Borrowers should have legal advice on margin loan documents (and, most importantly, all related retention and security documents) to ensure that they are familiar with their own obligations, the lender`s rights and the time frames in which marginal appeals must be met, and how long the lender must wait to exercise its rights. With respect to illiquid securities, there is also a risk that the valuation received by the lender will be too low and that the guarantees will actually be acquired by the lender in accordance with the Financial Collateral Regulations (see below). During the term of the loan, it is important that borrowers regularly check their credit account, as the value of the market value of the portfolio could change very quickly, and if the value decreases, the borrower must ensure that he or she will be able, if necessary, to sell the portfolio assets or repay the loan or replenish it with other assets. , taking into account that the time frames within which margin calls must be met can be very short (for example. B 24 hours or less). During the term of a margin loan, the borrower must maintain an agreed hedging rate at all times – in other words, the market value of the portfolio must be a multiple of the outstanding loan (depending on the volatility of the portfolio asset market). When the coverage rate falls below the required level, a “margin call” is triggered and the borrower is required to either repay the loan or “reload” the portfolio of additional assets in order to restore the coverage rate and ensure that it is maintained. If the borrower does not meet the margin call (by “reconstituting” the security or repaying the loan), the lender may sell assets in the portfolio (as the borrower`s representative or, if the guarantee agreements are considered financial guarantee agreements in accordance with the Financial Collateral Regulations (see below) and use the proceeds of the sale to repay the amounts owed to it. The more volatile the value of portfolio assets, the shorter the time to complete marginal calls and the faster the lender will want to liquidate assets that lose value in the scenario where a borrower becomes insolvent in the event of a margin call.
The PRA`s proposals are clearly relevant to transactions in which a single strategic shareholder, who is or has been very close to the issuer in the past, wishes to monetize its stake in that issuer. These are often transactions made by PDMRs or PDMRs8 PCAs against the issuer concerned, in which the debtor has few assets or does not want the lender to have access to them. In these cases, the issues that the PRA wishes to clarify are relatively clear and the proposals clearly reflect concerns about marginal lending to companies with other limited assets, for which the value of Collateral Shares has fallen rapidly and where there was a strong relationship between the issuer and the debtor. The PRA explains that it has reviewed the practice of companies in applying capital to secured financing operations. In particular, the PRA review focused on secured financing transactions in which the security consists, in whole or in large part, of shares of a publicly traded company5. that the debtor must maintain at all times.6 This would be by providing additional guarantees, since the value of collateral shares decreases either in the form of cash, other shares of the same issuer, or additional assets.