Lombard Loans

Lombard loans are always individually negotiated. The interest rate of your Lombard loan will mostly depend on the underlying security you are offering as collateral. However, the loan-to-value ratio, the quantum, the asset manager and other factors will affect what interest rates your borrower will provide you with.

For example, a diversified portfolio of A-grade stocks at a modest loan-to-value will be very cheap: around 1% per annum.

A high loan-to-value ratio on a single line of stock listed on a secondary index with low trading volumes will be more expensive by comparison.

Whatever the cost of your Lombard loan, it is always worth looking at the bigger picture. What constitutes an ‘expensive’ Lombard loan is often contextual, and it may ultimately cost you significantly less than selling your securities before they mature or the cost of a missed opportunity. Lombard loan interest rates can also be lower than ‘traditional’ loan rates, making them an interesting option.

Lombard Lending is a relatively short-term form of borrowing with terms ranging from as little as one week up to 24 months. Financial institutions will usually offer Lombard loans as a percentage of the value of the securities held by the borrower.

However, the investments or assets the borrower pledges to the lender must be easily liquidated.

Lombard Loans can typically be accessed by individuals with investment portfolios of at least £100,000 – lenders may also stipulate a minimum loan amount.

Stocks, shares and bonds are among the most common types of securities accepted, but some life insurance policies with a surrender value may also be considered. The types of securities usually affect the value of the Lombard Loan offered by the lender. However, most Lombard loans are offered at around 60 per cent of the value of the securities – this helps buffer against movements in the value of the securities.

Once the loan is agreed the securities will be kept in a custodial account controlled by the lender.

If the assets drop below a certain pre-agreed value, the borrower is likely to be asked to top up based on the agreement set out with the lender. Where a borrower does not, or cannot, provide further securities the lender may sell a portion of the existing assets to reduce the loan. The lender may also exercise this option if a borrower were to fail to make repayments.

Any unwinding costs of the assets before maturity fall to the borrower. If there is still an outstanding loan amount after all pledged assets are sold, the borrower is liable to the bank for this sum.

Asset based lending, also referred to as Lombard Loans, doesn’t fall under regulation by the Financial Conduct Authority. 

Many banks offer Lombard loans against financial assets, and they will happily offer you a loan if you have a certain type of asset and you are a client.

That said, you’ll find that the vast majority of Lombard loan lenders focus on the most vanilla part of the market. In essence, this means they will only offer loans collateralised against diversified portfolios and grade A securities.

Enness works with the many lenders who pick up everything else, including more complex or unusual assets or very niche areas of the market. Enness connects borrowers with specialist lenders, private equity houses, alternative financiers and even high-net-worth individuals who offer Lombard loans.

Timing, presentation, negotiation and access are crucial to securing the best Lombard loan.

Lombard loans always have a loan-to-value cap. That’s to say there is always a maximum percentage of the value of your asset(s) that lenders will be willing to lend. Lombard loan lenders need to be able to absorb potential volatility or changes in the value of the securities during the period of the loan without making a loss. For this reason, you won’t be able to borrow more than a certain amount against your assets.

Some Lombard loan lenders will also enforce a margin call should the value of a stock fall below a certain amount. In these cases, the Lombard loan will need to be repaid, or you will need to provide additional assets that your lender can use as collateral.

Lombard loans also have other limitations, and you should assess the consequences of these carefully. These limitations are by no means so restrictive that they make a Lombard loan unfeasible - after all, many people still use securities-backed finance with much success. However, you will need to understand how limitations will affect you and what room you might have to negotiate. Whether or not you retain voting rights, what happens to dividends, short selling clauses and so on should all be considered carefully. Enness’ broker will explain more about Lombard loans, potential risks and what you should think about before going ahead with this type of loan. 

Lenders will look carefully at your securities in the underwriting process for a Lombard loan. The key points a lender will look at are:

• The value of your securities
• What the security is made up of
• The liquidity of the security
• If the security is listed, which exchange it is listed on 
• How concentrated the shares are
• The industry or field the company trades in
• The management team

Lombard loans are particularly advantageous because it’s possible to receive your credit line relatively quickly. Comparatively, the underwriting process on something like a mortgage can take a while (because the lender needs to value the property). However, the underwriting process for a Lombard loan is much more straightforward because underwriting is usually limited to the collateral used as security for the loan. It’s this very efficient underwriting process that makes receiving capital so quick. In some cases, you might have access to your credit line in as little as 24 hours or a matter of a few days.

That said, knowing which lenders to approach, how to present your situation and how to settle an advantageous deal is critical. With access to the right lenders and a track record of securing Lombard loans against various types of security, Enness is ideally positioned to help you get the best deal.

Enness will start by discussing your needs, situation and helping you decide if a Lombard loan is the right option for you. If it is, your broker will then approach lenders to negotiate a Lombard loan and terms on your behalf. The lenders that Enness approaches on your behalf will depend on the securities you hold, how much you want to borrow and the other details of your situation. When it comes to the application process itself, Enness will work alongside you to ensure everything moves quickly and smoothly.

You’ll start by identifying the trading symbol of the securities you want to use as collateral for your Lombard loan. You will also specify the number of securities you wish to pledge to the lender if you are only using part of your assets as collateral or if you are pledging various equities.

Additionally, you will also provide your ID, banking and brokerage details. The lender will use this information to make sure you meet all the AML, KYC, reporting and other regulatory obligations that apply. The underwriting process then commences, and the lender evaluates your securities. Each Lombard loan issuer will have its own set of trading and liquidity standards that you will need to meet. These are entirely at the discretion of the institution and will vary from lender to lender. The lender will also check that your stocks are in proper custodial format.

When your Lombard loan is approved, you will need to electronically transfer your securities into the lender’s designated custodian account. The lender will verify receipt of the securities and then fund your transaction per the terms of your loan agreement.

For Lombard loans and repo transactions, you can recover possession of the securities at the loan or transaction maturity date. Either you will need to repay the principal balance of the loan, or you can repurchase the securities at an agreed-upon discounted rate.

Because the application process for a Lombard loan is relatively straightforward and quick, it can be faster to get a Lombard loan than to apply for a mortgage. It’s for this reason that Lombard loans are often associated with property financing. Lombard loans can be particularly useful if you want to buy an investment property or second home very quickly and you wish to bypass the mortgage application process for any number of reasons. Lombard loans can also be used to your advantage if you are competing to buy a property against cash buyers.

While Lombard loans are often employed in property financing, they are also used in other situations. Borrowers might choose to use Lombard loans to reinvest, to diversify a portfolio of single stocks or simply as a much-needed cash injection to cover an emergency or opportunity. Entrepreneurs or business owners often use Lombard loans to leverage opportunities or start a business-related scheme, project or plan.

In scenarios where the proceeds of a Lombard loan are used to reinvest or diversify a portfolio, there is always an inherent risk. Asset prices and investments can fluctuate or lose value. You will need to make sure you can continue to make repayments on your loan should this happen or if your lender enforces a margin call. Ultimately, what you use a Lombard loan for will depend on your needs, expertise, broader financial situation and appetite for risk.

Every lender has its own eligibility standards for Lombard loans. Some lenders are also more flexible than others. As a general rule, however, you will need to have an investment portfolio of at least £100,000 before a lender will consider you for this type of financing. Some institutions may require that your portfolio is more significant than this. Lenders will also have other criteria you - or your securities - will need to meet before you are eligible for a Lombard loan from their institution.

Enness works with clients - and lenders - from around the world, and many offer Lombard loans in a variety of different currencies for your convenience. Lenders are used to working with international borrowers who have several business interests, investments, and income streams, and as a result, Lombard loans are a truly international solution. Most lenders are open to working with borrowers of any nationality.

Lombard loans vary in duration, but they should generally be regarded as a short-term borrowing solution. In some cases, you might need a Lombard loan for a very short period - just a few days or weeks isn’t at all unusual.

At their longest, Lombard loans typically run for around 24 months. There’s no maximum timespan, and your loan could run for a little bit longer than this - there isn’t a cut-off or cap you need to keep in mind. However, if you need a longer-term financing solution, Enness' brokers will be able to advise you if a Lombard loan is the right choice for you. If a Lombard loan isn't the right option for you, Enness will present you with alternative solutions, possibilities, and lenders to meet your financing needs. 

As a very general rule of thumb, most Lombard loans are offered at a rate of around 50% of the value of your securities. In some cases, you will be able to get a little more, but this will depend on your situation and securities and will very much be at the lender's discretion.

The type of securities you own, how much you want to borrow, and the terms of your loan may also influence the amount you can borrow.

Lombard loans can be very attractive from a cost perspective. Especially compared to more ‘mainstream’ lending (i.e., consumer loans, credit cards, etc), Lombard loans can be very cost effective, and they are often much cheaper in terms of interest rates.

The interest rate you’ll pay for Lombard loans is typically tied to LIBOR or a standard base rate. The lender adds its margin on top of this. Interest rates will depend on your securities, your financial situation and the overall risk of the transaction. Every Lombard loan is granted on an individual basis, and as a result, there’s no standard interest rate but very broadly, you can expect typical Lombard loan interest rates to sit between 2% and 5%, although there will be deals where the interest rates fall outside of this bracket.

In principle, you can use any financial asset as security for a Lombard loan. However, the more liquid and mainstream your financial assets are, the more finance options exist.

Enness can help you secure a Lombard loan against the following:

• Portfolios
• Stocks
• Bonds