Category Archives: Securities

Credit, Securities Backed Lines Of Credit

Securities Backed Lines Of Credit

The Differences between Individual Margin Accounts and Revolving Credit?

It’s noon the day after Donald Trump has been victorious in his comeback cementing his Re-Election as President of the United States, and the country is electrified and the Stock Market is Roaring to all time heights today. But did you know? You can use you Securities as collateral to finance a loan? Yep! So I felt the need to share more about this today. Hmmm…It’s true!

Imagine yourself in the world of business and your a entrepreneur and all of a sudden you find yourself needing to use some debt to pay for your liquidity crisis? It happens and happened to me recently here is what I learned!

Credit Types

First before we dive into Margin Accounts that Banks Offer, we first must distinguish the two different types of Credit. The first type is Short term high interest credit. This credit type is usually one year or less and has a higher Interest rate because of the convenience it offers consumers. Just like in the Bond market the second type of credit is moderate to long term credit. Depending on the time involved with your credit needs? Moderate to long term credit is longer than one year and shorter than 10 years. This credit facility is used to offer borrowers lower interest rates.

Endowment Funds are a unique topic alone. Read all about this topic I wrote HERE!

Margin Vs. Short Term Revolving Credit

It seems I must share some quick facts and differences about Margin and Short Term Revolving Credit. Margin is credit offered by a Investment Bank that is lent to a individual who has a Brokerage Account with securities as collateral. It is usually high interest credit and short term. Margin credit works like this, Your portfolio of Securities of Stocks, Bonds, Mutual Funds and Investments held in your Brokerage account act as collateral for the Credit granted by the Bank.

It also must be pointed out that it’s highly likely you must have at least Fifty Thousand to One Hundred Thousand Dollars minimum invested in your Brokerage Account before the Bank will grant you a Securities Backed margin account. Under Finra rules a Bank is not allowed to grant credit of more than fifty percent of the total Securities held in the persons brokerage account. Example: If I have Fifty Thousand of Blackstone Stock in my Brokerage Account? The Bank can lend or extend me Fifty Thousand dollars on Margin. This credit is not to be used for purposes of Trading securities. It must be used as cash on anything else except Investments.

Revolving Credit | Credit Cards

According to Investopedia Revolving Credit is explained best by:

How Revolving Credit Works?

When a borrower is approved for revolving credit, the bank or financial institution establishes a credit limit that can be used over and over again, all or in part. A credit limit is the maximum amount of money a financial institution is willing to extend to a customer seeking funds.

Revolving credit is generally approved with no date of expiration. The bank will allow the agreement to continue as long as the account remains in good standing. Over time, the bank may raise the credit limit to encourage its most dependable customers to spend more.

Did you read my Page and Investment Portfolio? HERE.

Borrowers pay interest monthly on the current balance owed. Because of the convenience and flexibility of revolving credit, a higher interest rate typically is charged on it compared to traditional installment loans. Revolving credit can come with variable interest rates that may be adjusted. The costs of revolving credit vary widely:

So as you can see and imagine this can be a complex topic of discussion and to explain. However I like to keep thing simple and straight when I am writing. To sum up Securities Backed Lines Of Credit? It’s a Bank Loan that is deposited into your Brokerage account with the expectation that you will pay it back and use your Securities or Investments in the Account as collateral for the Loan. It’s that simple.

Larry Ellison loves his margin Account so much he uses it regularly for very large purchases. In fact if you want to read more on the topic? I would highly suggest you read this article by Forbes.

“How the Richest Public Company Executives use their Stock to have access to Billions.”

Speaking about Billions My Good Friend and Fellow Value Investor and Investment Advisor Mr. Bogumil Barnowski has built a Fantastic Podcast “Talking Billions” and Finance Professional Presence. Click on image.

Mr. Barnowski’s Podcast and Advisory Practice is incredibly interesting. Soon I will have to do a interview or post all about his Life as a Professional Advisor to High Net Worth Families.

SBLOC’s

As I conclude this Post about Margin Accounts and Securities Backed Lines Of Credit (SBLOC’s) Id like to leave you with this thought. Securities Backed Lines of Credit are more convenient than most other Lines of Credit. After all Securities are Asset’s just like a Home is a Asset to most Americans who invest into a Mortgage and store and grow their wealth using this method. However I would disagree with the thought “A Home is a Asset.”

I was taught by Investment Bankers as a Investment Advisor and as a Qualified Advisor? I do not feel a Home is a Asset. It is indeed a Liability. The upkeep and maintenance costs alone will erode and defy the mere fact your trying to create wealth for the future. I prefer my assets to be cash producing Investments. Buying Companies is a great way to build wealth as a Investor. At least you know if your wealth is increasing. Anyway’s I am getting off topic.

Using Securities Backed Lines of Credit

Securities Backed Lines of credit can incredibly useful as a Business owner or as extra source of finance when you find you need the convenience of fast money. As a Entrepreneur this can be incredibly useful and easy. The thought you can deposit income then buy stocks and bonds over time using your Income will no doubt generate wealth for you as a Entrepreneur.

Be Responsible With Debt and Credit

I would like to leave you with this one thought. What better way as a entrepreneur is there than taking the income we make from our Careers or Businesses than to deposit into a Brokerage account and buy Investments? Then when we have built up a small fortune with our stocks and bonds and investments? We can begin using them as assets to generate new strategies to building wealth.

I would argue that it could be risky if you don’t use this responsibly. However even thought with this said? If Larry Ellison and Elon Musk can use this for their convenience? To me that just seems like a convenient and winning strategy. It no doubt is bullish and capitalistic. Thank you for reading.

Godspeed
JS

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Business Articles, Corporate Finance, Finance Articles, Investing, Securities

Corporate Secured & Unsecured Debt Securities

Lending Money to Corporations using Corporate Secured and Unsecured Debt Securities could be a risky opportunity for Institutional Lenders and for the Banks and Private Credit Investors. If your not up to date on the legal hierarchy or priority of claims for repayment? Allow me to share that Priority list below. Familiarity with a Corporate Balance Sheet will likely make this list easy for you.

  1. Liquidation/bankruptcy fees and charges – this does not include court fees.
  2. Debts due to preferential creditors – those entitled to certain payments in priority over other unsecured creditors – including wages owed in the four months before the date of the insolvency order, as well as all holiday pay and contributions to occupational pension schemes.
  3. In company cases, any creditor holding a floating charge over an asset, such as a debenture. This is where a class of goods or assets – eg the debtor’s stock – are named as security for a debt.
  4. All unsecured creditors.
  5. Any interest payable on debts.
  6. The shareholders in company cases.

The hierarchy of Credit starts with Secured Creditors then Unsecured Creditors. However for this Post I would like to focus on deliberately on Secured and Unsecured Debt for Institutional Investing. This small list is meant to be used in order and will help Retail Investors, Students, and Business Executives who need to brush up on this topic of interest. As a value investor we are laser focused at looking on a Companies Balance Sheet and focus directly and early on a Companies Solvency. If the company is Debt heavy? This usually indicates we need to consider the use of the Debt in order to make a informed decision on “How we arrive at a Companies Valuation”. If the Company we are investigating has no Debt on the Books? This is a good sign. And tells us as Value Investors “This maybe a very profitable Business to investigate further.”

Secured Debt

Corporate Debt Securities are like any other Loan, and are backed by various types of assets of the issuing Corporation. This list is a Seniority list. Meaning they are Secured Debt options in order.

Mortgage Bonds

Just as a Individual would go to the Bank to ask for a Loan backed by the Home and Land as Collateral for the Mortgage, a corporation will borrow money backed by Real Estate and Physical Assets that belong to the Corporation. If the Corporation fails and is unable to repay the Long Term Debt Obligation “Mortgage Bondholders”. The Assets pledged are liquidated by Court Order when the Corporation is insolvent and goes through the Chapter 7 Bankruptcy process. For further explanation? This video should help.

Equipment Trust Certificates

Interestingly Railroads and Airline companies, finance the acquisitions of their Rolling Stock, Train Rail Cars, Airplanes, by issuing an Equipment Trust Certificate. The Company provides a Down payment of usually 20% Twenty Percent of the cost of the rolling stock, and finances the balance over the course of time. For example, 20 years time. Because equipment has wear and tear from daily use in the operations of the Business, the Railroad will pay off a portion of the loan on an annual basis. Interestingly at no time, theoretically, is the value of the assets (rolling stock, rail-cars,Jet Aircraft) worth less than the amount of the principal remaining on the loan. When the company finishes paying off the loan it receives a clear title for the equipment pledged from the Trustee. If a company does fail to make the payments for the loan? The lender can then repossess the collateral and sells it for his benefit. It’s the same concept of financing a new Car.

Did you catch my post here on: Pooled Investments What you need to know?

Collateral Trust Bonds

Sometimes a Corporation doesn’t have real estate, Equipment, or assets to pledge as collateral for a Mortgage or Loan. Instead the Board of Directors or Management can pledge Company Securities like Stock or other Negotiable Securities from a Parent Corporation into a Trust as a form of secured collateral. This is useful because the Securities are readily liquidated in case of default. Obviously the better quality of Securities deposited as collateral the better the Rating of the Bond. Sometimes these are also referred to as Collateral Trust Certificates.

Unsecured Debt Securities

Debentures

A Debenture is a Debt Obligation of a Corporation backed by only the Corporations word and general creditworthiness. Debentures are written promises of the corporation to pay the principal loan amount back its due date with interest on a regular basis.Debentures surprisingly are not secured by any pledge of property. They are considered safe when the Lender has trust or a credit relationship with the Corporation. This is sort of like a Revolving line of Credit for Commercial Banks and their clients who are the Corporations. Example: Similar to Consumers who use a Bank Credit Card and have great credit worthiness.

Guaranteed Bonds

A Guaranteed Bond is a Bond that is guaranteed as to payment of interest, or both principal and interest, by a corporate entity other than the issuer. The guarantee is only as good and valued if the company providing the guarantee has a strong business. Guaranteed Bonds were popular in the Railroad industry in which Major Railroad Companies sought to ease the trackage rights from a short line Rail lines, and would guarantee the smaller Rail Lines companies debt. A more recent example would be Exxon Mobile Corporation guaranteeing a subordinate companies debt issue.

Senior Debt

This is used to describe the seniority of a Debt Issue. Or the relative priority of repayment claim of a Debt that has been issued. Every preferred stock has a Senior claim to Common Stock. Every Debt security has a senior claim to preferred stock. Secured Bonds have a senior claim to unsecured debt.The term senior securities means bonds and preferred stock, because they have a claim senior to common stock. If you would like to see the Seniority of Debt and Equity? Please refer to the Chart Above below the opening paragraph.

Subordinated Debt

Subordinated Debt is just that! “Belonging to a lower class or rank.” Please refer to above list of Ranked Repayment Obligations.

Credit Ratings

It would be unprofessional of me not to include Ratings and Credit Ratings Agencies in this Post. When evaluationg a Bonds Ratings? You should refer to the Bond Ratings are defined by the Creditworthiness of a Companies Debt. These are issued by Standard & Poors and Moody’s and Jefferies Investment Bank. All these are fantastic Companies who hand Credit Worthiness of Debt Issues and Companies Debt History.

For Credit Ratings This Image Below Will show my Notes on Bond Ratings.

High-Yield Bonds

Since I would have a difficult time explaining in detail High-Yeild Bonds. Investopedia has shared and described High-Yield Bonds as?

High-yield bonds (also called junk bonds) are bonds that pay higher interest rates because they have lower credit ratings than investment-grade bonds. High-yield bonds are more likely to default, so they pay a higher yield than investment-grade bonds to compensate investors.1

Issuers of high-yield debt tend to be startup companies or capital-intensive firms with high debt ratios. However, some high-yield bonds are fallen angels, which are bonds that lost their good credit ratings.

In conclusion I hope you learned a few things about Corporate Secured and Unsecured Debt Securities. In the end Bond Investing can fail. So it’s vital to know the basics of Bonds and Credit. This Wall Street Journal Animated Video should help you understand this fact.

These are basics we use as Investing and Finance professionals. Feel free to share and if you learned something? Fantastic! “

This post is for Educational purposes only. And should not be construed, implied, or taken as Investment Advice.”

Godspeed! Thank You.

JS

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Business Articles, Finance Articles, Investing, Law, Securities

National Securities Markets Improvement Act

Wether your a Financier, a curious investor or a even new Stock Broker/Dealer Agent, If your not up to speed on the NSMIA of 1996? This short post will give you a brief overview of what the National Securities Markets Improvement Act is and what it is used for.

Here is a question? What is the National Securities Markets Improvement Act of 1996 (NSMIA)? The National Securities Markets Improvement Act is a law passed in 1996 that sought to simplify securities regulation in the U.S. by apportioning more regulatory power to the federal government.

NSMIA is a List of Securities that are Federally Listed on the NSMIA Website.

NSMIA Securities are Federally Covered Securities.

The National Securities Markets Improvement Act (NSMIA) amended the Investment Company Act of 1940 and the Investment Advisers Act of 1940 and went into effect on Jan. 1, 1997. Its main consequence was to increase the authority of federal regulators at the expense of their state-level counterparts, a change that was expected to increase the efficiency of the financial services industry. 

What Changed after NSMIA was Introduced?

NSMIA caused a material impact on the responsibilities of federal and state regulators. Ultimately, it reduced the overlap between federal and state power. State security laws no longer oversaw the following topics:

1. Capital

2. Margin

3. Bonding

4. Custody requirements

N.S.M.I.A

  • The National Securities Market Improvement Act (NSMIA) was introduced to more efficiently allocate capital in financial markets.
  • NSMIA amended the Investment Company Act of 1940 to promote more efficient management of mutual funds, protect investors, and provide more effective regulation.
  • Nationally traded securities, securities of registered investment companies, sales to qualified purchasers, and securities issued in certain exempt offers are exempt from state regulation.

There are a-lot of Securities that are listed on the N.S.M.I.A website. To catch up on the latest case by case basis? Here is the List HERE.

I do hope you learned something here, If you did not catch my Invesment Fund Article Here, Id highly recommend you go read it. It’s all about Investment Funds.

What are covered securities under NSMIA?

Today, most stocks traded in the U.S. are considered covered securities. In addition to the offers and sales of certain exempt securities, the NSMIA defines “covered” securities as securities that: Are listed on national securities exchanges such as the New York Stock Exchange and the Nasdaq.

Thanks for Stopping by,
Godspeed

JS

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Business Articles, Finance Articles, Financial Products, Investing, Law, Securities

Thought’s On Crypto Regulation & Binance Lawsuit

Anthony Scarramucci CEO of Skybridge Capital Shares Opinion Segment In My Youtube Video Provided.

People do ask for my opinion on Crypto and its shaky history of legitimacy.There are many questions that need to be asked. Is it useful? Does it have a place in the Financial Service Industry or Markets? Can we leverage it for good? And can we keep the Scam Artists, Conmen, and Charlatan’s from promoting their shady dealings with this unregulated Currency?

My latest video on the topics above will give you better understanding “How the Securities and Exchange Commission used a little known Law that describes a “Investment Contract – THE HOWEY TEST” to bring a Lawsuit against Binance Crypto Exchange.”

Did you catch my latest Article on “Asset Backed Securities”? HERE.

Enjoy, and Please Do Share if you find useful.

Godspeed
JS

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Business Articles, Finance Articles, Financial Products, Real Estate, Securities

“Asset Backed Securities”

What are Asset Backed Securities? “Why every Finance Professional Should Know All the Asset Classes and “How they impact our Community and Business’s.”

Asset-backed securities (ABS) finance pools of familiar asset types, such as auto loans, aircraft leases, credit card receivables, mortgages, and business loans. In one way or another, these asset types represent contractual obligations to pay.

  • These contractual obligations to pay often rank senior to a borrower’s traditional debt obligations, reducing ABS investors’ exposure to the borrower’s financial health. ABS also have many other investor-friendly features that may help protect against loss and improve liquidity, such as traunching (SEGMENTS) of risk, over-collateralization, and diversity of payers in each underlying pool. Despite these and other strengths discussed in this report, some ABS and other forms of structured credit continue to offer higher yields than similarly rated corporate or municipal bonds. ABS investors’ principal job is to analyze the cash flows from these obligations to assess value and the possibility of loss, rather than relying solely on the current market prices of hard assets, the reputation of a sponsor, or the presence of an investment-grade rating.
Guggenheim

What is a RMBS? (Residential Mortgage – Backed Security)

Residential Mortgage – Backed Security is exactly what it sounds like. A Home or Residential Building Mortgage Contracts packaged and registered by a Investment Bank Institution placed into a folder with other Residential Mortgages and Packaged as a Security product by the Investment Bank for the purpose of trading and Investing within the Public Markets.

LARRY FINK – BLACKROCK

1970 to 2000

It is with great enthusiasm that I am able to introduce the Man who pioneered Mortgage Backed Securitization. Mr. Chairman of BlackRock Larry Fink. According to Wikipedia’s Profile on Fink? Larry started his career in 1976 at First Boston, a New York-based investment bank,[13] where he was one of the first mortgage-backed security traders and eventually managed the firm’s bond department.[14] At First Boston, Fink was a member of the management committee, a managing director, and co-head of the Taxable Fixed Income Division; he also started the Financial Futures and Options Department, and headed the Mortgage and Real Estate Products Group.[15]

Fink added “by some estimates”[3] $1 billion to First Boston’s bottom line. He was successful at the bank until 1986, when his department lost $100 million due to his incorrect prediction about interest rates.[3] The experience influenced his decision to start a company that would invest clients’ money while also incorporating comprehensive risk management.[3]

In 1988, under the corporate umbrella of The Blackstone Group, Fink co-founded BlackRock and became its director and CEO. When BlackRock split from Blackstone in 1994, Fink retained his positions, which he continued to hold after BlackRock became more independent in 1998. His other positions at the company have included chairman of the board, chairman of the executive and leadership committees, chair of corporate council, and co-chair of the global client committee.[3][15] BlackRock went public in 1999.

For more info on Mr. Fink please refer and read Blackstone – Mr. Scwarzman’s Book “What it Takes“.

Continuing with Asset Backed Securities.

Did you catch and watch my latest Youtube Channel Video on Derivative Contracts Below?

Commercial Mortgage Backed Security

(CMBS)

A commercial mortgage-backed security (CMBS) is a type of fixed-income security. It is backed by real estate loans. These loans are for commercial properties. They might include office buildings, hotels, malls, apartment buildings, and factories.

Learn more about CMBSs, how they work, and what they mean for individual investors HERE.

In 2008 WallStreet’s Lehman Brothers Investment Bank was overly exposed by backing, and registering TOXIC Securities, otherwise known as Subprime Mortgage Backed Securities.

Watch as Warren Buffet shares and explains more about the Financial Crisis that happened in 2008 Below.

CDO SWAP Derivative – Collateralized Debt Obligations

According to my friends at the Corporate Finance Institute: A Collateralized Debt Obligation (CDO) is a synthetic investment product that represents different loans bundled together and sold by the lender in the market. The holder of the collateralized debt obligation can, in theory, collect the borrowed amount from the original borrower at the end of the loan period. A collateralized debt obligation is a type of derivative security because its price (at least notionally) depends on the price of some other asset.

Historically, the underlying assets in collateralized debt obligations included corporate bonds, sovereign bonds, and bank loans. A CDO gathers income from a collection of collateralized debt instruments and allocates the collected income to a prioritized set of CDO securities.

Similar to equity (preferred stock and common stock), a senior CDO security is paid before a mezzanine CDO. The first CDOs comprised cash flow CDOs, i.e., not subject to active management by a fund manager. However, by the mid-2000s during the lead up to the 2008 recession, marked-to-market CDOs made up the majority of CDOs. A fund manager actively managed the CDOs.

Finishing out this month’s post on Corporate Finance and Investing, I genuinely hope this article and post was of value to you. Did you know I began learning all about the depths within Corporate Finance only few years ago? This has been a difficult road. But I am having a Blast learning and becoming a Professional Investor and Corporate Finance Professional. There have been times learning all these Financial Products has been Challenging. Especially learning the exact details of Markets, Contracts, and the growing list of Sophisticated Financial Products. But I can say with certainty all my efforts and has been worth the effort. And I do hope you will share the Post. And until next time? We will see ya. Thank you for reading.

Godspeed.
J.S.

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