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Has anyone tried this?

http://www.sbffunding.net/marginvssecurityloan

http://www.sbffunding.net/sampleloan

 

I'm skeptical because they claim I can borrow 80% of the initial security value and then only get called if it falls in value to 80% of the loan amount.  Therefore, there is no call unless the market price of the stock falls to 64% of the original value.

 

But because it's non-recourse, I could just walk away and keep my 80% loan right?  Then I can actually increase my investment because I have 80% of the initial investment but I can buy it back for 64% of the initial price.

 

Do I misunderstand this? 

 

 

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This is an everyday margin loan callable at 80% of MV. In Canada its callable at 70% & you pay floating rate on the amount borrowed. In the US - look at TD Waterhouse.

 

It is recourse. If you cant repay within 5 days of the margin call, the broker can sell the stock & use the sales proceeds to repay the loan. If the proceeds aren't high enough to repay the loan, the shortfall is the brokers problem. 

 

The lender in your example is making a fix-float spread on 80% of the market value & hoping its more than enough to compensate for the higher shortfalls that they will encounter because they're lending at 80%, vs 70% of MV. The client is virtually certain a higher cost than would otherwise be the case.

 

SD

 

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There's something they aren't telling you.

 

Put up $2 today to buy $10 of stock with $8 of loan (loan at 80% of MV)

Tomorrow they call your loan in at $6.4 (80% of the $8 loan). You're sold out at a $3.60 loss (6.40-10.00), but you only put up $2 of equity - so who took the other $1.60 of loss? If this is truly non-recourse it can only be the lender, & that makes no sense at all.

 

Or is it really ... Put up $10 today against which you can borrow $8 to buy some other asset, so there is now $18 of asset (10+8) supporting $8 of loan?

 

If the lender is adament that its the former, you'd buy something risky at a little less than the highest leverage possible - put no new cash in, & let the lender eventually call you.

 

SD 

 

 

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It partly seems too good to be true.  You get all the upside from the stock but stand to lose only 20% maximum.  It's like getting a put while at the same time a loan.  Yes, that sounds a bit like an in-the-money call option except you also get the dividends (but you don't get them in the call option example).

 

They must be hedging the stock at lower cost than the interest rate they are charging me.  That's all I can think of.  But then how are they hedging so cheaply?  

 

They also hold title to the shares during the loan period -- counterparty risk?  Are they doing something like lending the shares out to shorts or something during the loan period for extra gain?  

 

That's why I thought somebody on this board might already have an understanding of how this kind of lender really operates.

 

 

 

 

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Thanks for bringing this site to the board. I'm sorry that I don't have any insight, but you should also make note of the loan terms found here: http://www.sbffunding.net/underwritingguidelines

 

Hedging might be difficult with three year minimum loan term and fixed interest rates.

 

 

 

It could be that only the least volatile, non-dividend paying stocks are getting anywhere close to that LTV. Perhaps SBF sells the stock upon receipt, hedges their exposure, and invests the remainder. They could keep rolling over calls, relying upon the LTV spread and proceeds from investment to cover time value and unexpected volatility.

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