we have deep knowledge of international securities regulations and expertise working globally. Our investment banking partners include some of the top global financial institutions. Working with them enables us to have greater worldwide reach to better serve our international clients.

Our clients come to us from around the globe because of the many advantages they see in obtaining a securities-based loan from EFH. A securities-based loan uses one's stock as collateral for a secured loan. The collateral can be any type of security, whether stocks, bonds or mutual funds. Equities First offers a different type of securities-based loan: a non-purpose loan. A non-purpose loan is a more flexible alternative for individuals who do not want to sell their securities to obtain liquidity.

This type of loan allows greater freedom and the utmost flexibility. With this type of non-purpose loan is also non-recourse. Thus, the borrower is not held liable in the event of a default. The lender cannot seize non-pledged assets or properties, and the borrower has the option to walk away from the loan with no penalties. With a non-purpose loan, there is no limitation on the borrower's use of proceeds, whether it is for expanding a business, paying a mortgage, or personal use.

Our international clients receive the same advantages and quality service for their loans as our U.S. clients. With an EFH loan, borrowers can receive up to 80% loan to value and lower-than-market fixed interest rates. There is no price requirement and virtually all types of securities are accepted. Prior to the inception of a transaction, an individual or institution receives an extensive loan/pledge agreement, which clearly outlines the EFH process. Once an individual presents securities and accepts the terms offered, he can get funded within five to seven business days. A loan term is typically three years. At the end of the loan term, once the loan is repaid in full, EFH returns the identical amount of pledged collateral.

Stock Loans: You Decide How to Use the Proceeds


Al Christy 

As you know, it wasn’t too long ago that homes provided many with a deep and seemingly endless pool of loan collateral. Depressed real estate values combined with tight lending standards have taken this option off the table for many homeowners. However, those same consumers are discovering an alternative: securities-based loans.

Securities-based loans make use of stocks, bonds or exchange traded funds as collateral. The most common form of a stock loan is a margin loan, which typically allows you to borrow up to 50 percent of the value of stocks in your account, and a higher percentage for less volatile assets such as Treasury or municipal bonds.

We at Equities First Holdings offer another type of stock loan, called a non-purpose loan, which follows similar collateral rules but carries better rates and terms than a margin loan. While many people are familiar with margin as a way to finance stock purchases with borrowed funds, the loan proceeds from those arranged by Equities First Holdings can be used for virtually any purpose.

Loans provided by Equities First Holdings provide an excellent alternative for people who don’t want to liquidate securities to raise money they need by providing flexible access to the power of a portfolio. And the use of the proceeds is entirely up to the borrower. Stock loans can be used as a short-term financing bridge while a consumer waits for a house to sell, to fund nursing home expenses, or even for emergency situations such as repairing a roof. Proceeds can be used to fund the expansion of a business, for home construction or refinancing a commercial mortgage.

Two heart-wrenching stories, illustrate the broad uses for the proceeds from loans arranged through Equities First. The first involved a family who owned an apple farm. They had exhausted all of their commercial loans and were on the verge of filing for bankruptcy. They needed $3.5 million to keep the farm operating. The family did have a stock portfolio and we were able to arrange the loan they needed, and did so within five-to-seven days, saving the farm.

The other story concerns a husband and wife. She had cancer and their insurance company dropped them. They had access to a portfolio with stock that could not have been used as collateral under most circumstances; however, using that stock as collateral, we were able to get them the much-needed $250,000. This story also has a happy ending as the woman received treatment and her cancer went into remission.

The point: proceeds from securities loans arranged by Equities First offer borrowers’ wide latitude in how they are used. Global institutional investors look to EFH to provide securities-based lending services as a more flexible alternative with significant advantages over conventional margin loans. From individuals with short-term needs for a few hundred thousand dollars to large investment institutions looking for options for their clients to diversify multimillion dollar portfolios, an EFH securities-based loan opens new possibilities in alternative funding for:

  • Leveraged buyouts
  • Mergers and acquisitions
  • Retiring high-interest debt
  • Bridge loans
  • Refinancing margin accounts, and
  • Mortgages – new, refinance, or home equity loans.


Many investors think of margin accounts when they are looking to gain leverage from their investments. However, securities loans are a more attractive alternative because they can offer a higher loan-to-value (LTV) ratio, lower fixed-interest rates, and other significant advantages over conventional margin loans

Five Questions to Ask Any Stock-Based Lender

 

Jeff Smith 

When deciding to work with a stock-based lender, conducting a thorough due diligence on your lender is critical. Here are five key questions to ask any lender you are considering. Professionals at any experienced firm will be able to answer these questions with confidence.

  1. What is your performance like?

    You want to know what to expect from the transaction. Beginning with the term sheet, ask the lender about the process of funding the loan. The lender should give you a step-by-step scenario of how the transaction will unfold.

    How long does it typically take for the lender to provide funding? How often are you informed regarding the interest charge and any dividends that the shares are entitled? And last, what is the course of action taken to return collateral?
     

  2. What is your track record?

    A simple question, but one of the most important. A successful lender should have completed a significant number of successful stock loan transactions without a hitch.

    How many stock loans has the lender successfully completed? On what exchanges has the lender completed the transactions? In what countries are the clients based?
     

  3. What law firms do you work with?

    The lender's law firm is an integral partner in the transaction. The lender's law firm should possess experience and capabilities in dealing with stock-based lending.
     

  4. When the loan is finalized, what firm will hold the shares?

    Ideally, you are looking for a top-of-the-line investment bank that holds global custodial accounts, and has experience in handling securities loans.
     

  5. Can I have references?

    Though any lender might tell you what to expect from the process, a former client can tell you what actually happens. The reference should be able to reaffirm the reputation of the lender and the quality of work provided.

Insights
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