Stock Loans

[modaddy]

All,

As I wrote here , my company got bought last February. The deal closed last month, and I finally got ahold of my stock and am ready to roll.

However, instead of liquidating all of my stock, I'm considering taking a no-recourse loan against the stock and using that to diversify my position. (No-recourse means that at the end of the loan term, I have the option to surrender my stock to satisfy the contract with no additional obligation)

The goals of this are:

- Avoid short term cap gains on sale of the stock
- Give myself an opportunity to gain in the event that our parent company takes off
- Avoid disaster if I hold onto the stock and my parent company goes into the toilet

The company I am considering to do this loan is offering 9.25% APR, 85% LTV, and no origination fees. They are BBB-registered and my initial research indicates they are legitimate.

Has anyone done this kind of loan before? What alternatives do I have that can accomplish the 3 goals above?

Thanks in advance...

[DcifrThs]

are you not allowed to sell a chunk of what you hold?

Barron

[pig4bill]

That sounds like a pretty good deal. I think you will still be exposed to the possibility of Alternative Minimum Tax. Check with your tax guy, but I think you are liable for the gain in the year you get the stock, for the "discount". Say the stock is selling for 30 and you had options at 10. You got a 20 point discount and are liable for the tax on it, at payroll rates. If it drops to 10 the next year, you still owe the tax on the 20 points.

[modaddy]

Yeah, I'm already planning on a hefty AMT bill but should be in OK shape to pay it. Another advantage of the loan will be that I will be able to pay my AMT if I hold the stock and it tanks. :-)

[DesertCat]

My personal experience is you should do this in a heartbeat, it sounds (almost) like a no lose situation. My shares were trading at $8 or so when the deal closed but I was locked up, I ended up selling most for about $1.50. My friends who never sold got taken out in an acquisition at 51 cents. So you are ahead of the curve in planning your financial future.

[Scorpion Man]

Mo:

Sorry, but I don't understand the terms here. I don't see how a lender can do what you describe. Are you certain that there are no other terms than you have written? This appears to be unhedgeable from a lenders' perspective, and therefore unwriteable.

Can you please be very specific about the terms? BTW -- 9.25% APR is a lot, its the avg LT return of the stock market, and I don't see how borrowing at 9.25% to diversify is a good economic trade. I would never do it.

[modaddy]

The company's website is here. I don't know much about about hedge trading (perhaps a reason not to do this), but the idea seems to be that they use the leverage of the additional assets to take advantage of various hedge opportunities.

I think the 9% rate is quite reasonable considering the risk
the lender faces of losing the entire cash value of the loan.

I did a few "models" that show the loan is "profitable" compared to holding the stock in almost all scenarios I came up with, even without taking the tax benefits into consideration.

One last thing... if you happen to go to the above link and decide it's something you want to partake in as well, please let me know. They have offered me a referral bonus which I would be happy to split.

[pig4bill]

[ QUOTE ]
Can you please be very specific about the terms? BTW -- 9.25% APR is a lot, its the avg LT return of the stock market, and I don't see how borrowing at 9.25% to diversify is a good economic trade. I would never do it.

[/ QUOTE ]

You wouldn't? He's essentially getting a LEAP call option for 9.25%. That's pretty cheap for a growing Silicon Valley tech company. Even better, he's getting the cash now instead of laying out the call premium. Theoretically he could put that cash into the market and have the call option essentially free, except for the possibility of losing 15% from the LTV difference.

[Scorpion Man]

I talked to them. Hmmm.....

My instincts, as they are always with derivatives, is that unless tax arbitrage makes up for it you are by definition gettting the short end of the stick (at least in a pure financial sense). The question is just how short and do other circumstances make up for it. You are, in a derivative situation, paying for your counterparty to use its balance sheet to support you hedging. You are also paying them for their expertise in hedging.

You have a very high LTV from what I can tell. I would think that would imply that your parent company has ample liquidity and realtively low volatity. This is, I assume, how they can hedge it away...they are buying long term out of the money puts for you. You are paying for this by paying them 2x short term rates.

They sound legit -- said no lawsuits, complaints, or claims in their history.

So overall the reason to do this, as you state, is to avoid ST taxes and probably because you are not allowed to buy long term puts on your company stock when you still work there (which is the b.s. of this product from a regulatory standpoint, as an aside). Generally, if I am looking for risk reduction and diversification, I would much prefer to simply sell the stock and diversify. This cuts out all the middle man costs and caps your losses just as effectively.

I think about it like this. If I were sitting around from scratch and constructing a portfolio, would I choose a regular old diversified portofolio? Or woudl I choose to have some buy LEAPs for me, so i could get way overconcentrated in a single stock, then borrow moeny from those people using my stock as collateral, then get diversified while paying a usurious rate.

Everything I ever needed to know I learned in kindergarten.


THanks for pointing it out. Interesting product.

[Scorpion Man]

[ QUOTE ]
[ QUOTE ]
Can you please be very specific about the terms? BTW -- 9.25% APR is a lot, its the avg LT return of the stock market, and I don't see how borrowing at 9.25% to diversify is a good economic trade. I would never do it.

[/ QUOTE ]

You wouldn't? He's essentially getting a LEAP call option for 9.25%. That's pretty cheap for a growing Silicon Valley tech company. Even better, he's getting the cash now instead of laying out the call premium. Theoretically he could put that cash into the market and have the call option essentially free, except for the possibility of losing 15% from the LTV difference.

[/ QUOTE ]

You sure piggy? Its not 9.5%, Its 9.5% PER YEAR>