Borrowing against shares goes by several names, and the names are used loosely. A private banker says Lombard loan; a brokerage says margin; a specialist lender says stock loan or share-backed facility; an index provider says securities lending and means something else entirely. The words overlap, and none of them settles the questions that decide whether a particular arrangement suits a particular holder.
This piece defines each term as it is generally used, then sets out the six questions a product name does not answer.
The terms, one at a time
Securities-based lending
The broad category: credit secured by a portfolio of marketable securities. In its most common form it is offered by a bank or brokerage to an existing client against securities held with that institution, as a revolving line or a term loan. The borrower typically remains personally liable for the debt, the lender sets an advance rate against the portfolio and can demand additional collateral or repayment if its value falls, and the securities stay with the lending institution.
Lombard loan
The European private-banking term for the same idea: a loan secured by assets the client holds with the bank, usually a diversified portfolio of liquid securities. The bank assigns a lending value to each holding, lends against the total, and retains the right to call for more collateral or to sell holdings if the lending value is breached. In most arrangements the client remains liable for any shortfall.
Margin loan
The brokerage version: borrowing against securities in a brokerage account under the broker’s margin terms. Advance rates are set by regulation and by the broker, a margin call follows a fall in value, and the broker may liquidate positions without advance notice. The borrower is liable for any shortfall after liquidation.
Stock loan, share-backed loan, non-recourse stock loan
Financing against a specific listed position, usually a concentrated one, often from a specialist lender rather than the holder’s own bank. The structure varies: the shares may be pledged or title may be transferred; the lender may be the principal or an intermediary; recourse may be full or limited to the collateral. In a non-recourse stock loan the lender’s recovery is limited to the agreed collateral, within the scope of the transaction documents. The name says nothing about who holds the shares, what the lender may do with them, where the money comes from or what is returned at the end; the documents do.
One distinction matters more than the rest. In a prefunded facility the lender’s capital is placed in the borrower’s account before the shares move, and the advance is funded from that capital. An arrangement funded by selling the shares on receipt is, in substance, a sale, whatever the document is called.
Securities lending
A different transaction, despite the similar words. In securities lending the owner of securities lends them to another party, typically a broker or fund, for a fee and against collateral, so that the borrower can use them for settlement or short selling. It is a way of earning income on a holding, not of borrowing money against it. The term matters here because share-backed financing structures include a provision for the lender’s use of the pledged shares during the term; that provision, its limits and the return obligation beside it are among the things to read for.
Pledge, title transfer, block financing
Pledge and title transfer describe how the collateral is held. Under a pledge the holder keeps title and grants security over the shares; it is the standard structure for a holder who intends to keep the position. Under a transfer of title the lender becomes the owner for the term and owes the holder a return of equivalent securities; it is a different arrangement and is documented as one. Block financing is a market term for financing against a large single holding; it describes the size of the position, not the structure.
What a product name does not tell you
Six questions decide the arrangement, and none of them is answered by the name on the term sheet.
Where the money comes from, and when. Is the capital for an advance in the borrower’s account before the shares move, or do the shares move first? Is the advance funded from the lender’s capital, or from the sale of the shares? Where there is more than one advance, is each one matched, with the capital in the account before that advance’s shares are deposited?
Recourse. If the shares are worth less than the debt, does the lender pursue the holder’s other assets, or keep only the collateral while the holder keeps the funds released? Where is the limitation written, and what undoes it?
Who holds the shares, under what agreement. Pledge or transfer of title; the institution; the account and whose name it is in; and the control agreement that says what the lender may and may not do.
What the lender may do with the shares, and where that is written. A lender without recourse to the holder’s other assets carries the downside of the stock, and can only do so by managing its risk in the collateral, as any institution financing a concentrated position does. The question is not whether that right exists but where it is written, what its limits are, and whether the obligation to return the same or equivalent shares sits beside it. A lender offering non-recourse who says there is no risk management in the collateral is either carrying a loss it cannot carry or managing the collateral somewhere the holder has not been shown.
What changes the position. The warning level at which the holder may add collateral or repay part of the facility, the enforcement level, any period to remedy, and the consequence. Share-pledge financing in several markets calls these the warning line and the liquidation line.
Cost and timing. Interest and fees, when each is payable, whether anything is payable before funds are released, and whether early redemption is permitted and at what cost.
A proposal that answers all six in one set of documents can be compared with any other. One that answers them piecemeal, or by reference to the product name, cannot. The one-page checklist of twelve questions covers the same ground in the order a lender should be asked.
Silo’s approach
Silo provides privately negotiated, non-recourse financing against listed shares, as principal, on a pledge: the holder keeps title and grants security, and the shares stay in the borrower’s own account at the designated licensed broker-dealer under the Collateral Management Agreement. For an approved advance, capital is placed in an account opened in the borrower’s name at the designated licensed broker-dealer before the corresponding collateral is deposited, and funds are released when the agreed settlement conditions are met. The advance is funded from Silo’s capital; it is not funded by selling the borrower’s shares.
Silo manages its risk in the collateral as an institution does, within the limits written in the Collateral Management Agreement, and returns the same or equivalent shares on repayment. A maintenance event gives the borrower the opportunity to add collateral or repay part of the facility before any enforcement; on enforcement the borrower keeps the funds already released and owes nothing further. Full drafts of the documents are provided to the borrower’s counsel before signing, and no fee is payable to Silo before funds are released.
Frequently asked questions
Is a Lombard loan non-recourse?
In most private-banking arrangements the client remains liable for any shortfall after the bank has realised the collateral, so the answer is usually no. The provision that limits recourse, if there is one, should be read together with any personal guarantee, cross-default or top-up obligation elsewhere in the documents.
Is securities lending the same as a stock loan?
No. Securities lending is lending out securities for a fee; a stock loan is borrowing money against them. The terms meet where a share-backed financing sets out the lender’s permitted use of the pledged shares during the term, which is a provision to read for in the documents together with its limits and the return obligation.
Which structure suits a concentrated holding?
That depends on the holder’s objective, the shareholding and the proposed terms rather than on the product name. Compare where the money comes from and when, recourse, who holds the shares and under what agreement, what the lender may do with them and where that is written, what changes the position, and the cost and its timing. For a holder who intends to keep the position, a pledge with the lender’s capital in place before the shares move and the same or equivalent shares returned on repayment is the arrangement to look for.
Discuss a proposed facility
An initial discussion begins with the issuer, exchange, size of the shareholding and financing objective. Silo assesses each proposal individually, with funding subject to underwriting, lender approval and the definitive agreements.
This material is provided for informational purposes only. Nothing herein constitutes investment, legal, tax, securities, accounting or regulatory advice, an offer to lend or provide financing, a solicitation, a recommendation, or a commitment to enter into any transaction. Securities-backed financing involves risk, including loss of collateral. Access may be restricted by jurisdiction or residency. Any potential facility remains subject to Silo’s review, diligence, approval, jurisdictional analysis, compliance review and definitive documentation. Readers should consult their own professional advisers.