How strategic borrowing can help keep your investment strategy on track

A securities-backed line of credit may help you meet a need for liquidity, without selling assets you may need in the future.

13 Oct 2017

No matter how carefully you’ve planned your finances, the time may come when you need a large sum to meet an unexpected, major expense—buy a piece of real estate, pay a large tax bill or help a child finance an entrepreneurial dream—and you don’t have the cash on hand. That is the time to sit down and discuss your options with an experienced ally—your UBS Financial Advisor.

Key takeaways:

  • Selling securities to meet a current expense could disrupt your long-term investment goals.
  • One option to help keep your investment strategy in place is a loan using eligible securities as collateral.
  • A securities-backed line of credit may be more cost effective than other credit alternatives.
  • But, borrowing against your investment entails risks, including the possible liquidation of your securities.
  • Discuss all your borrowing options with your UBS Financial Advisor and other professionals to make sure borrowing is the best choice, while still keeping your longterm investment goals on track.

Staying on course

Consider the case of a business executive who suddenly found herself facing a $10 million tax bill. The most direct way to raise the cash was to sell shares of her company where most of her wealth was concentrated. Yet she quickly realized this approach posed serious drawbacks. Because those shares were worth much more than when she had acquired them, selling would have subjected her to sizable capital gains taxes. Moreover, having fewer shares would dilute her voting rights in the company and impair her ability to benefit financially from its future growth.

Working with her UBS Financial Advisor and a UBS Wealth Management Banker, this executive explored another approach: using her shares as collateral for a securities-backed line of credit, a loan that she could use to finance this tax bill. With this approach, the executive had a plan to repay the loan that worked comfortably with her income stream, spending needs and overall financial goals. The loan enabled her to fund the tax expense, hold onto her shares and maintain her voting rights in the company.

For that executive, or any investor hoping to maintain a long-term investment strategy by borrowing against the value of their eligible assets, a benefit of securities-backed line of credit is that “you keep your investment strategy intact with the asset allocation you’ve chosen,” says Trisha Knake, Head of SBL & Accounts Product Management for UBS. You meet a temporary liquidity need and continue to pursue your long-term goals.

A securities-backed line of credit should not, however, be confused with margin account. While both use investment assets as collateral, a securities-backed line is a "non-purpose" loan, which means it can be used for any purpose except buying, carrying or trading securities. On the other hand, a margin account is considered a "purpose" loan and may be used to purchase securities.

Interest rate advantages

Because a securities-backed line of credit is a LIBOR-based loan, it may offer lower interest rates than a conventional loan tied to the Prime rate, Knake adds. And while applying for a bank loan could take weeks to process, “you can generally get a decision on a securities-backed line of credit in a few days,” Knake adds.

It all starts with a conversation

Your UBS Financial Advisor and your tax specialist can help in the review of flexible financing options. Despite the potential advantages of a non-purpose securities-backed line of credit, borrowing against securities (as with any type of borrowing) entails risks that you should consider carefully. A securities-backed line of credit may allow you to keep your investments on track even as you meet short-term liquidity needs.

Discuss your financial situation and your long- and short-term goals with your UBS Financial Advisor.

Related Articles:

Disclosures

The example above is for illustrative purposes only. You may not experience the same results. Talk to your financial advisor about your personal situation.

Borrowing using securities as collateral entails risk and may not be appropriate for your needs. All loans are subject to credit approval. For a full discussion of the risks associated with borrowing using securities as collateral, you should review the Loan Disclosure Statement that will be included in your application package. Neither UBS Financial Services Inc. nor UBS Bank USA provides legal or tax advice. You should consult your legal and tax advisors regarding the legal and tax implications of borrowing using securities as collateral for a loan.

Credit Lines are securities backed loans provided by UBS Bank USA, an affiliate of UBS Financial Services Inc. Credit Lines are full recourse demand loans, are subject to credit approval, and are "margin loans" subject to collateral maintenance requirements (i.e. margin requirements). The lender can (i) demand repayment and/or (ii) change collateral maintenance requirements (i.e., margin requirements) at any time without notice. If the required collateral value is not maintained, the lender can require you to post additional collateral (commonly referred to as a “margin call”), repay part or all of your loan and/or sell your securities. Failure to promptly meet a margin call or repayment or other circumstances (e.g., a rapidly declining market) could cause the lender to liquidate some or all of the collateral supporting the Credit Lines to repay all or a portion of the outstanding Credit Line obligations. Any required liquidations may result in adverse tax consequences. You are personally responsible for repaying the Credit Line in full, regardless of the value of the collateral.
Credit Lines are "non-purpose" loans and may not be used directly or indirectly to purchase, trade or carry securities or to repay debt (a) used to purchase, trade or carry securities or (b) to any affiliate of UBS Bank USA. Additional limitations and availability may vary by state. Prepayments of UBS Fixed Credit Lines will be subject to an administrative fee and may result in a prepayment fee.

Neither UBS Financial Services Inc. nor UBS Bank USA provide tax or legal advice. You should consult your legal and tax advisors regarding the legal and tax implications of borrowing using securities as collateral for a loan. For a full discussion of the risks associated with borrowing using securities as collateral, you should review the Loan Disclosure Statement that will be included in your application package. Securities backed financing involves special risks (including, without limitation, being subject to a margin call if certain collateral value requirements are not met) and is not suitable for everyone.


Important information about advisory & brokerage services
As a firm providing wealth management services to clients, UBS Financial Services Inc. offers both investment advisory and brokerage services. These services are separate and distinct, differ in material ways and are governed by different laws and separate contracts. It is important that clients understand the ways in which we conduct business and that they carefully read the agreements and disclosures that we provide to them about the products or services we offer. For more information on the distinctions between our brokerage and investment advisory services, please speak with your Financial Advisor or visit our website at ubs.com/workingwithus.


© 2017 UBS Bank USA. All rights reserved. Member FDIC. The key symbol and UBS are among the registered and unregistered trademarks of UBS. UBS Financial Services Inc. and UBS Bank USA are subsidiaries of UBS AG. Member FINRA/SIPC. IS1662163