Pledged Share Stock Loans Increase Year on Year Allowing Clients To Access Better Stock Loan Financing

Pledged share stock loan financing is more popular than ever as an alternative source of liquidity for significant shareholders in UK-listed companies. We explore the reasons why the market has reached new highs in the last two years – and what will drive its growth from here.

Loans backed by pledged shares in UK-listed companies are taking off as a growing number of investors look to raise money from their shareholdings. Platinum Global are an institutional investment broker that specialises in long-term asset-backed financing.

The number of equity-backed loans disclosed by directors of UK-listed companies more than doubled in 2020 compared with the previous year. Based on the trend observed so far in 2021, the transaction count is also on course to grow again in the full year, although the volume of loan proceeds raised may decline.

Share pledges disclosed by directors in the year to August were worth over £412 million at the time the transactions were made public, compared with almost £2.4 billion in all of 2020. Using a typical industry loan-to-value (LTV) ratio of 65%, We calculate that these pledges translated into loans worth some £1.55 billion in 2020 and £269 million in the year to August 2021.

Pledged Share Stock Loans

These figures provide new insight into the evolution of share-backed financing, which is commonly referred to as Lombard lending in the UK. Market observers see it becoming increasingly broad-based, developing from a tool for high-net-worth individuals with billions of dollars of assets into an increasingly mainstream source of funding.

Indeed, the more recent LSE data shows that share-backed financing is being used by a wider range of individual investors looking to raise smaller amounts of capital against shares in a broad spectrum of listed companies.

Close to half the firms in which stock was pledged in the last two years were in the benchmark FTSE100 or 250 indices, according to the data. However, experts point out that larger and more liquid stocks are typically eligible as collateral for margin lending from large banks, which does not necessarily have to be disclosed by directors since it may involve no change of title over the underlying shares.

Without question, the universe of borrowers is growing and there is an increased understanding that share-backed financing can be a great way to access liquidity for a very wide range of purposes without having to sell your shares.

London Stock Exchange rules require companies to disclose share dealings, including pledges, by persons discharging managerial responsibilities: board directors, senior executives and people or entities connected with them. Disclosure requirements for major investors who are not directors sometimes also require information about certain share pledges to be disclosed.

Beyond these disclosures, though, public data is limited and the personal nature of these transactions – although they involve shares in listed companies – means the industry places a premium on privacy and discretion. These qualities are essential.

A share-backed loan is a relatively straightforward concept. In the same way that a mortgage secured by a property carries a lower interest rate than unsecured borrowing with a credit card, a loan backed by a portfolio of public securities can give an investor flexible funding at an attractive borrowing cost.

Borrowing against stock can be an attractive alternative to an outright sale. The borrower – a company director, major shareholder or other long-term investors – can retain the economic benefits of the pledged shares, including dividends and gains from stock price appreciation.

This has all been true for decades, though. So why is equity-backed financing suddenly in vogue? Experts point to a number of reasons, ranging from rising demand from high-net-worth clients to changes taking place in the banking system.

On the supply side, banks and specialist providers are finding that equity-backed lending can be an efficient use of their capital. With liquid securities as collateral, share-backed loans take up less of a bank’s regulatory capital than unsecured or corporate credit lines – one reason why so many banks are looking to grow their private wealth businesses.

By on October 8, 2022   /   Blog  
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