- 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 the traded 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 Pledge Agreement and Contract are forwarded to the borrower for signatures.
- The securities are then transferred to the lenders 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 is 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 below $640k the borrower could walk away from the obligation of repayment of the loan and keep the original loan proceeds ($800k) or contribute cash or securities to bring the value back up to $640k. The borrower would 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 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.
Sample Loan
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