DWS Posted October 29, 2004 Report Posted October 29, 2004 Staying "In" and "Out" of the Market at the Same Time? Hedged portfolio stock loans have become more popular in recent years as a means to tap asset value when capital gains taxes loom in the event of a sale. These loans utilize private options writers to handle the puts and calls needed to cut the lender's risk position to zero; the lender then passes 90% of the portfolio at-the-money back to the client in a feature rich loan structure. An example here is an offer I received from one of the bigger companies out there, HedgeLender out of Reston, VA, on a loan concluded a couple of months ago. This demonstrates the mechanics of the hedge loan which I wanted to share here: Description: HedgeLender's "Flagship" (full upside) HedgeLoan Features: Unlimited upside appreciation to the account of the borrower; no margin calls for any reason; non-recourse loan; comprehensive quarterly Account Statements; investment grade counterparties; 100% hedged. Ticker: BRCM (Broadcom Corporation) Share total: 365,000 Loan-to-value: 90% Value cap: None. There is no limit on the growth of the portfolio. Term: 5 years Loan origination fee: 5 points Interest rate: 11.17%, interest accrues monthly Break-Even Point Appreciation: 9.43% annual portfolio appreciation needed to break even; growth beyond this is profit to the borrower at 100%. When I took this out the price was $27.66, making my a current porftolio value of $10,095,900 . My loan is 90% of this approximately (exact amount at hedge) or about $9,086,310 Fees deducted at 5% present a net loan of: $8,631,995 Dividends are credited against interest up to 4%/yield, but BRCM isn't doing much there. Note also that the discount and interest rate are not profits to the lender. The discount is the cost of the initial options; the interest rate is the cost to amortize those options over the term of the loan. HedgeLender basically advances funds to amortize the options and collects only when interest is paid at the end, since these loans do not require payment of principal or interest. Fees - points on the loan I think they are called - are the main area of profit but I am assuming that some astutely performed hedges also come into play. The portfolio appreciation I will need at this rate will come to $5,746,431 over five years. During that five years I have unlimited use of my funds for any other non-marginable investment (the one restriction). I am probably going to put it into short-term non-marginable T-bills and regen the profits consistently until loan maturity. Will make a good bit more than the payoff, and at the end I'll not only have my shares back in full, but have a tidy profit to boot. This is a tax deferral strategy, but a portion of my HedgeLoan proceeds are going into oil and gas trust investments that should produce a nice tax bennie if my CPA is correct. Still checking this out. On the matter of security, this company (HedgeLender) uses Options Clearing Corp, an S&P AAA-rated firm for clearing what are in any case privately underwritten investment grade options. No options can be written through them without OCC providing a guarantee on every one. There are contractual safeguards involved as well, and the company has an unblemished record over 6 years now and thousands of these loans. Members of the Better Business Bureau. Did my homework. There are no margin calls on this. And its nonrecourse. No tax event is triggered unless I default, which I am allowed to do. But even in that case, it is not recorded as a sale to the lender until the end of the loan term. I am basically cutting my risk of loss to 10% of the current porftolio value, while preserving my interest in a future rise in value and putting my stock value to work today in other investments. Please note that 57,000 of the above 365,000 are stock options, not free-trading shares (they don't take restricted shares). This company will pay the execution price directly the the options holder and place the shares directly into the stock loan, deducting the cost of the options (plus any taxes) from the loan. This meant that I was able to do the entire thing without reaching in my pocket for a single penny... Their website is at www.hedgelender.com. I open this topic up. I am happy with my loan -- but am open to any discussion or comment. Would love to hear from others. I understand that there are legit hedged portfolio lenders and some not so legit out there too -- the stock dumpers, or those offering far less than HedgeLender's 90%, etc. Nice discussion if you are interested on their website at http://www.hedgelender.com/baitersfinal.htm I attached one of their flyers to help in the discussion process. Skeptics and complimenters equally welcome.
alceringa Posted October 29, 2004 Report Posted October 29, 2004 Hmmmmmmmmmm...... Welkomen to stoolville DWS. Care to explain how "hedgelender" makes thier money?
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