Is a securities-collateralized loan the right choice for you? Or would you be wiser to wait, or sell outright in the conventional manner through your brokerage or bank? No one can answer that question other than you as securities owner and prospective borrower. Your financial objectives, problems, and needs are yours and yours alone. Input from your qualified financial advisor, CPA, or attorney can help greatly, but in the end it is your decision to make.

However you ultimately decide – and whether you place your loan through our facilitation service or choose another path – we feel you owe it to yourself to ask a few basic questions and understand a few basic concepts before you sign on the dotted line. We hope you'll find this section useful in helping you make your ultimate decision wisely.

Should you have any comments or further questions after reading this, please feel free to drop us a line via our Contact Form and we will respond immediately.

 

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Question: Can you tell me about transparency and disclosure on securities loans like these? How much should I expect or require?

Like any contract, it is important that you review all of the information carefully before you commit to anything, and to be sure that you are completely comfortable with and fully understand the terms of that contract before you sign. You should understand and receive full disclosure covering the key elements of your loan, and these should be provided freely by the actual signatory lender (or a licensed advisor for that institution) in advance. The most important information you should know is is much like what you should know about any loan, beginning with the total cost of the including interest and any points. (Good securities loan programs do not charge fees in advance of the loan itself.)

Expect your lender to disclosure how the interest rate is determined, whether fixed or floating or any other method. Make sure the term (length) of your loan is likewise clearly stated. Make sure any fees are listed and properly stated and that you understand what net loan amount to expect and how that amount is determined. Do not proceed until you have the answers.

Every HedgeLender Term Sheet we deliver to you shows the total cost of your loan as quoted over the full term of your loan. The interest rate is clearly stated - (for our Premier program, currently floating LIBOR +4, though special structures may use different methods and you will be asked to consult your licensed advisor at your lending institution for precise details). You should study when your interest-only repayment begins, and know what your total payments come to annually and over the full term using the lender's rate calculation method. All should be listed clearly.

It's a good idea generally (and particularly so if you are not accustomed to lending contracts) to have your securities loan agreement reviewed by a knowledgeable trusted third party, for example your attorney or your CPA. If you do not understand any aspect of your securities loan contract, you should always ask and get the answers you need. Never enter into any contract unless you fully understand it and your questions have been answered in full. Remember - You have every right – and we would add, responsibility – to know precisely what each word in your loan contract means or implies before you close.

HedgeLender LLC addresses this when you first inquire, with a firm "open door" policy. You will be free encouraged to contact our staff at the outset discuss your Premier loan. After you've signed your no-obligation Term Sheet, you will have access to a licensed institutional account advisor at the lending institution who will work with you to go over all of your questions in detail as your loan contract is drawn up and your loan customized into its final form.

Like any industry, product, or service, the securities-backed lending field has it's share of poorly managed, weak asset reserves, poor management, and misleading or exaggerated claims. It is not unusual for a new stock loan client to be overwhelmed by a canned website or a smooth pitch, particularly when they are in need of cash, only to be severely disappointed later. Wise borrowers will always keep their feet on the ground and consider their written term sheets and. most importantly, their loan documents rather than to rely on spoken assurances alone.

HedgeLender LLC brings over ten years of experience to its clients, and specializes solely in institutional securities-backed financing. In January of 2009 HedgeLender LLC inaugurated a strict policy requiring additional corroboration and verification through everything we do. We do not support nor allow any "hard sell" tactics by anyone associated with our company, stressing that our job begins and ends with facilitating solid loan services and nothing more. We ask our clients and associates to notify us of anything that they believe is not compliant with this policy.

Question: "Do I need to transfer title and name of my shares prior to funding?"

If your lender is requiring you to transfer the title into the lender's name during the loan term, this is something you need to be sure meets with your expectations. It is a very important question overall because it addresses the core issue of whether allowing lender contractual control over your securities until the loan is repaid is acceptable to you.

In recent years the Internal Revenue Service has come to treat such loan programs, particularly those where some or all of the shares are sold as part of the funding, as taxable events at loan inception. Before you choose any transfer-of-title type loan, be sure to consult with a qualified tax professional to determine if this structure is acceptable to you. The proceeds of such programs are in any case not tax-free, and this should always be kept in mind.

With some lenders such transfer may indeed mean more risk. You would ask for a statement of assets or similar review by a licensed professional to ensure that the lending firm has the assets and financial wherewithal to properly manage and process your loan. You should also request a thorough background check to ensure that you are aware of any legal or regulatory issues they may have faced. Your final decision should incorporate all of these areas.

Please keep in mind that although there may be additional risk and such loan proceeds are certainly taxable, the mere fact that a transfer occurs doesn't automatically mean, in and of itself, that you are any more or less likely to receive your shares back upon repayment. A valid lender with a strong background, healthy financials, strong management, and full disclosure may well fit into your financing plans.

HedgeLender recommends caution and additional verification should you just to undertake a transfer-of-title type loan where the shares might be sold during the loan term. Do not sign your loan documents until you have had an expert third party review them, and ask as many questions as necessary to ensure that you fully understand the rights you are assigning to the lender and that the lender has a background that meets your standards. HedgeLender LLC today only offers its Premier institutional program, with no transfer of title where shares remain in the client's account at all times. Our Premier program allows online account access and monthly statements as well, and since management is via a fully regulated brokerage/banking institution, access to information on the institution, its licenses, its financial standing, etc. are very easy to obtain while you deliberate over the merits of our loan programs.

Question: "Do you understand, and fully accept, the permissions you are giving the lender?"

A related question for transfer-of-title style loan programs in particular is whether the permissions you give the lender are acceptable to you. Many private placement securities lenders require the contractual right to short-sell or hypothecate (leverage) some or all of the securities as part of the loan structure, while you remain beneficial (that is, contractual) owner of the portfolio. While agreeing to these permissions can be acceptable for borrowers whose primary concern is to obtain a limited recourse loan should they default, these permissions may not be acceptable to you. Proceed with your loan only if you are completely comfortable with the rights you are ceding to the lender during the term of your loan.

Your HedgeLender Premier loan quote will be outlined in your Term Sheet, but your final loan documents will be finalized together with your institutional account advisor so that every feature and provision is both understood and fully agreed before assembling your final loan documents. Your shares remain in your account and title at all times during the loan term, with online access and regular account statements direct from the fully regulated, major U.S. brokerage that manages your account.

Question: "Is an institution-backed securities loan program safer than a private placement securities loan?"

The instinctive reaction to a question like this is "yes, of course", but in fact one is not necessarily comparing apples to apples in this situation. True, a loan like HedgeLender's Premier, on the face of it, is provides a level of security that includes no change of title, 24-hour online account access, licensed U. S. institutional facilities and management, lump loan cash with no sale or trade to fund the loan, and many other security and access enhancements that our lending clients have long requested and we are now happy to be able to provide. But asset and lender security will always be a combination of many factors for any loan program, including the overall financial health of the company or institution holding your collateral, its track record, its backing assets, its hedging or collateral security provisions/method, and other factors. Many thought that Lehman Brothers was the safest possible brokerage, or that AIG couldn't possibly have any major financial issues. Yet one disintegrated, and the other barely survived with government help. So the point is: Look at all factors, and weigh them together.

On balance, though, a strong, institution-backed program operated through a healthy U.S. brokerage or bank does clearly provide the full power, reputation, and transparency of a licensed and regulated financial enterprise, whereas any private placement loan - even when very soundly managed - usually does not. This may be an important factor to you in deciding what loan program to pursue or whether to undertake a securities loan at all, and that's why we mention it here.

If you decide to go with an institutional, no-transfer-of-title program, be sure that it is indeed truly institutional. A valid institutional loan program should work through a top-rated (preferably U.S.), fully regulated and licensed bank or stock brokerage. It should permit the client to hold his/her collateral securities in their own account and title at all times while a lien is placed against the account in a very easy-to-understand conventional structure. The final details of the loan should be finalized between yourself and a licensed professional working for and through that institution, so that once your Term Sheet is signed, you will have full access to a range of flexible options and follow-on services to support and even complement your loan. In a strong program shares are always accessible and visible and the process is entirely transparent as well, so that the result is typically a high level of client confidence. If your institutional program lacks any of these things, you will want to weigh this as you make your loan decisions.

Whether you are in a position to choose a program where shares remain in your own name and title, or a program where shares change title, always ensure that you have studied the program thoroughly and understand its features and permissions first.

The Question: "Do I really need a securities-backed loan?"

Perhaps the most important question of all. Why not just pick up the phone, call your stock broker, and tell him to sell your stocks at today's or some set price?

We answer by sending the same question back to you. Why not? If you, in consultation with your financial advisor or simply on your own conclude that this is the best path, that you do not care nor need to retain your securities, then that call to your stock broker might be the very best decision of all. There's no objective reason why you shouldn't just sell your securities instead of getting a loan against them, and if upon reflection that is the right move, by all means, do so.

But there may be equally good reasons for tapping your stocks or securities for cash for some other useful or profitable purpose, while retaining that right and ability to participate in their possible future growth. When that is important to you, an institution-managed securities loan such as the kind HedgeLender facilitates may be an answer. Again, many factors, both personal and objective, will come into play when making this decision, and HedgeLender LLC is not empowered to advise you on way or another as a loan facilitation company. Still, retaining an interest in your stock or securities portfolio after you've sold them, is, after all, impossible with an outright sale and losing that future participation may simply not be a desirable choice. When that is the case, a securities-backed loan from HedgeLender can be a solution.

So the answer to the question of whether or not a securities-backed loan financing is the right choice over a conventional sale through your stock broker will usually depend on what your objectives are and what makes most sense financially. Discovering what securities loan(s) you qualify for can help clarify the issue, of course (and you are perfectly welcome to check by contacting us - there is no obligation when doing so at HedgeLender). But in the end, no one can make an over-arching, universal statement that a securities-backed loan is universally either wise or unwise. The question really boils down to whether a structured securities loan solution fits into your financial objectives and preferences or not, and that is something only you (preferably informed by your licensed institutional financial advisor) can determine.

(Contact us for a no-obligation term sheet, if you wish, then consult with your CPA or other licensed financial advisor for their guidance and input. Note please that one application will be sufficient for you to determine eligibility for all of our program variants).

We recommend that prospective borrowers always be aware - be cautious - and only consider stock-secured loans or other forms of securities-backed financing from companies they have fully vetted and trust. If you find any legal or regulatory issues that are not acceptable to you, ask for an explanation. Never take any step until you have prepared.

Whether or not you choose HedgeLender LLC for your securities-backed financing requirements, wherever you place your collateral, always strive to know your lending organization first and never simply pass lightly over your loan contracts. Read thoroughly, perform due diligence, get clarifications and explanations in writing, and if there's anything you do not understand, ask, or have your attorney or CPA look it over. Make sure you are fully comfortable with your loan as well as your lender. If you do, you can enjoy the assurance of knowing you've "done your homework" prior to making your final decision.

 

Daniel W. Stafford, President and Founding Partner,
HedgeLender LLC, October 28, 2009