Pledging shares is relatively safe in a bull market, when rising prices ensure the value of the collateral remains above that of the loan facility. But if equities fall, the borrowers may face margin calls and have to come up with funds to avoid defaulting or having to liquidate assets at depressed prices. That’s what happened with Hwang, whose family office is now at the center of the stock sales. In this case, he used obscure derivatives to build large stakes in companies.
Securing a loan against a mix of real estate and stocks can help the world’s rich cut borrowing costs, and more of them have looked to leverage their assets as they’ve sought lifestyle changes in the fallout from the pandemic, according to Paul Welch, founder of London-based lending broker largemortgageloans.com.
“We’ve seen more transactions for boats, jets and homes,” Welch said. “We’ve had many more inquiries over the past year than we would normally about people wanting to utilize their assets to get transactions.”
Committing stock is especially common in Asia, where state-owned banks dominate financial markets and high-growth companies need to find different sources of funding. In mainland China, where top shareholders in initial public offerings typically have their stakes locked for 36 months, the practice can help them get liquidity while maintaining their voting rights.
Along with China, Japan and India require pledgers to disclose their activity in a timely manner to keep track of the possible risks in the market, though that’s not true for most of countries.
Public companies in the U.S. are required to annually disclose any hedging of the firm’s shares by directors or senior executives. Most large companies ban the practice.
“In a bull market, share pledging can make the bets more lucrative,” Everbright Sun Hung Kai’s Ng said. “When the value of a stake goes up, the investor might be able to ask for additional loans to buy more stocks. But the risks are also doubling when the market turns volatile.”
—With assistance from Jack Witzig, Anders Melin, Alex Sazonov and Ben Stupples.
This article was provided by Bloomberg News.