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True Loan
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A True Loan (also known as a True Stock Loan or TLP) is a form of proprietary stock loan offered as a financial service by private lenders within the finance industry to shareholders of publicly traded companies seeking liquidity from their stock without having to sell their securities. Unlike a typical stock loan where borrowers are normally required to pledge free trading securities, the True Loan is a specialty vehicle allowing loans to be secured against both affiliate (as defined by the SEC) and non-affiliate restricted stock and/or Rule 144 stock and a public company’s treasury stock. Free trading shares are also viable collateral for the TLP. The True Loan’s reputation was borne in it being the first lending structure offered by non-banking entities which didn’t require a borrower to transfer ownership of their stock to a lender. The True Stock Loan format affords borrowers the ability to maintain shares within their own name and account. For investors, the True Loan is considered a non-wholly correlated investment strategy. The True Stock Loan’s fixed ROI isn’t atypically affected by market volatility and overall returns are generated and supported by three independent financial components. From a compliance standpoint, the True Stock Loan appears to be the only domestic lending program offered by private lenders that is fully SEC, U.C.C. & FRB compliant. Ajene Watson is the developer of the True Loan Program. The TLP is managed by True Lending Platforms, a division of Ajene Watson, LLC. Stock Loan vs. Securities Lending (Stock Lending) Securities/Stock lending traditionally refers to the lending of securities by a lender/ banking entity to a borrower. Whereas a Stock Loan, in the world of private lending, refers to the lending of money by a lender/non-banking entity to a borrower who pledges securities as collateral. True (Stock) Loan vs. Stock Loan Like all stock loans traditionally offered by private lenders, the True Loan is secured by the pledge of stock as collateral; giving no credence to the borrower’s credit or economic background. The primary difference between the True Loan and other stock loans as it pertains to the collateral is:
True Loan Recourse Types True Stock Loans can be transacted in any one of the following recourse types: Non Recourse - whereby the borrower is not personally liable for the outstanding obligation. Should the borrower default, the lender can seize the collateral and dispose of such in accordance with the law; but the lender's recovery is limited solely to the collateral. If the stock proves insufficient to satisfy the outstanding loan balance, the lender makes the write-down. This loan type is only provided to non affiliates. Full Recourse - whereby the borrower is personally liable for the entire loan obligation. Should the borrower default, the lender is entitled to seek financial recourse against the borrower. This loan type is provided to non-affiliate, affiliates and public companies. Limited Recourse - whereby both the borrower and lender share in the liability of the loan. With limited recourse, while the borrower is not personally liable for the entire loan, they are made to bear a predetermined portion of obligation. Likewise, while the lender is entitled to financial recourse against the borrower, such recourse is limited to a predetermined portion of the obligation. Thus, in the case of a default, the lender can seize all of the collateral and dispose of such in accordance with the law until they are made whole. In the event the sale of the collateral was insufficient to cover the obligation, then the lender may seek some recourse against the borrower based on the predetermined limited portion of liability assumed by the borrower. Limited Recourse as it relates to the TLP, was designed by Ajene Watson as a component of the True Loan specifically to ensure the legitimacy of non-recourse type funding for affiliates while simultaneously mitigating investors’ holding risk. This loan type is provided to affiliates, non-affiliates, and public companies. True Loan Example In an example transaction, a private lender having a license agreement with Ajene Watson LLC and True Lending platforms will provide a borrower holding restricted stock in a public company traded on the NYSE, NASDAQ or AMEX exchanges with non-recourse type funding. The borrower will take their stock certificates and make a deposit into their own account at a TLP approved major broker dealer. After the seasoning period elapses (time required by most B/D’s), the lender will fund the borrower within five to fifteen business days. The entire timeline for funding is similar to that of receiving a mortgage or other significant business loan. There is a one time Funding & Origination Fee. Interest is simple fixed rates paid quarterly; ranging between 4% and 11% depending on the collateral. Lenders generate revenues via the funding & origination fee (which varies from lender to lender) and debt service income. There are three types of agents: (i) basic, (ii) intermediate, and, (iii) advance. An agent’s revenue is generated via the funding & origination fee and in some cases from debt service and bonuses. Investors, whose capital is managed either through investment pools or funds, are locked into a fixed rate of return; normally between 8% & 14% per year. Investors also benefit from an appreciated rate of return at the end of the loan term which can positively adjust returns to rates as high as 28% per year. Loans durations are generally between one and three years. True Loans have no lock-up provisions, allowing loans to be prepaid at anytime. In the event of default, the lender will make themselves whole and return any and all overage back to the borrower in either cash and/or stock. An event of default is the one and only time the lender can remove any restrictive legends and dispose of the stock; prior to this, legends must remain intact and the collateral is never sold, traded, shorted, loaned, hypothecated or hedged against in any way. Overall cost for a True Stock Loan can be considered expensive depending on the caliber of restricted stock pledged as collateral. Free Trading shares are acceptable as well. However, due to the program’s pledging method, wherein lies the primary expense, free trading shareholders who are less interested about collateral control, comfortable working within the “gray area” and/or aren’t impeded by strict SEC laws, would seem less likely to obtain a True Stock Loan. Legalities The True Loan is presumably a completely legal stock loan which clearly acknowledges that it is regulated by more than the SEC, but also the FRB and U.C.C. The True Loan adheres to these bodies of law in so much as: The True Loan also makes way for U.S. Treasury Revenue Rulings and IRS requirements, further ensuring proper securities and loan valuations and lender, investor and shareholder disciplines. Market size The overall capitalization of the US market continuously fluctuates but places within the tens of trillions of Dollars. While restricted stocks make up a smaller portion of the overall market, during 2004/2005 Restricted Stock Partners (RSP) was quoted on several occasions noting the value of the restricted markets to reflect $1.2 trillion to $1.3 trillion dollars. This valuation is substantiated by the estimates indicated within the Depository Trust & Clearing Corporation’s 2004 REPORT. The True Loan format is currently assessable only by those shareholders who hold securities trading on the NYSE, NASDAQ and AMEX (American Stock Exchange). Without consideration given to the amount of viable free trading shares available for the True Loan Program, the TLP is exposed to significant portion of the restricted market. However, Ajene Watson, developer of the True Loan has been very public in saying that his vision for the program is to access between 2% and 3% of the market over a four year period; which equates to over $30 Billion in actual loan transactions. From an investment perspective, the True Loan’s market is open to a myriad of investors. Income investors, bond desk, note purchasers, CDO markets, restricted stock buyers, derivatives, investment pools, hedge funds, etc. To this regard, the TLP can be used as either the primary investment product or hedging tool. The product is designed primarily for medium yield, low risk. Based on market performance, medium yields transcend into higher yields with continual low risk basis. In direct relation to the aforementioned 2% to 3% market estimate, ROI’s for the True Loan could possibly range between $2.4 billion and $8.4 billion dollars annually. Evaluation Method Much of what is standard practice in valuing typical stock loan programs, securities and debt instruments, along with predicting price, interest, various forms of risk, market fluctuation, etc., seem to have been altered, reversed and/or disregarded in the TLP valuation process. Conversely, a host of newer finance conjectures were employed. Yet still, to the True Stock Loan’s credit, the strategy manages to create an investment environment which seems to be virtually unaffected by typical market volatility - a “non-wholly correlated” investment. However, this is not to suggest that this investment vehicle, as with any other, couldn’t be derailed provided market conditions were destructive enough. Much of the evaluation methods and techniques used in determining loan terms vs. investment returns for the True Loan transaction is proprietary and has yet to be fully disclosed. There are also various mechanisms which appear to be exclusive to the True Loan - not discussed with anyone outside of borrowers, licensed lenders, investors and their attorneys. Regardless, there are some general themes and principles used in the evaluation process that have been extrapolated from various monthly tutorial phone conferences and documentation True Lending Platforms often distributes or provides on the website. What is known about the evaluation process is that it includes the following: I. Technical Analysis:
II.Fundamental Analysis (including):
III. Full Scope Restricted Stock Appraisal One of the primary problems with the True Loan evaluation process, is, that it is exhaustive and rather time consuming. Most stock loan lenders can turn quotes around to a prospective borrower within 24 to 48 hours. This is a major selling point for lenders and borrowers. Lenders offering the True Loan generally will not have an accurate quote for between 7 and 10 business days. This is generally an enormous turn off to the average shareholder who may not regard their stockholdings as being as important of an asset as any of their other properties; or may, but have just been jaded by the industry’s general 24 to 48 hour standard. Another issue would be that for the laymen, the results of the True Loan’s thoroughly complex evaluation process yields to much degree, a very counter-intuitive product. An example of this would be, the longer the duration of the loan, the less expensive are the terms; or the prepayment penalty in the early periods of the loan are much less expensive than the latter years. In fact, while there is no lock up provision (meaning a borrower can prepay at any time) of any kind, there are instances where the prepayment penalty may reflect a $0 cost basis within the first three to six months. Or more commonly, if a security is at an all time high, there is a great possibility that the evaluation will reflect a higher grade risk transaction resulting in terms less favorable then that of a competitive company whose stock is trading at an all time low. Interestingly, while the True Loan is one of the only stock loan products which allow restricted securities to be fully pledged by affiliates (or other restricted shareholders), its counter-intuitive nature raises great concerns of legitimacy. This is primarily due to the confusion caused by what one is used to, expects, or assumes appropriate logic to be. However, being counter-intuitive doesn’t make conclusions wrong or illegitimate. Much of Mr. Watson’s evaluation process is influenced by accomplished economist and financial scholars such as Harry Markowitz, William Sharpe, Fischer Black and Myron Scholes; individuals whom weren’t exactly conformist. Persons such as these rather claim contrarian economic and mathematical concepts; views which would become proven disciplines and ultimately adopted, taught, employed and used ongoing - even in current day economics. In other words, while in fact the True Loan evaluation, process and result is indeed very different, lengthy and complex, it may very well one day become a standard. But this is yet to be seen. Until Ajene publishes his conjectures or makes his valuation technique public to some degree, it will be difficult to accurately discuss the methods used in engineering the complex construct of the True Loan. What is known for the moment is that great consideration is given to dozens of variables which seem to have been effective in producing protective loan terms for borrowers; and a rather secure, low risk - medium/high yield environment for investors. Known Contributors
History Shareholders continuously seek new methods of accessing the liquidity of their stock holdings. Normally, a sale of stock would achieve this goal. However, during the early 90’s, accessing liquidity without selling one’s shares became en vogue. The margin loan was characterized as the “go to” transaction if an investor wanted to leverage their portfolio and command additional buying power. However, margin environments quickly fell out of favor as there were many restrictions and various liabilities that were unsettling to investors. Additionally, banks, broker dealers and any other type of “banking entity” guided by Regulation T and Regulation U (aka Reg. T & Reg. U, respectively) were limited to how much credit could be extended, to whom and when. These firms were also generally caused to loan solely on a full recourse basis. With banking entities having their hands tied, the door was left wide open for another group of firms and investors to take the lead — private lenders or non-banking entities. Private lenders weren’t subjected to the same stringent FRB guidelines. Therefore, these firms were able to provide loan products that seemed extremely flexible and desirable. Interest rates were low, loan to values (LTV) were high, term durations were flexible, no margin call or maintenance requirements and the majority if not all of these loans were non-recourse. With the prospect of offering and receiving such a loan, a new era of the Non-Recourse Stock Loan was ushered in. To meet the demand of shareholders seeking liquidity from their shares without selling, private lending companies were not simply lending against free trading shares, but began lending on restricted securities. However, the format used for free trading stock was not conducive to restricted stocks. Still yet, private lenders and borrowers with the help of their attorneys continued to consummate these loans against restricted stock sighting and exploiting what was considered to be a “gray” area in rule 144. As the industry grew and the popularity of the non-recourse stock loan attracted affiliates and non-affiliates with restricted stock, problems began to arise. Many lending firms were using hedging strategies that were deliberate and risky. This would often result in the collapse of a stock price or the inability for a borrower to reclaim their shares once the loan had been paid off. The non-recourse stock loan began to be the cause of many suits, bringing lenders, agents and borrowers under heavy scrutiny of the IRS or SEC; thus resulting in governmental litigation and a lot of unclear opinions as to what constituted a loan, what constituted a sell, and how one could borrow against their restricted securities without violating the law and hurting company shareholders. The stock lending industry soon began to lose its luster and the search was on to create a better stock loan product. This product would have to give borrowers the safety and legitimacy required, yet at the same time meet and exceed every regulatory and compliance hurdle that faced each of the lending participants: the borrower, lender and agents. In October of 2006, a new loan program emerged that would change the face of the industry and solve problems that lenders, borrowers, and agents all faced in the past. Still in its infancy stage at the time, it would be another full year before this program would garner any credible attention. After four years in development, this new loan product has been now supported by a number of contributions from SEC, FRB and U.C.C. specialty attorneys, IRS and tax consultants, investment advisors, industry agents and even a former assistant deputy director of the SEC's New York Enforcement Branch. Aptly named the "True Loan" by its creator, Ajene Watson, this financing vehicle is currently one of the only bona fide fully domestic stock loan program available by private lenders offering Non-Recourse type environments for restricted shareholders of any type, where shares remain within the borrower’s own name and account, and all parties remain in full compliance with FRB, U.C.C., and most importantly, SEC regulations. See Also
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