The Wire: Autumn 2021Case study – borrowing using shares as collateral

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Case study – borrowing using shares as collateral

In October 2020, I received a call from a client who had recently sold his business. He had £3 million to invest and had specific requirements:

  1. A regular monthly draw/income from this capital of £2,500 (net)
  2. A portfolio invested in individual equities spread internationally, without a UK bias
  3. A loan facility of up to £1 million secured against the portfolio. He needed £150,000 to meet his Capital Gains Tax (CGT) bill in January 2023 and £850,000 for a potential property development.

Lending using a portfolio of shares as collateral is sometimes referred to as “Lombard Lending”. In the current climate of ultra-low interest rates, it can be an attractive strategy.

The loan-to-value ratio is set by reference to the composition of the investment portfolio on which the loan is secured. The more cautious the portfolio, the higher the loan available as a percentage of the portfolio.

With a 100% equity portfolio, a bank will lend between  65% to 70% of the portfolio value. Typically, the loan would be drawn to around 30% ensuring there is an adequate buffer in the event of a substantial fall in value of the portfolio due to market volatility. As the portfolio increases in value, so the loan facility can be increased.

Securing great terms for my client

I spoke to several private banks regarding the loan facility, some of whom wanted to charge an arrangement fee of 0.5% and an interest rate ranging from 1.25% to 1.75% over Sterling Overnight Index Average (SONIA).

I then approached Bellecapital, with whom we have a close relationship. They are headquartered in Zurich but have a London office and offer an international equity portfolio held in custody at Credit Suisse UK.

Due to the number of assets Bellecapital have at Credit Suisse they have preferential pricing arrangements. This allowed them to secure a £1 million loan facility from Credit Suisse against the client’s portfolio at an interest rate of 1% over SONIA with no arrangement fee.

Bellecapital’s equity portfolio performed extremely well during a volatile 2020, and it is substantially up this year.

My client is extremely happy with this arrangement. He has seen his portfolio grow substantially, received his monthly income, and made use of the loan facility to pursue other opportunities.

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