Default Risks By Collateral Valuation Losses Differences: Non-Recourse Loan vs Margin Loan

When looking at securities based financing products, Borrowers should look carefully at what the Lender’s terms are for when a price valuation (devaluation) default occurs.

First, a margin product offered by a Bank will immediately trigger a margin call (default notice) as soon as your collateral drops below the valuation floor set by your Lender.

Regardless of the value correcting immediately afterwards, once a margin call is triggered it must be satisfied.

Depending on the market, Banks typically are not allowed to give more than 1 banking day for a Borrower to settle the margin call by either providing additional collateral or paying down the loan balance otherwise they face having the shares liquidated and any remaining balance must be paid in full before legal and debt collection actions are taken against the Borrower (recourse).

In the case of Mountbatten Global Fund’s Non-Recourse Securities Finance products, the drop in value must be continual for a period of several days before a margin call or default is considered. So during the period specified in the contract, should the share price recover above the floor value before the end of the specified time period, a default will not have occurred.

It is important to note that this is not the case with a wide range of other Non-Recourse Lenders who will follow a model similar to a Bank margin loan and default the loan immediately upon hitting the price floor.

This is because they will want your loan to default as soon as possible so that they do not have to service your debt, mostly because they have sold off the collateral and do not want to repurchase it at a later date.

So before choosing a Lender to borrower against your stocks or other securities, it is wise to check over their default criteria first.

Michael

Director

The Mountbatten Global SPC Fund

[email protected]