Crystal Cove Capital

Focus / 03

Margin Loans

Liquidity against listed stakes without giving up control.

Loans secured on shares in listed companies where the shareholder does not want to sell, give up voting rights or board seats, or trigger disclosure.

The shares might be illiquid due to a lock-up agreement or other transfer and pledge restrictions, or an existing lender has decided not to roll over the loan after a material decline in the share price or stake value.

Typical scenarios

  • A relatively big and illiquid stake in a listed company where the shareholder has liquidity needs but does not want to lose voting rights or trigger any disclosure
  • The shares are locked up and cannot be transferred or pledged
  • A margin or share-based loan that is in default or close to default after a decline in the value of the underlying shares
  • A margin loan where the existing lender refuses to roll over the existing loan

What we look for

  • Quality of the underlying listed company
  • A structure that allows the shareholder to retain control except when an event of default occurs
  • A structure that takes care of any disclosure, governance and tax considerations

Instruments

Margin and share-based loans, prepaid forwards or collars and other structures that combine financing and hedging.

Questions

01

How does a margin loan on a large listed stake work?

The shareholder borrows against a large holding in a publicly traded company. A key term in margin loans is the outstanding loan amount vs. the stake’s market value expressed in percent (loan-to-value or LTV). For example, a margin loan with an outstanding loan amount of €45 million secured against a stake with a market value of €100 million would have an LTV of 45%. The LTV is generally higher for companies with larger market caps and higher average daily trading volumes (“ADTV”) and lower for smaller companies or companies with lower ADTV. The borrower keeps ownership and voting rights in the company, and the loan is paid back from dividends or a subsequent sale of the stake.

02

How is it different from a margin account at a broker?

While the terms of a broker margin account are standard and include automatic margin calls and forced sales in case of a drop in the relevant share price, the terms of a margin loan on a large single stake are negotiated individually. They depend on the size of the stake versus the ADTV (see question 1 above) on the exchange, transfer or pledge restrictions and governance rights of the shareholder (e.g. board seats, veto rights on reserved matters, etc.). The objective is to generate liquidity without relinquishing governance rights or causing disclosure of the margin loan to the market.

03

What happens if the share price falls?

Using our example from question 1 above: a margin loan with an outstanding loan amount of €45 million secured against a stake with a market value of €100 million and an initial LTV of 45%. The borrower and lender agree that the borrower has to provide cash collateral if the LTV exceeds 55%. Assuming the value of the stake declines by 20% to €80 million, the LTV would be 56.25% (€45 million loan amount divided by €80 million stake value) and the borrower would be required to provide €9 million in cash collateral to re-establish the initial LTV of 45% (45% of €80 million = €36 million or €9 million less than the original loan amount of €45 million). This is a margin call. If the borrower does not pay the margin call, the lender will likely sell the pledged shares/collateral to repay the loan amount. There are alternative financing structures that combine a loan with a hedge, such as a collar or a put. These alternative structures are more complex to execute but the borrower does not have the risk of a margin call.

04

Can shares subject to a lock-up or pledge restrictions be financed?

Sometimes, yes, but it depends on the specific circumstances and the terms of the restriction. If the shares are subject to a lock-up, or cannot be pledged due to a shareholder agreement or the rights of an existing lender, financing may still be secured through other structures.