Share owners are offered loans against their assets
Share owners seeking to raise cash against their holdings have a wider range of options following the launch
The bank believes the new facility will appeal to entrepreneurs who have sold their business for shares in a quoted company; to executives who have built up large holdings in their own company through incentive programmes; and to people with significant portfolios who are invested long-term but require cash for more immediate needs.
Securities lending is more often associated with the institutional market where pension funds and insurers have boosted their returns by lending equity portfolios running into the hundreds of millions of pounds.
This practice has generated controversy when hedge funds have borrowed the shares to support short-selling strategies – designed to profit from share price falls – or where the voting rights attached to the shares have been used to influence takeover bid battles.
But it has proved far less common in the retail market although share owners have been able to raise cash through a process known as margin lending, where the shares are used as collateral.
For the individual raising the cash, margin lending and securities lending look very similar. But with securities lending the bank is required to put less capital aside against the stocks and shares and so can offer its client a better rate of interest on the loan.
Securities lending also allows the shareholder to borrow a larger sum, relative to the value of the shares, than is possible with a traditional margin lending transaction.
“On a conventional loan secured by shares a lot of banks will offer 50 per cent of the share value,” says David Drewienka of Investec’s specialised lending division. “We will go much higher. We did one deal at 90 per cent. It depends on the liquidity and volatility of the stock and on whether we have recourse to other of the client’s assets.”
Investec says it is looking for a minimum transaction of a hefty £2m but it would be prepared to go lower if there was the prospect of the client bringing it other business.
The standard contract would be 364 days – after which time the bank returns the shares and the client returns the money plus interest – but this would be renewable for up to three years.
But share owners need to be aware of the pitfalls of securities lending. There may be constraints on directors or substantial shareholders lending stock in this way. At the very least they may be required to notify the stock exchange. If the value of the shares falls, they may find themselves having to meet margin calls on the deal, or that they are repaying a much larger sum to the bank than the value of the shares they receive back. This risk can be covered by taking out a put option but there is a cost involved.
The client could find that the shares they have put into the deal have been lent on by the bank to a hedge fund that needs them to short the shares themselves. Investec says it undertakes not to do this but admits it has no control over the actions of anyone to whom it, in turn, lends the shares.
Voting rights should not be a problem because Investec says it will follow the owner’s instructions.
of a securities lending service specially tailored for private clients by Investec Private Bank.
