Nonrecourse Loan for Shareholders
Through our strategic partnership with a US Private Equity firm, we provide a non-recourse, collateralised equity loan facility for holders of concentrated equity positions. The facility provides flexible terms with a very efficient cost of capital for the equity investor.
- Investors looking to gain liquidity from their equity holdings have the following traditional options (with associated negative implications):
o Outright sale on the market
o Giving up any future gains
o Potentially crystallizing any tax expense or capital loss
o Negative market perception when directors or large shareholders sell
- Traditional margin loan
o Requires additional collateral and is full recourse against the borrower
o Subject to short term margin calls in a falling market
o High interest rates and an “average” loan to valuation ratio (“LTV”)
o Negative market reaction for directors or senior management when they take out traditional margin loans
Given current market conditions, margin loan providers are not willing to offer terms for shares outside the top 100 to 200 companies on major exchanges. They also very rarely provide a facility for companies valued under $1 billion.
The current market conditions are limiting liquidity options available to the majority of equity investors
Through our strategic partnership, we can deliver a non-recourse facility that provides a unique solution for investors who are seeking liquidity but do not wish to sell shares or take out a traditional margin loan. In some situations the facility is the only option available to investors other than outright sale.
- Investors may have a need for liquidity for many reasons, and there is no restriction on use of proceeds. Typical uses of this facility include:
- Releasing capital in order to exercise share options or participate in new capital raising
- Re-financing of an existing margin loan:
o moving from a full-recourse to a non-recourse facility o reducing interest costs
o accessing additional capital based on an improved LTV
- Obtaining cost effective capital to pay down more expensive debt
- Releasing capital for personal use
Any listed equity that has an average daily traded value (i.e. average volume x average price) of USD50,000+ is eligible for this facility (market capitalisation is secondary).
Typical terms include
- Non-recourse facility (no additional collateral or personal guarantees) that is structured as a loan
- No restriction on use of proceeds
- Loan-to-valuation ratio of 50% to 80% of the collateral value
- Fixed interest rate is typically between 2.5% and 5% per annum (payable quarterly in arrears)
- Fixed term facility of 2 to 5 years (early termination is not possible)
- Origination fee of 3% (calculated on the gross proceeds value)
- Facility is drawn down in tranches, initiated by mutual agreement
o Timing of each tranche and the number of pledged shares per tranche (subject to maximum number stipulated in term sheet) are controlled by the borrower.
Borrowers typically receive funds within 5 – 7 business days of returning the signed term sheet. The borrowers will receive their funds in 2 parts:
- Initial portion of the proceeds on a delivery versus payment basis. As the shares are transferred a portion of the estimated proceeds are wired simultaneously (DVP Amount)
- Remaining proceeds are paid after the ”Fair Market Price” is set
o Fair Market Price = average of 3 closing prices following the delivery of the shares
o Gross Proceeds = Strike Price x number of shares x LTV%
o Final payment = Gross Proceeds less DVP Amount less origination fee
Margin Call or Floor Price Breach
The facility has a floor price breach or margin call mechanism, which will create an additional collateral call for the borrower. The mechanism functions differently to traditional margin loans:
- Floor price is calculated at 80% of the LTV. For example, if the LTV is 65% then the floor price is 80% of that amount, i.e. 52% of the pledged shares’ initial value, thus providing a greater buffer against a margin call than with traditional margin loans
- If the floor price is breached during the life of the facility more collateral can be pledged (cash or shares) to retain the right to repay the facility and receive the shares back at maturity.
What happens at the maturity of the facility?
The borrower will receive all of the shares pledged throughout the life of the facility when they repay the gross loan proceeds, retaining 100% participation in the upside of the shares. Alternatively, the borrower may roll the facility over for another term or walk away altogether should they wish (e.g. where the share price has fallen significantly, especially below the floor price).