Securities-based Lending
A Financing Alternative For Investors
Provided by: Michael Alioto, Senior Vice President, UBS Financial Services Inc.
I
f you have a portfolio that may be used as collateral for a loan, you may be able to access
liquidity without immediately liquidating securities and still maintain your portfolio's
current exposure to the market. This is known as securities-based lending.
What is Securities-Based Lending?
Securities-based lending is generally a revolving line of credit that uses your eligible invest-
ment portfolio as collateral. This strategy allows you to access funds without immediately
liquidating your portfolio.
In order to establish a securities-based loan, your portfolio is pledged to a lending insti-
tution as collateral. This gives you, the investor and the borrower, the ability to access
liquidity while maintaining your portfolio's current exposure to the market. You will con-
tinue to receive the benefit of any dividends, interest or capital appreciation that may accrue
in the account. However, if you have an outstanding loan balance and the portfolio used to
secure that loan declines in value, the lending institution may require you to post additional
collateral or repay part or all of the loan. The lending institution may also liquidate all or
part of the portfolio, which may interrupt your long-term investment strategy and could
result in adverse tax consequences.
For Whom Is Securities-Based Lending Appropriate?
A securities-based loan may be an alternative to traditional borrowing for an investor who
wants access to borrowing for non-purpose use. Since there is risk involved in this type of
strategy, this avenue should be explored only if you are risk tolerant.
What is Non-Purpose Borrowing?
Loans that are provided by lenders, such as banks and brokerage firms, must be classified
as either purpose or non-purpose, as directed by the Federal Reserve. The proceeds of a
non-purpose loan may not be used to purchase, carry or trade securities. Therefore a non-
purpose securities-based loan is a loan that uses an eligible investment portfolio as collateral
for funds for purposes other than purchasing, trading, or carrying securities, or for refinanc-
ing other debt used for these purposes. Some uses for a non-purpose loan include:
• Financing real estate opportunities
• Paying taxes
• Refinancing high interest debt'
• Financing business opportunities
• Funding higher education
• Buying a luxury item
Non-purpose borrowing against an eligible investment portfolio has a number of benefits
that are not available with traditional margin borrowing. While a margin loan must be
drawn in the same account where the eligible securities are held, a non-purpose loan is held
in a different account; thus, multiple asset accounts may be pledged to secure one non-pur-
pose loan. This structure is particularly useful in situations where multiple parties wish to
secure a loan for a single borrower, for example, business partners securing a business loan
for their company. In addition, there are often higher borrowing limits or release percent-
ages against the value of your eligible securities when they are pledged for a non-purpose
loan.
What Types of Non-Purpose Securities-Based Loans Are Typically Available?
The terms and/or types of non-purpose securities-based loans will vary by lending institu-
tion; however, in general, these loans are uncommitted, demand facilities with either a fixed
interest rate for a period of time or a variable rate. The lender may require repayment of a
demand loan at any time, without notice.
For more information about whether securities-based lending may be an appropriate financing
solution for you, contact your financial advisor as well as your legal and tax advisors.
1 Non purpose loans may not be used to purchase, trade or carry securities or to repay debt used to purchase trade or carry securities owed to the lender.
Neither UBS Financial Services Inc. nor its employees provide legal or tax advice. You should consult your legal and tax advisors regarding the legal and tax implications of borrowing using securities
as collateral for a loan. For a full discussion of the risks associated with borrowing using securities as collateral, please review the Loan Disclosure Statement that will be included in your application
package. Borrowing using securities as collateral entails risk and may not be appropriate for your needs.
This article has been written and provided by UBS Financial Services Inc. for use by its Financial Advisors.
Do you need h
aging
vestmen
If you are like many investors, you may be overreacting to daily market
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