Stock lending was historically the domain of the Banking Sector, but significant changes to the regulatory environment and capital adequacy requirements have meant that the traditional source of finance for stock holders has all but disappeared.
Whenever the Banks move away from traditional profitable sources of revenue, Private Capital steps in and this sector is no exception. As with all forms of asset backed finance, the key to success is in the three P’s:
Procurement of high quality transactions
People – with skills and knowledge to evaluate the proposal
Process – through which the transaction is executed
How it works:
The shares must be traded on a recognised and active stock exchange
Loans can be Hedging or Non Hedging.
Hedging Loans: Hedging loans allow lender to hedge on the pledged shares via hypothecation, pledging, loan etc. Lender however will not short sell or dump the shares in the market. Such loans typically are much cheaper and can do larger quantums.
Non Hedging: Non hedging loans on the other hand does not permit lender to touch the pledged shares.
Shares will have to be moved to a designated account open in the name of the borrower. Hence its non title transfer.
The usual LTV is about 40%-50%
Interest per annum is typically 4%-10%.
Loan tenure Is typically 2-5 yrs
The G9 Team work on both sides of the equation – placing shares with lenders and placing loan capital with borrowers.