Understanding Risks Inherent in SBLOC Securities Transactions

Overview

The program we call LeverageLine — a securities-based loan program tailored to the franchise buying, business acquisition and commercial real estate investor — can be an ideal supplement or even full substitute for conventional financing when managed responsibly.

The A. B. Nicholas LeverageLine program is a full-recourse line of credit; we take a firm stand against nonrecourse stock lending as, unlike the ABN program, with nonrecourse stock loans the client loses ownership and the usually “private” lender sells the securities to fund the “loan” — making it a spurious sale of your securities, which is taxable as a sale, not a loan.)

Because our LeverageLine program is financing that uses stocks, bonds, mutual funds and other securities — assets that could rise or drop in value over a short period of time — you should recognize that any lending against securities does involve some risk of the portfolio falling in value such that together with your lender advisor if you have a LeverageLine, you may need to take some action.

If one or more securities in your portfolio falls significantly enough to significantly drop the overall value of your collateral,  your lender will ask you to either rearrange your portfolio by selling some securities and buying others; paying down your line of credit so your portfolio collateralizes your outstanding principal at the same, original ratio (for example, if the loan-to-value was 75%, your collateral should be sufficient to retain your collateral-value-to-outstanding-principal ratio); or by adding additional collateral.

Although A. B. Nicholas is neither a financial advisor nor a licensed stock brokerage, and therefore cannot provide any advice on the suitability of a securities-based line of credit for our clients’ particular circumstances, your licensed FINRA-member lender advisor at the lending institution with which we’ve partnered for your financing does have a clear understanding of all aspects of your securities-based financing, including the risk that a portfolio could in theory fall in value to the point where you might have to restructure out of some of your existing, falling securities into securities that are more stable for collateral purposes. When determining your offer, a complex system of risk analysis is used to minimize risk to the lender if that should occur. Therefore, your term sheet/offer includes full considerations of risk.

That risk notwithstanding, we can accurately say that of the hundreds of ABN clients who have chosen to use our LeverageLine SBLOC program, as of 2018 very few have had any need to touch their collateral portfolio other than to occasionally trade like-kind securities within that portfolio) and all of our clients have determined that the risks were perfectly manageable. The approach of our clients’ licensed lender advisors is also a factor in our client’s comfort.

We select the ender-advisor not only on the basis of his excellent FINRA record, but also on their willingness to work with every ABN clients to ensure a satisfactory outcome regardless of borrower’s situation or the size of their portfolio.

Your advisor: We at ABN work with a carefully selected professional Certified Financial Planner with at least 15 years of experience with franchise funding, business acquisition, and commercial real estate that we require for our business model. To date, we also have several advis0r partners at three separate major public institutions. As noted, each is a licensed professional who has agreed to provide superior service and the particular features of a LeverageLine-style securities credit line to our ABN clients, including  the lowest rates possible in the market — we call “wholesale” rates — and other custom features. People come to A. B. Nicholas when they want far more than just a margin loan, but rather a high loan-to-value, low-interest financing SBLOC tool for their entire objective.

Your Licensed Lender Advisor’s Responsibilities to You

Our view is that it is always the responsibility of the licensed institution and advisor, in their professional judgment, to determine if your portfolio and circumstances merit a securities-based credit line and if so, what loan-to-value is the least risky or “best bet” for the lender, all things considered.

In some cases, your adviser may consult his risk department for clarification of their decision which can be the case if they determine that a securities-based line is not suitable for you. If so, we will decline to proceed. (If your advisor declines to proceed, you will not receive a term sheet but  a letter of decline from A. B. Nicholas; as always, you’ll owe us nothing unless you are offered and choose to proceed with your financing, and then only at actual completion of your funding.) A responsible and ethical determination is at the core of your lender advisor’s  job. We expect our professional advis0r partners to operate with the highest standards if he/she wishes to continue to serve A. B. Nicholas clients..

The overwhelming majority of our clients have sufficient net worth, liquidity and financial stability to undertake a securities-based line very successfully, but on your initial conference call with your licensed lender adviser, we urge you to ask any questions to ensure that this form of financing is the right one for you.

Note that one of the aspects of our LeverageLine program is that the collateral value is determined by the averaged value of the entire portfolio, not any one stock, bond, mutual fund, etc. within the portfolio (unless, of course, the credit line is based on only one stock). A multi-stock portfolio spreads the risk around instead of placing it, for example, on one stock alone, as is typically the case with margin loans. This does not eliminate risk of collateral falling in value, of ourse — one or two stocks could still drag the entire portfolio of ten or more down into the danger zone if they fall far enough — but historically, averaging of all the securities in the portfolio does tend to provide a much more stable collateral asset.

Another point: If you do not take any steps to deal with a dropping stock or other securities that are affecting overall portfolio value, you will be at risk of an automatic trigger that will cause a sale of your securities automatically if your portfolio does indeed fall under the required maintenance-value level. All brokerages and banks reserve the right to do this to protect the cash they’ve extended to the client-borrower. No surprises there. However, our lender advisors, to the extent possible, will call you in advance if it appears your portfolio has been dropping in value dramatically since lending value does not depend on just one stock, .

Your advisor’s goal, if possible, is to keep you as a long-term client. He will typically be willing to go the extra mile to do so, as we at ABN stated that excellent customer service is an absolute necessity.

Note also that one of the advantages of our A. B. Nicholas LeverageLine program is that your advisor will speak with you to go over your specific paths at no charge, and even call in advance when possible to alert you to a situation that might require you to rectify a falling portfolio. Our lender advisors do not charge account management fees, so keeping you as a contented client is very much in their interests as well. Ensuring that any drop in your collateral value is taken care of in a professional manner is a critical requirement for any A. B. Nicholas lender.

Some clients prefer to use options – “puts” and “calls”— to put a “collar” or  “floor” on the securities value in the collateral portfolio.  While A. B. Nicholas neither recommends nor opposes this technique, it is an additional step that every LeverageLine client is welcome to discuss with their licensed lender advisor.

In actual practice, few A. B. Nicholas clients have only occasionally been required to shore up their collateral or sell some securities to bring their loan into compliance. To date, all of those cases, to date, were resolved and did not involve any undue hardship for our clients. .

Here at A. B. Nicholas we believe our program to be a winner in its market niche, with the lowest rates and most dedicated customer service possible. We’ve gone to great lengths to select what we consider to be the ideal program for the franchise, business acquisition, and commercial real estate client in need of low-cost capital without transferring ownership of their portfolio or selling shares as a condition for funding.

While no program involving securities of any kind is without risk, we feel confident in stating that if a securities-based SBLOC loan is indeed right for you, we have provided the best we could find.

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