Understanding Risks Inherent in Securities Transactions


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.

However, because this is financing that uses stocks, bonds, mutual funds and other securities — assets that in theory can 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, you’ll need to take some action.

to a place where you must 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).

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. That risk notwithstanding, we can say that hundreds of ABN clients have considered our LeverageLine program carefully, and have determined that the risks were manageable.

To date there have been no issues with any ABN client. We selected you lender adviser not only on the basis of his excellent FINRA record, but also on their willingness to work with every ABN client to ensure a satisfactory outcome regardless. So just who is your lender adviser?

We at ABN deliver you to a carefully selected professional from your lending institution with the background in franchise funding, business acquisition, and commercial real estate that you (and we) require. To date, we have several adviser partners at four separate major public institutions. He/she will always be a licensed professional who has agreed to provide superior service to 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 the want much more than just another margin loan, but rather a high loan-to-value, low-interest financing tool for their entire objective.

Your Licensed Lender Adviser’s Responsibilities to You

Our view is that it is always the responsibility of the adviser, in his 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 to all concerned. In some case, he may consult his risk department and determine that a securities-based line is not suitable for you. If so, we will decline to proceed. (If your adviser declines to proceed, you will not receive a term sheet but  a letter of decline from A. B. Nicholas; as always, you owe us nothing unless you 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 his job. We expect our professional adviser partners to operate with the highest standards if he/she wishes to continue to service 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 from 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 course — one or two stocks could still drag the entire portfolio down into the danger zone if they fall far enough and make up a sizable portion of the portfolio’s overall net value — 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.

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

Another way your LeverageLine lender will try to reduce the risk of a call is to set the loan-to-value at a point that is informed by the historic volatility and other analytical data for the securities in the collateral portfolio. A 95% loan-to-value where the client has drawn all 95% of their allowed cash is more at risk should the portfolio drop in value than, say, a 65% loan-to-value scenario where there’s more of a buffer. Also, if one has a 95% loan-to-value line but only draws, say, 65%, then again, the risk is likely to be less than if all 95% is drawn.

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. All of those cases, to date, were resolved and fortunately did not involve any undue hardship.

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 loan is indeed right for you, we have the best program you can find.

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