Its commonplace that an novice investor will often times invest in those publicly traded corporations that are name brands whether or not they actually know what the issuing company does, its past or current performance and/or its future projections. Likewise, the novice stock loan borrower or even a borrower that is bullish on their holdings may seek terms and conditions that are not commensurate of their securities.
Many shareholders, particularly Affiliates or other 144 restricted stockholders, seek higher end greed appealing terms that can ultimately end detrimentally for both themselves and the issuing company. This is especially noted with those borrowers who hold house hold name brand stocks. It would seem that the non recourse loan or even the more mystically elusive non-recourse “restricted stock loan”, with 80% to 90% LTV (Loan to Values) and subprime rates, is the epitome of every borrowing shareholder’s secret fantasy. Never mind the business risk typically associated with the mechanics of these loans, or the precarious position affiliates or major shareholders may place public companies due to the usual dubious structure of the stock loan. Too further these evils by seeking, accepting or believing that one’s shares should reap grandiose terms based on name brand or even on high trading volume, is a misnomer and a key ingredient in a popular but undesired recipe. This may be the reason many private lending professionals and prospective borrowers find themselves in counsel with one individual whose interest seem to be rooted in the overall prosperity of the Private Lending Industry as a whole.
In a previous article, it was noted that the TLP (True Lending Platforms) was asked to evaluate Alcatel-Lucent (ALU: NYSE) and determine the possible loan terms for a shareholder seeking $1mm. Now, while there are many private stock lending firms, “above board” lending firms with good reputations that will lend against Alcatel-Lucent securities, in the majority of cases, the shares had to either be free trading or experience some sort of transfer of ownership; while with others [private lenders], aspects of the transaction were facilitated off shore. In the proposed case of the Alcatel-Lucent shareholder as with most any, the client would seek that their stock not be transferred to the lender in any form, the entire transaction from inception too term, remain domestic and that the stock pledged be restricted certificate shares with restrictive legends intact.
Evaluating prospective securities to be pledged as collateral, particularly restricted stock, for a non recourse type stock loan is no easy task… especially a bona fide stock loan. The TLP utilizes an extensive and comprehensive dual analytical approach to render loan terms, as prescribed by Ajene Watson. This is no overnight call. However, the great news is… this approach indirectly causes an additional benefit. Due to a real estate appraisal method Ajene incorporates, possible terms for other companies are derived from the target valuation.
In the case of determining loan terms for an affiliate holding the restricted shares of Alcatel-Lucent (ALU: NYSE) and seeking $1mm, the TLP also sited and concluded basic terms for Cisco Systems, Inc. (CISCO: Nasdaq-GS), Juniper Networks, Inc. (JNPR: Nasdaq-GS) and Nortel Networks Corporation (NT: NYSE). Each of the comparable stocks were assumed to be rule 144 restricted shares or other restricted securities, held by an affiliate in certificate form, seeking $1mm in a non recourse type restricted stock loan where the shares remained wholly within the shareholder’s possession in a fully domestic transaction. The results:
*NOTE* The above reflects the most basic terms and conditions derived by the TLP for both the Target and three general comparables (number of comparables can vary). Given possible circumstantial changes such as shareholder status, stock status, length of ownership, number of shares pledged, etc., terms will vary. Additionally, the intricacies of the TLP terms are absent the above depiction for the sake of easy comprehension.
In looking at the aforementioned, it is clear that the TLP believes there to be more risk lending against Alcatel-Lucent than with Cisco Systems, Inc. or Juniper Networks, Inc. There is however a similar perception of risk embedded in the loan terms of Nortel Networks Corporation as compared to Alcatel-Lucent. Yet, while the common risk assessment reflected within the basic loan terms of both Alcatel-Lucent and Nortel Networks Corporation may be understood, the curious question would be, why does Juniper Networks, Inc., a company which appears to consistently outperform the Markets, receive less favorable terms than Cisco Systems, Inc., which seemingly underperforms both the Markets and Juniper Networks, Inc., time and again? This is an answer that perhaps only Ajene Watson and the TLP can provide. None the less, it is these unpredictable fine nuances that seem to reinforce the credibility of the True Loan’s legitimacy. Not to mention, keeping the TLP investors and associates comfortable in facilitating loans against restricted securities where there is absolutely no benefit received from the pledged collateral.
It could be suggested the True Loan is a responsible stock loan; and lenders offering stock loans based on the TLP’s platform aren’t interested in winning popularity contest based on extravagantly sexy but covertly toxic terms but rather seek to win clients by offering transactions that are conscientious and protective of everyone’s interest. Likewise, responsible borrowers, especially affiliates, look toward lenders offering True Loan driven products primarily because the borrower cares about what happens to their stock, their company and the shareholders they’re ultimately responsible too.
This line of thinking may speak volumes as to why someone would embrace terms such as those presented above. Terms which for “name brand” companies are probably less attractive than those offered by many private lenders; barring the fact that most private lenders cannot provide a non recourse type of restricted stock loan against 144 restricted shares or other restricted stock pledged by the issuing corporation, affiliates and/or restricted non-affiliates within the same safe, legal and domestic format. And in case you’re wondering, banks and B/D’s can’t legally provide non-recourse type stock loans against restricted securities based on the stock’s own merit.
Perhaps, it’s not always what you think, but exactly what it’s meant to be. Maybe other valuations should be requested and the results posted just to be sure. This may provide a better understanding of what type of financing options are out there for restricted shareholders and which stock loan transaction is best for you.
Let us hear your thoughts below: