Securities-backed Lending In The Current Environment: Key Takeaways

• There is still plenty of lender appetite for loans and very significant loans of several million dollars are still possible
• Lenders remain open to lending against shares in securities, pre-IPO companies, unlisted stock, bonds, private equity carry and hedge funds. Despite layoffs and challenges in the tech industry, lenders are still prepared to lend against tech stocks, provided they see a quality borrower, use case and the valuation is high enough 
• Most lenders haven’t officially moved to restrict lending criteria, although they are being more selective with the loans they will write and the securities they will accept as collateral
• Loan-to-value ratios are broadly, lower than they have been in the past few years as lenders look to mitigate risk and circumvent potential margin calls. They are also considering loan-to-value ratios in the context of a ‘choppier’ economy and emerging pressure points in the market (bank failures, outflows, etc)
• Loans can still be executed quickly: there is no lender desire to slow-down execution for quality deals to quality borrowers

Current Lender Appetite For Securities-Backed Lending

Although it’s often expected, choppy markets do not automatically translate to a credit crunch when it comes to securities-backed lending. Lenders typically become more discerning about the loans they will write, who they will lend to, the securities they will lend against and the loan-to-value ratio. However, there are no formal restrictions on lending, as we see currently.

Lenders are still offering very significant loans, with finance available in the £1 million - £10 million range, against securities valued at £2.5 million - £20 million. Much larger loans are available, including deals of £50 million or more against very significant shareholdings and portfolios.

What a lender will offer in terms of loan-to-value ratio will usually depend on the how many shares you hold and the total value of your shareholding, how liquid the stock or security is, which stock exchange the shares are listed on (if they are listed), the type of shares and the industry or sector (where the lender will be looking at volatility, future demand and so on).

Use Cases

Securities-backed loans are flexible in their application. While there are many considerations at the most basic, you will need to have a defined purpose for borrowing, a solid exit plan and be able to detail how you will manage the loan capital. 

However, this type of finance is different from a conventional loan like a mortgage which can only be used for a single purpose (i.e. to buy a house). As a result, securities-backed lending can be used in many different scenarios, including more unusual situations or to create a solution to a problem. In some cases, securities-backed loans can be cheaper than other types of finance, which is a big draw. The lenders that offer high-value loans are highly sophisticated, used to working with high-net-worth individuals in complex deals that need to be carefully structured and arranged. Beyond legal requirements and each lenders’ lending criteria (with regards to minimum stock value and loan-to-value ratio), there are no limitations on where a borrower or their securities are based.  

The below list is non-exhaustive, but some common lending scenarios include using securities-backed loans to:

• Diversify an investment portfolio (especially relevant when securities are linked to a single line of stock or a relatively illiquid stock)
• Create liquidity to purchase property (either to raise capital to buy a home or holiday home, or to raise capital to place as assets under management to secure a conventional mortgage with a private bank)
• Create liquidity to cover a capital shortfall before a liquidity event
• To pay off tax liabilities or consolidate debt
• Raise capital to invest into a business opportunity
• Create liquidity to use in high-ROI projects or investments

Industries 

Lenders continue to offer securities-backed loans collateralised against securities from a wide range of industries and sectors. These include tech, aeronautics, healthcare, financial services, e-commerce, internet and telecommunications as well as more niche sectors, like food and beverage, although there are no formal limitations on industry. Of course, it is also possible to use mutual funds, mixed portfolios and ETFs as security for a loan, even if your portfolio is spread over a variety of sectors.  

Lenders tend to focus on liquidity and value of your securities rather than making lending decisions based purely on industry. It’s perfectly possible for a lender to prefer to lend against quality securities in an industry that’s undergoing some challenges (i.e. tech in  the current economy) than it is against overvalued stocks in a fast-growing industry, for example. The lender will mainly be looking to make quality loans to quality borrowers against well-valued stock and in cases where there is as little risk of default or a margin call as possible. 

How Enness Arranges Securities-Backed Loans

High-value securities-backed loans are generally bespoke, rather than an off-the-shelf product that you can access via online trading platforms, for example. Any high-value securities-backed loan needs to be arranged and negotiated carefully to ensure you get the best deal available, not only with regards to rates and fees, but also the terms you are offered. 

Restrictive covenants, legal or transfer restrictions, fiscal implications and structuring all need to be considered from the outset, rather than once the process has started. This is especially important if you want to access capital quickly: it’s possible to draw down loans in just a few weeks, so going back to negotiate once you’ve got offers or we’ve made headway negotiating an initial deal will slow things down considerably.

For smaller loans (£50,000 - £100,000) lenders tend to offer package products with set fees and low loan-to-value ratios - online applications are the norm and lenders usually want to offer a package deal, rather than tailor loans to each client on a case-by-case basis. For loans of £1 million or more, a tailored and negotiated deal will always be advantageous. Especially if you want to raise high-value finance against carry from private equity or venture capital funds, pre-IPO stock, illiquid stocks, stock in private companies, secure a loan against a single line of (listed or unlisted) stock or bonds, having Enness arrange a deal for you will almost certainly work to your advantage. 

At Enness, we have relationships with a wide range of lenders that offer different types of securities-backed loans, including niche financing solutions, such as pre-IPO loans and single stock lending. We always source the best pricing and terms from the market, tailored to your individual circumstances.