Why Non-Recourse Securities Based Loans Require Rehypothecation

A common item that is asked by agents and clients alike is why non-recourse lenders such as Mountbatten Global require the ability to rehypothecate the collateral they receive.

First, let's understand what rehypothecation means.

Rehypothecation is where a lender reuses collateral it has received for other loans and is a common practice in the banking and capital markets industries by lenders.

There are three main reasons why collateral is rehypothecated which are:

1. A hedging structure to offset the risk of losses due to devaluation of the collateral
2. Unlocking the cash value of the collateral to make various investments to generate revenue as well as an added hedging method
3. Creating liquidity that can be utilized to fund additional loans

Rehypothecation can come in various forms, the most commonly used are:

• Leveraging pooled accounts on margin
• Leveraging single positions on margin
• Leveraging single positions using REPO’s (repurchase agreements)

Rehypothecation should not be confused with short selling or the dumping of shares to the open market as these are not considered rehypothecation structures.

With regard to Mountbatten Global, the disclosure that a borrower’s shares are subject to rehypothecation for the duration of their loan is clearly stated in order to maintain proper transparency.

It is important to note that because all loans offered by Mountbatten Global are purely non-recourse, that rehypothecation is mandatory in order to protect the financial interest of the fund and its investors since personal/corporate guarantees to repay their loans are not required from borrowers.

This is also why Mountbatten Global has strict minimum criteria for collateral to meet in order to be accepted for its loans.

Micro Cap listings and most illiquid securities (low or no trading volume) can not be leveraged with institutional counter-parties which is why they are not accepted.

This is much the same reason that margin lenders such as banks and securities brokerages will only accept certain securities and not others.

Will Mountbatten Global agree to not rehypothecate, trade or hedge the collateral until an event of default has occurred first?

No, because by doing so would cause the fund to incur significant financial losses in doing so, especially if the value of the collateral plunges significantly over a short period of time or simply becomes illiquid.

This type of structure would be akin to taking out a life insurance policy after you have died. No insurer will offer a policy after the fact which is the same with structuring hedges to offset the risk of losses on collateral used to secure loans.

What if I don't want my collateral to be rehypothecated?

Then we suggest that you do not use the asset in question as collateral for any loans, even margin loans where the lender claims it will not be rehypothecated, traded or hedged since this is an industry standard practice and in some markets, lenders may not be required to factually disclose this.

Will Mountbatten Global tell me or notify me of what rehypothecation structure will be used specifically for my collateral?

No, since this is considered proprietary and also one or more structures may be used by Dominion8, Mountbatten's investment manager as a means of hedging the fund's risks.