In late November, Amazon’s founder and Executive Director, Jeff Bezos, announced that he had sold around $240 million of Amazon stock and he was rumoured to be considering offloading significantly more: potentially up to $1 billion. The initial $240 million Amazon liquidation was filed as contributions to non-profit organisations. Any further stock liquidation could be for the same reason, given Bezos has several philanthropic funds he may need to finance. Alternatively, it may be that Bezos wants to create liquidity from one part of his wealth base (Amazon) to invest into another of his companies (Blue Origin):especially as he reportedly invests up to a billion dollars of his own money into his aeronautics firm on an annual basis.
Blue Origin Stock
Blue Origin is privately held by Bezoswith no potential IPO in sight, and there is currently no indication he wants to take the space tourism company public.
Raising capital from private and institutional investors for Blue Origin is an option for Bezos. However, doing so would dilute his control in the business, so investing his own capital may make sense, depending on his long-term objectives for the company and its financial position. When the sums of capital required are as large as Bezos' rumoured billion-dollar-a-year tab for Blue Origin, selling Amazon shares to create the liquidity needed could also make sense.
Raising such a significant amount of capital so often would be incredibly time-consuming and challenging from the perspective of sourcing, negotiating and structuring the capital inflow. Add in stakeholder or shareholder demands (which will usually include profitability), covenants that might potentially restrict the direction Bezos' can take the company and other limitations that come with outside investment, and it's easy to see why Bezos might want to keep Blue Origin private. It's also possible that Bezos’ return on investment from Blue Origin may ultimately yield higher returns than holding the stock in its original position within Amazon.
Bezos has also increased his philanthropic giving since he stepped down as Amazon's CEO in July 2021, announcing at the end of November he had given just under $120 million to non-profits that help homeless families in 2023 via the Bezos Day One Fund. It's thought that much of Bezos' charitable giving may be made through donating portions of his Amazon shares, which is also likely to be a fiscally advantageous way of providing financial support.
Of course, a centibillionaire (an individual with a new worth of 100 billion US dollars) with a staggering 988.3 million Amazon shares plays by his own rules when it comes to buying and selling stocks. However, for many investors, it will be far more advantageous to use an existing portfolio of securities as collateral for a loan rather than selling off these assets, which can trigger tax liabilities and can mean you can't benefit from future appreciation. Another advantage of securities-backed lending is that the interest rates associated with these loans can be more competitive than with other types of lending.
Exploring further the advantages Of Securities-Backed Lending
Access Liquidity Without Selling Securities
Instead of selling securities as a way to access capital, investors can effectively leverage their investment portfolio or stocks, using it as collateral for a loan in return for credit from a lender. This allows them to maintain their investment positions while accessing the capital they need. It is beneficial for individuals with a long-term investment strategy or who expect the value of their stocks or portfolio to be worth significantly more in the future.
Avoid Triggering Potential Tax Liabilities
In some cases, selling securities to create liquidity can trigger fiscal liabilities. The larger a sell-off, the higher the amount may be due, with capital gains tax being the most common liability. Setting aside capital created from the sale of securities to cover tax bills can reduce the amount of capital an individual has available, which can mean the seller has less capital than they need. Alternatively, using all the capital from the sale of securities means the seller will ultimately need to find more capital at a later date to cover the fiscal liability, which can be a challenge or will require arranging for the disposal of other assets.
Conversely, pledging securities to a lender as collateral for a loan won't usually trigger a fiscal liability because these is no sale, which is advantageous for anyone looking to avoid incurring immediate tax liabilities. The loan must be structured carefully with expert legal and fiscal advice to ensure it is compliant and structured advantageously. However, in most cases, a loan against securities will circumvent triggering capital gains tax while still providing access to significant liquidity.
Speed
Especially in the current environment, raising finance through traditional routes can be a challenge. Some lenders are taking longer to underwrite loans, assess affordability and evaluate a borrower's profile and suitability for a loan. Some lenders may also have adopted a more conservative approach to lending, equating to longer decision-making processes and loans taking longer to complete.
Conversely, securities-backed lending transactions tend to move much more quickly, and the application process can be more straightforward than other types of loans. This is because lenders will focus almost exclusively on the value and quality of the securities pledged as collateral.
Lenders will also need to value the securities that the borrower proposes to put forward as collateral and then move to complete the loan quickly because the value of securities used as collateral can potentially change between the moment the lender values/underwrites the securities and the completion of the loan, affecting everything from loan-to-value ratio to interest rates. As a result, lenders need to move quickly to complete transactions. This is an advantage for anyone who needs to access capital quickly and enables borrowers to access capital quickly - loans can be completed in as little as two weeks.
Flexibility
Lenders will want to understand what a securities-backed loan will be used for, but they are open to almost any scenario, provided there is a rationale for borrowing and a reasonable level of risk. Other types of mainstream lending can be more restrictive than securities-backed loans because lenders may limit how the capital is deployed (a mortgage can only be used to buy a property, for example). Securities-backed loans can be used for almost any purpose, from buying property to purchasing assets, consolidating debt, paying off unexpected liabilities, purchasing or growing a business, diversifying wealth and so on - the possibilities are nearly endless.
Maintain An Existing Investment Strategy
Another advantage of this type of financing is that investors can retain their existing investment strategy for the duration of the loan, meaning they benefit from any future appreciation of the securities. This is usually beneficial as an investment strategy will be carefully planned and will suit the investors' risk tolerance, financial objectives, the diversity of asset allocation and other factors such as a desire for ESG investing and so on. Securities-backed lending, therefore, often allows investors to 'go long' if they want to, maintaining their investment strategy without changing it or liquidating securities. At the same time, they can access capital they can put into other projects or to solve problems.
Discreet, expert guidance is essential
Of course not every individual has the extreme wealth that Jeff Bezo has impressively accumulated. But nevertheless even those with more modest investment portfolios may benefit from protecting their equity holdings when capital raising.
Enness has deep experience in assisting with arranging high-value securities-backed loans. If you are interested in knowing more, please get in touch. Our team of experts will answer any questions you have, including the types of securities you can use for such a loan, the process, structuring and what you will need to consider with this type of finance.
This guide is for information and illustrative purposes only and nothing contain within should be construed as advice or a recommendation.
