Post by oldman on Nov 7, 2013 10:19:29 GMT 7
Book: Your first million, 2nd Edition
Section: Tools of the trade
When you pledge a share, you are transferring ownership of the share to the financial institution that lends you the money. In many ways, your pledged shares represent the collateral for the loan. If you default on your loan, the financial institution must have a way to liquidate your collateral, without having to go back to you for your permission – which of course, if you have your way, you are likely to decline.
For margin accounts, when you pledge your shares, the shares will be transferred from your name to the name of the broker, who will then provide you with the margin financing. If there is a margin call and you are not able to top this up, the broker can sell some of your pledged shares. The broker is able to do so because your pledged shares are already in the broker’s name.
I understand that for some high net worth clients, there can be back-to-back arrangements between brokers and clients such that the client can still hold the shares in his name but the broker has an unexecuted agreement, which he can execute immediately, in the event of a default. Such pledged shares are not easy to trace.
For car loans, my understanding too is that the car is under the name of the finance company until you have cleared your car loan. This is why finance companies keep the car log card and can repossess your car by towing it away if you drop behind in your repayments.
I think the repercussions from the issue of pledged shares may eventually extend to the shareholdings of companies as well. Some majority owners of companies may also have pledged their shares for loans and it is only fair that investors are informed. Of course, the majority owners will not be too happy as this may expose their positions.
Convertibles are just another way for companies to raise money. Usually, most listed companies raise money through a rights issue, a placement or simply, through a bank loan.
For smaller companies, they may find it hard to raise money the traditional way and convertibles may then look attractive. This is especially so if a well known financial institution knocks on your door, instead of the other way around, and offers you an easy way of raising money.
The listed company issues a convertible bond to the financial institution at a discount to the current share price. My understanding is that many financial institutions dealing with such convertible bonds do not hold on to the shares once it has been converted, as their business model is not that of an investment company. Their business is to sell the shares in the open market and keep the difference as their profits. Many investors do not appreciate this important fact.
If the listed company issues tranches of convertibles, the same process is repeated. This may put increasing pressure on the share price as the conversion price for each tranche is usually at a discount to the share price at the time each of the tranche is released. No wonder such convertibles are often referred to as toxic convertible bonds.
Not all convertibles are created this way. Traditional convertibles have fixed prices for conversion. When blue chip companies issue convertibles, they are usually the traditional fixed type ones offered at fair market value and not at a discount to existing market value.
Section: Tools of the trade
When you pledge a share, you are transferring ownership of the share to the financial institution that lends you the money. In many ways, your pledged shares represent the collateral for the loan. If you default on your loan, the financial institution must have a way to liquidate your collateral, without having to go back to you for your permission – which of course, if you have your way, you are likely to decline.
For margin accounts, when you pledge your shares, the shares will be transferred from your name to the name of the broker, who will then provide you with the margin financing. If there is a margin call and you are not able to top this up, the broker can sell some of your pledged shares. The broker is able to do so because your pledged shares are already in the broker’s name.
I understand that for some high net worth clients, there can be back-to-back arrangements between brokers and clients such that the client can still hold the shares in his name but the broker has an unexecuted agreement, which he can execute immediately, in the event of a default. Such pledged shares are not easy to trace.
For car loans, my understanding too is that the car is under the name of the finance company until you have cleared your car loan. This is why finance companies keep the car log card and can repossess your car by towing it away if you drop behind in your repayments.
I think the repercussions from the issue of pledged shares may eventually extend to the shareholdings of companies as well. Some majority owners of companies may also have pledged their shares for loans and it is only fair that investors are informed. Of course, the majority owners will not be too happy as this may expose their positions.
Convertibles are just another way for companies to raise money. Usually, most listed companies raise money through a rights issue, a placement or simply, through a bank loan.
For smaller companies, they may find it hard to raise money the traditional way and convertibles may then look attractive. This is especially so if a well known financial institution knocks on your door, instead of the other way around, and offers you an easy way of raising money.
The listed company issues a convertible bond to the financial institution at a discount to the current share price. My understanding is that many financial institutions dealing with such convertible bonds do not hold on to the shares once it has been converted, as their business model is not that of an investment company. Their business is to sell the shares in the open market and keep the difference as their profits. Many investors do not appreciate this important fact.
If the listed company issues tranches of convertibles, the same process is repeated. This may put increasing pressure on the share price as the conversion price for each tranche is usually at a discount to the share price at the time each of the tranche is released. No wonder such convertibles are often referred to as toxic convertible bonds.
Not all convertibles are created this way. Traditional convertibles have fixed prices for conversion. When blue chip companies issue convertibles, they are usually the traditional fixed type ones offered at fair market value and not at a discount to existing market value.
