Lending against securities otherwise known as Securities Based Lending, (SBL), (or Securities-Backed Loan), is a simple transaction of borrowing cash or accessing capital offering eligible securities as collateral. These loans may be used for many purposes such as buying a house, car, real estate or anything tangible. They may not be used to purchase other shares or repay shares bought on margin.
Securities Based Lending is usually reserved for high-net-worth individuals and are offered by large financial institutions or private banks. The lender will value the securities, (referred to as a portfolio), and will offer a loan to value, (LTV), against the assets, which, depending on the nature of the securities can be anything from 0% up to 90%. Once the loan is approved, the securities are assigned to the lender for the duration of the loan. If the borrower defaults on the loan, the lender will sell the securities in the market to recoup their losses.
Advantages for the Borrower
The borrower can enjoy a lower interest rate using securities as collateral for a loan. Typically this type of loan is based on a premium over the 30 day or one-month London Interbank Offer Rate, (LIBOR). Furthermore, there is a lot less paperwork to sign, and loans can be made available within a few days.
Another advantage of to the borrower is avoiding a tax predicament. If the borrower had to sell their portfolio in order to raise funds, any profits would possible incur a tax liability, but with securities-based lending there is no need to sell, therefore avoiding any tax ramifications
Disadvantages to the Borrower
The borrower will always be at the mercy of the vagaries of the global markets. If there is a meltdown in share prices as we have witnessed in the past, the this could trigger a forced liquidation by the lender at an unfavourable price. Furthermore, the borrower could be asked for further assets or liquidity to act as collateral for the outstanding loan.
If the assets consist of mainly government bonds then there is little risk to the borrower, but individual shares may be falling due bad performance or a massive fall in all share prices. In this instance the borrower may well be asked to replace the shares with others that have a value consistent with the value of the loan, or again as above they will be sold at an unattractive price.
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