Buy, sell or hold. Oddly enough, these recommendations hardly ever influence the viability of a stock loan… not a True Loan anyway. This is why so often TLP clients are baffled by which companies receive more favorable financing terms vs. the negative market perception of any particular company and/or its sector.
Most stock loans, especially the “non-recourse” or the so called “Rule 144 Restricted Stock Loan”, require the transfer of ownership. This process creates a host of problems for shareholders while tainting the legitimacy of the loan; ultimately, skewing the understanding of what bona fide non-recourse type stock loan terms should reflect. So there is no wonder why an agent, lender or borrower would immediately perceive the public company that has been downgraded, possibly submerged in heavy short interest, subject to an overall depressed sector, etc., to be a victim of unfavorable loan terms. Conversely, if stock prices seem to be at 52 week highs, reflect exceptional market caps, present greater than expected earnings, etc., financing terms would be expected to place through the roof. Unfortunately, while this “face value” determination method may indeed be the beacon for “free-delivery” transactions, it is in no way plausible for bona fide financings.
This discussion came about as the TLP (True Lending Platforms) was asked to determine loan terms for Alcatel-Lucent (ALU: NYSE). Of course, in classical appraisal style, Ajene Watson doesn’t simply assess the proposed securities to be pledged as collateral for a loan, but runs an extremely extensive and comprehensive comparative study on both the industry and target comparables. In the case of Alcatel-Lucent, companies such as Cisco Systems, Inc. (CISCO: Nasdaq-GS), Juniper Networks, Inc. (JNPR: Nasdaq-GS) and/or even perhaps Nortel Networks Corporation (NT: NYSE) may be plausible candidates for a comparative study. Dually, such comparable assessments inadvertently render possible financing terms for each relative company almost immediately. The result… rather interesting, as the outcome isn’t always what you might think.
Cisco Systems, Inc. and Juniper Networks, Inc. may both be on Michael Patterson’s (Bloomberg.com News) list of companies whose shares may have unusual price changes in the U.S. markets today, February 7, 2008. Nortel Networks Corporation may truly be the sole underperformer as technically compared to the other aforementioned companies in addition to several Market Indices. Still yet, none of these precepts solidify the fate of loan terms.
The devil, as it’s said, is within the details. You’d be amazed as too which securities are ultimately safest to lend against (as compared to one another) and will yield borrowers the most favorable terms within a bona fide financing. Perhaps the results will be displayed in the upcoming days.
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