Structuring Margin Financing for Private Equity Funds: Securities as Collateral, Margin Calls and Cures, Registration Issues

Description

The recent surge in asset-based lending to private equity funds has often included margin financing where shares are pledged in support of asset-based loans. The collateral may include publicly traded securities, preferred shares, convertible notes, or debt of public companies. Finance counsel must understand the nuances of margin lending with regard to each collateral type and how it fits into the entire transaction.

The method of perfection may vary depending on the type of collateral. Public securities can be deposited into a custodial securities account with a control agreement in favor of the lender. Control over book-entry securities can be effected with a contractual control agreement with the issuer or the lender to take physical control of certificated securities.

Valuation is a key component of margin credit facilities. There must be a valuation method to track LTV, whether by mark-to-market for publicly traded securities, or value as reported by the sponsor investment vehicle to its investors and creditors. If the securities fall in value, a margin call will require a cure to reduce the LTV to the required level.

A cure is accomplished by repayment of a portion of the loan or posting additional collateral. If a cure is not possible, the borrower may be forced to sell shares and apply the proceeds to pay down the loan. If the borrower's shares were not registered in connection with the related IPO, a registration statement must be filed, or the sale must be conducted pursuant to an exemption from registration.

Listen as our authoritative panel discusses the structuring, documentation, and administration of margin loans.