Structured lending: an important wealth management offering

Your clients expect financing solutions tailored to their needs. This is a niche product you may want to consider: the put-protected single stock loan.

Do you have clients holding a high concentration of their assets in one listed stock? Are any of them encountering challenges raising single stock loans? If so, “put-protected” loans may be the solution.

 

This financing instrument is typically of interest to clients with a single stock concentration in their portfolio, such as:

  • Entrepreneurs
  • Founders of publicly-listed companies
  • Executives
  • Anchor shareholders.

They might want to leverage concentrated stock holdings and re-invest the proceeds into a diversified portfolio (although they can also use the proceeds for other purposes).

Common challenges

Yet, although the benefit of wealth diversification appears obvious, you may have encountered a range of challenges with single-stock loans. Common challenges include:

  • The stock does not qualify as collateral for a loan
  • A low loan-to-value (LTV) ratio is offered
  • Your client does not want to expose his holding to an event risk or be forced to sell his/her stock in a falling market
  • A shareholder agreement prohibits the sale of the shares beyond a pre-defined circle.

Benefits of put-protected loans

If such issues have arisen, a put-protected loan can help to overcome them, allowing your client to raise a credit facility against the stock. The loan’s benefits include:

  • Hedging the downside risk (long put option). Your client is protected against a downside risk. The downside is limited by the strike price of the option (excluding the option premium)   
  • Your client receives the full upside of the stock performance
  • Increasing leverage. At Julius Bär we offer LTV ratios up to 100% against the strike price if booked on the Swiss booking platform
  • Reducing the credit margin. We offer fairly attractive loan spreads as a result of the floored market risk
  • Your client, the shareholder, maintains voting rights and is eligible to receive dividends.

But the downside of a put-protected loan is the cost of the option premium. This can be reduced in two ways:

  • Firstly, lowering the strike price of the put option (compared to the actual spot price) reduces the option premium
  • Secondly, using a collar structure by adding a short-call to the put-protected loan subsidises the option premium, although it also caps the potential gain from a rising stock price.

However, if a stock is illiquid then a put-protected loan cannot be used, as typically there will be no option market.

What if the stock is not listed but client wants to monetise his shareholding?

Unlisted stocks are by definition illiquid. But your clients can borrow against them through a credit facility secured on the underlying company’s future cash-flows (or dividend streams from multiple underlying companies). The unlisted shares will be used as collateral and pledged to the lender. The term-loan will be committed and will typically have an amortising feature, i.e. future cash-flows are used to service the debt.

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