Why Risk Borrowing from a Bank when Non-Recourse Loans from Private Lenders are Available?
As Bill Hwang and his Archegos Capital Management are learning the hard way these past couple of weeks, Banks — who most always reserve rights (take it or leave it) of Recourse with Call Provisions to forcefully trigger immediate Fire Sale liquidations if necessary — are not the best option for the Borrower when selecting a Lender for financing one’s business (or personal) activities.
If only the Borrower had chosen a much more flexible and reasonable Private Lender who offers a Non-Recourse Loan — who doesn’t issue Margin Calls to force Fire Sales — instead of a Bank, Mr. Hwang would not have been forced to liquidate upwards of $20 Billion in a stock fire sale which resulted in the wiping out of huge fortunes in a matter of merely days.
Massive financial losses have resulted because of exposure to the trading activity of a single investment firm, Archegos Capital Management, which is a New York-based Family Office headed by Sung Kook “Bill” Hwang. One Wall Street veteran, Michael Novogratz, was quoted by Bloomberg News, “I’ve never seen anything like this — how quiet it was, how concentrated, and how fast it disappeared. This has to be one of the single greatest losses of personal wealth in history.”
Hwang was forced by his bankers to sell more than $20 billion worth of shares after some trading positions moved against him. As the bets went wrong, Hwang’s prime brokers (i.e. Banks) started demanding that he provide more collateral (i.e. they made Margin Calls) and then exercised their right to liquidate (i.e. forced a Fire Sale of) his positions to recover their money with no consideration or distinction between business and personal assets.
The Banks always want their money yesterday — but will settle for it now — because when you borrow from Banks, you will usually have no other alternative (take it or leave it) than to provide Personal Guarantees (PGs), Co-Signers, and agree to Call Provisions.
Make no mistake: Banks will retrieve their money by any means necessary, and by all means available.
Beware Banks with Margin Calls that Can Trigger Fire Sales
A Margin Call is triggered when investors — who borrow using their Stock Portfolio as collateral — have to make up the balance required by Banks when the share prices fall and the collateral is worth less.
Among the Banks known to have exposure to Archegos are Goldman Sachs Group (ticker: GS), Morgan Stanley (MS), UBS (UBS), Wells Fargo (WFC), Credit Suisse (CS), and Nomura Holdings (NMR). The latter two Banks together are thought to account for more than half of the projected losses because it took them longer than peers to unwind the positions. Credit Suisse has calculated a $4.7 Billion loss from its exposure to Archegos Capital Management.
As the situation was unfolding a week ago, Credit Suisse said in a statement, “a significant US-based hedge fund defaulted on margin calls made last week”, and that it and other Banks were now “in the process of exiting these positions”. All told, Archegos’ banks sold millions of shares in companies the fund had bet on, dragging down stocks across the media and other sectors.
Investment Banks including Goldman Sachs Group Inc. and Morgan Stanley were said to have sold a series of huge chunks of shares — what’s known as block trades and is relatively commonplace in markets. Typically, a block-trade deal is negotiated privately and transacts when the markets are closed.
Sizeable block trades — especially those done at a discount to the market price — are always unnerving for investors, especially when the seller isn’t clear. Put simply, the fear is that someone else somewhere knows something bad that you don’t.
As events unfolded, nine stocks bore the brunt of the selling in those following days: online and entertainment companies ViacomCBS, Discovery and Shopify Inc.; Chinese firms Baidu, Tencent Music Entertainment Group, GSX Techedu Inc., iQiyi Inc., Vipshop Holdings Ltd.; and U.K. online retailer Farfetch Ltd.
What Goes Up, Must Come Down
For the wise, careful, and seasoned investor, such pullbacks in the market should be expected. Indeed, the current market seems overstimulated having soared over 75% in an historic 12-month run. The last time the S&P 500 rose this much in a 12-month stretch was in 1936, according to Howard Silverblatt, senior index analyst at S&P Dow Jones Indices.
Make no mistake: owning stocks entails risks. However, it is often true that “Fortune favors the bold” and that the higher the risk, the higher the potential reward. Therefore, when taking the financial risks of investment, it is always wise to avoid any unnecessary risks by taking the necessary precautions of de-risking via hedging.
Certainly since it is possible to de-risk one’s exposure to the stock markets by hedging that risk, wouldn’t this be the best course to follow if the opportunity were available?
Yet how can you de-risk your exposure to the stock market in general, or to a specific stock?
Timing is everything, and what a difference a day makes.
If Bill Hwang, as the Borrower, had only followed the wisest and best course of action by utilizing a Private Lender (who doesn’t issue Margin Calls) for his Liquidity and Financing needs, perhaps he would still be the privileged owner of all those Stocks (and Liquidity) that he lost a couple of weeks ago when those Margin Calls were issued by the Banks.
If only Bill Hwang had hedged his risk to the stock market with a Non-Recourse, Non-Transfer-of-Title Securities-Based (Stock) Loan (SBL) — otherwise known as a Stock Portfolio Loan, or just simply a Stock Loan — instead of taking a high-risk Margin Loan from a Bank with Full Recourse.
Furthermore, as most certainly Banks are going to continue to tight access to credit and liquidity, where are you going to find Liquidity when you need it?
Private Lenders versus Banks
If you are fortunate enough to know a Private Lender willing to lend you the Money that you need to provide solutions, then nearly always a Private Lender is preferable to a Bank.
Private Lenders can be more flexible because of less regulatory obligations, and often can be more creative in order to solve your problems by providing the financing options and solutions that you need.
Private Lenders often offer better (i.e. higher) Loan-to-Value (LTV) ratio for the pledged collateral. Banks only offer low, unattractive ~15%-30%+ LTV, and they often do so with take-it-or-leave-it terms, heavy restrictions and penalties with Loan Covenants, and severe limitations on how/where the money can be used. Bank also require credit checks, income verification, business incorporation documentation, and a generally much more complicated Loan Application / Approval / Funding Process.
Private Lenders usually can offer higher LTV ~40%-70%, quicker, more flexibly. and with fewer limitations, as well as more freedom for the Borrower.
For the Borrower, borrowing from a Bank is some of the riskiest type of borrowing as a Bank not only has Full-Recourse to collect all outstanding debt on the Loan, but a Bank can call out (or call in) a Loan (i.e. make a Loan Call on a Call Loan or a Callable Loan) at virtually any time for virtually any reason.
Although not all of them do, Private Lenders who offer Non-Recourse, Non-Transfer-of-Title, Securities-Based (Stock) Loans have No Recourse if the Borrower defaults on the Loan, and therefore the Borrower does not risk any personal assets. Furthermore, business risk for the Borrower is limited only to the stocks/securities shares that are pledged as collateral — i.e. no worry of losing your house or other critical assets.
Banks like to lend money to people who don’t need the money. So when you need Money and Liquidity, where (and how) are you going to find it? Who is going to lend to you Liquidity without Personal Guarantees (PG), credit checks, income verification, Loan Covenants, etc.?
Do you need Liquidity?
If you own Stock/Equity/Securities, then chances are we can help you.
ZZStockLoans.com — We Solve Problems. We Provide Solutions: We Provide Liquidity, Finance, and Money Solutions
Unlike Banks, we as Private Lenders offer you instant Liquidity with absolutely no Loan Covenants, no Personal Guarantees (PG), no Balloon Payments, no Fire Sales, no Call Provisions, and no calling in the notes whatsoever. In fact, since our Loans are Non-Recourse Loan Products, you can even walk away from the Loan (e.g. as an investment exit-strategy) the day after receiving the Loan Proceeds and never make a payment — with no financial penalties whatsoever.
All of our Loans are Non-Recourse Loan Products which means that the Borrower is not personally liable, and has no business liability beyond the stocks pledged as collateral — therefore the Borrower is safer with a Non-Recourse Loan, and has more options and security than a Full-Recourse Bank Loan or a Margin Loan. Our Non-Recourse Loan Vehicles require no credit checks and no financial statements whatsoever other than the Client/Borrower’s Brokerage Account Statement to prove ownership of the securities.
All of our Loans are LOW FIXED-INTEREST %, and not tied to variable interest rates such as the London InterBank Offered Rate (LIBOR) — which is a benchmark interest rate at which major global banks lend to one another in the international interbank market for short-term loans — or Prime Rate which is the interest rate that commercial banks charge their most creditworthy corporate customers. This Prime Rate should not be confused with the Federal Funds Rate which refers to the interest rate that banks charge other banks for lending to them excess cash from their reserve balances on an overnight basis.
So where are you going to find and obtain the Liquidity that you need quickly in order to solve whatever your problems may be — in trade, business, investment, or perhaps for personal needs — that require Liquidity Solutions?
If you have a liquid, publicly-traded Stock (or other tradable Security) on most major Stock Exchanges worldwide, chances are we can help you. We specialize in providing quick-funding, Securities-Based financing solutions specific to our Clients’ needs. We offer the widest variety of Stock Loans and Securities-Based financing solutions in the industry, and we are flexible where others (most especially Banks) are not so.
More information and details are available at the following URL:
ZZStockLoans.com
STOCK LOANS FAQs: ZZStockLoans.com/index.php#faqs
References:
2.) Credit Suisse Takes $4.7 Billion Hit on Archegos Meltdown
3.) Banks May Take a $10 Billion Hit on Archegos. What That Could Mean for the Stocks.
5.) In Archegos fire sale, Credit Suisse, Nomura burned by slow exit
6.) Credit Suisse and Nomura warn of losses after Archegos-linked sell-off
7.) How a Blowup at Hwang’s Archegos Is Rattling the Finance World
8.) Credit Suisse and Nomura warn of losses after Archegos-linked sell-off
9.) Global banks warn of possible losses from hedge fund default
10.) One of World’s Greatest Hidden Fortunes Is Wiped Out in Days
11.) ViacomCBS Skeptics See Prospect of More Pain After 55% Drop
12.) Overstimulated? Stocks soar 75% in historic 12-month run
13.) Investopedia.com
#StockLoans #SecuritiesBasedLoans #PortfolioLoans #LombardLoans #LoanStock #BlockTrade #BlockTrades #MarginCall #MarginCalls #FamilyOffice #FamilyOffices #Finance #Financing #TradeFinance #TradeFinancing #Loans #Liquidity
