Securities-based lending: an opportunity for investors

Real Estate Weekly, July 13, 2005 by Seth Rutman

The strategic use of credit may be an important component of your overall wealth management plan.

If you have an eligible portfolio that may be used as collateral for a loan, you may be able to access liquidity without immediately liquidating securities and still maintain your portfolio's current exposure to the market.

This is known as securities-based lending.

What is Securities-Based Lending?

Securities-based lending is generally a revolving line of credit that uses your eligible investment portfolio as collateral for a loan. This strategy allows you to access funds without immediately liquidating your portfolio.

In order to establish a securities-based loan, your portfolio is pledged to a lending institution as collateral. This gives you, the investor and the borrower, the ability to access liquidity while maintaining your portfolio's current exposure to the market.

You will continue to receive the benefit of any dividends, interest or capital appreciation that may accrue in the account.

However, if you have an outstanding loan balance and the portfolio used to secure that loan declines in value, the lending institution may require additional securities to be pledged as collateral or request repayment of the loan.

The lending institution may also liquidate all or part of the portfolio, which may interrupt your long-term investment strategy and could result in adverse tax consequences.

For Whom Is Securities-Based Lending Appropriate?

A securities-based loan may be an alternative to traditional borrowing methods for an investor who wants to borrow for non-purpose use. Since there is risk involved in this type of strategy, this avenue should be explored only if you are risk tolerant.

What is Non-Purpose Borrowing?

Loans that are provided by lenders, such as banks and brokerage firms, must be classified as either purpose or non-purpose, as required by Federal Regulations. The proceeds of a non-purpose loan may not be used to purchase, carry or trade securities. Some uses for a non purpose loan include: Financing real estate opportunities; Paying your taxes; Refinancing high interest non-purpose debt; Financing business opportunities; Funding higher education; Buying a luxury item

Non-purpose borrowing against your investment portfolio has a number of benefits that are not available with traditional margin borrowing.

While a margin loan must be drawn in the same account where the eligible securities are held, a non-purpose loan is held in a separate account; thus, multiple asset accounts may be pledged to secure one non-purpose loan.

This structure is particularly useful in situations where multiple parties wish to secure a loan for a single borrower, such as business partners securing a business loan to their company.

In addition, there may be higher borrowing limits or release percentages against the value of your eligible securities when they are pledged for a non-purpose loan.

What Types of Loans Are Typically Available?

The term or type of loan will vary by lending institution; however, in general, these loans are non-committed, demand loans that may be priced with either a fixed rate for a period of time or a variable rate for a revolving line of credit. The lender may require repayment of a demand loan at any time, without notice.

For more information about whether securities-based lending may be a financing solution for you, contact your financial advisor and/or tax advisor.

Neither UBS Financial Services Inc. nor UBS Bank USA provides legal or tax advice. You should consult your legal and tax advisors regarding the legal and tax implications of borrowing using securities as collateral for a loan.

For a full discussion of the risks associated with borrowing using securities as collateral, please review the Loan Disclosure Statement that will be included in your application package.

SETH RUTMAN

UBS FINANCIAL SERVICES INC.