ab Securities-Based Lending
We realize that the strategic use of credit may be an important component of your overall wealth management plan. If you have a portfolio that may be used as collateral for a loan, you may be able to access liquidity while keeping your investment plan on track. This is known as securitiesbased lending. It is important that you understand the ways in which we conduct business and the applicable laws and regulations that govern us. As a firm providing wealth management services to clients in the U.S., we are registered with the U.S. Securities and Exchange Commission (SEC) as an investment adviser and a broker-dealer, offering both investment advisory and brokerage services. Though there are similarities among these services, the investment advisory programs and brokerage accounts we offer are separate and distinct, differ in material ways and are governed by different laws and separate contracts. It is important that you carefully read the agreements and disclosures that we provide to you about the products or services we offer. While we strive to ensure the nature of our services is clear in the materials we publish, if at any time you seek clarification on the nature of your accounts or the services you receive, please speak with your Financial Advisor or call 201-352-9999. For more information, please visit our website at www.ubs.com/workingwithus
What Is Securities-Based Lending? Securities-based lending is generally a revolving line of credit that uses your eligible investment portfolio as collateral for a loan. This strategy allows you to access funds without immediately liquidating your portfolio. In order to establish a securities-based loan, your portfolio is pledged to a lending institution, such as UBS, as collateral. This gives you, the investor, the ability to access liquidity while maintaining your portfolio s current exposure to the market. You will continue to receive the benefit of any dividends, interest or capital appreciation that may accrue in the account. However, if a borrower has an outstanding loan balance and the portfolio used to secure that loan declines in value, the lending institution may require the borrower to post additional collateral or repay part or all of the loan. The lending institution may also liquidate all or part of the portfolio. 1
What Is Non-Purpose Borrowing? Loans that are provided by lenders, such as banks and brokerage firms, must be classified as either purpose or non-purpose, as directed by the Federal Reserve. A non-purpose loan may not be used to purchase, carry or trade margin securities. Some uses for a nonpurpose loan include: Paying your taxes Refinancing high interest non-purpose debt Financing business opportunities Funding higher education expenses Purchasing a luxury item Non-purpose borrowing against your investment portfolio affords a number of benefits not available with traditional margin borrowing. While a margin loan must be drawn in the same account where the eligible securities are held, a non-purpose loan is held in a different account; thus, multiple asset accounts may be pledged to secure one non-purpose loan. This structure is particularly useful in situations where multiple parties wish to secure a loan for a single borrower for example, business partners securing a business loan for their company. In addition, there are often higher borrowing limits or release percentages against the value of the securities when they are used for a non-purpose loan. 2
How Much Can I Typically Borrow Against My Portfolio? The lender evaluates each security in the investment account used to secure the loan. The lender then determines how much it will loan or release against each security, while also taking into consideration the entire mix of the portfolio and other risk factors. For instance, a portfolio that contains a single stock position may not receive as high a release percentage as a diversified portfolio, based on the overall risk of the investments. Financial institutions may lend up to 50% of the market value of an equity position as a margin loan. However, if you re borrowing for a non-purpose use, you may be able to borrow up to 70% against the value of your equities in your eligible securities account. Bear in mind that the more you borrow, the higher your leverage will be, resulting in increased risk should your securities decline in value. 3
What Types of Loans Are Typically Available? The terms and/or types of loans will vary by lending institution; however, in general, these loans are non-committed, demand facilities with either a fixed interest rate for a period of time or a variable interest rate. Fixed-Rate Loan A fixed-rate loan means you borrow a defined amount of money for a fixed period of time and for a fixed interest rate. This is commonly referred to as locking in a rate. Once you draw upon your loan, you agree that it will remain outstanding for the entire agreed-upon term, whether it is 30 days, 3 months or even years. Should you decide to pay down the loan before the expiration of the term, most lending institutions will charge you a termination or prepayment fee. Variable-Rate Loan A variable-rate loan means the interest rate you are charged on the money you have borrowed is not fixed for any given term. Rather, it fluctuates on a daily basis. This can be to your advantage or disadvantage, depending on fluctuations in the loan s underlying index. 4
How Are Loan Interest Rates Usually Determined? Your interest rate is made up of a base rate and a spread. Two commonly used base rates are the Prime Rate and LIBOR (London Interbank Offered Rate). 5
For Whom Is Securities- Based Lending Appropriate? A securities-based loan may be an attractive alternative to traditional borrowing for an investor who wants access to borrow for a non-purpose use. Since there is risk involved in this type of a strategy, you should consider securities-based lending only if you are risktolerant. 6
Liability Management at Our Firm The UBS Client Experience Review Understand Focused on you Agree & Implement Propose In delivering the UBS Client Experience, our Financial Advisors take the time to understand your needs and goals and proactively provide appropriate solutions. We keep you informed on a periodic basis, and can monitor and update strategies, as appropriate, to respond to ever-changing markets and your evolving needs. For more information about whether securities-based lending may be a solution for you, contact your tax or legal advisor and a Financial Advisor at UBS Financial Services Inc. 7
UBS Lending Solutions At-a-Glance Prime Credit Line 1 Minimum Approval Reference Rate Interest Rates $25,001 $249,999 The Wall Street Journal listed prime rate Under $25,000: Prime + 3.125% $25,000 $49,999: Prime + 2.625% $50,000 $74,999: Prime + 2.125% $75,000 $99,999: Prime + 1.625% $100,000 $249,999: Prime + 1.375% (Interest rate based on drawn amount) Fees/Points None Term Minimum Draws Access to Funds Interest Payments Pay-Downs Demand loan; no fixed term Initial draw is $25,001; increments of $2,500 thereafter Credit Line check or Fed Funds Wire Due monthly; may add interest to principal (with sufficient collateral) at client discretion Fed Funds Wire 1 Credit Lines are provided by UBS Bank USA, an affiliate of UBS Financial Services Inc., and are subject to credit approval. 8
Premier Variable Credit Line 1 $250,000 Daily 30-day LIBOR rate Premier Fixed Credit Line 1 $250,000 Same-term LIBOR $250,000 $499,999: LIBOR + 2.75% $500,000 $999,999: LIBOR + 1.75% $1,000,000 $4,999,999: LIBOR + 1.5% $5,000,000+: LIBOR + 1.25% $250,000 $499,999: LIBOR + 2.75% $500,000 $999,999: LIBOR + 1.75% $1,000,000 $4,999,999: LIBOR + 1.5% $5,000,000+: LIBOR + 1.25% (Interest rate based on approval amount) None Demand loan; no fixed term Initial draw is $25,001; increments of $2,500 thereafter Credit Line check or Fed Funds Wire Due monthly; may add interest to principal (with sufficient collateral) at client discretion Fed Funds Wire (Interest rate based on approval amount; rates can be fixed for periods up to 5 years) Prepayments subject to administrative and possible prepayment fees Demand loan; no fixed term Increments of $100,000 Fed Funds Wire Due quarterly; may request advance at variable rate for interest due (with sufficient collateral) Fed Funds Wire 9
Potential Risks for Your Consideration Credit Lines from UBS Bank USA are demand loans and are subject to credit approval and collateral maintenance requirements. UBS Bank USA can demand repayment at any time without notice. If the required collateral value is not maintained, the lender can require you to post additional collateral, repay part or all of your loan and/or sell your securities. Failure to promptly meet a request for additional collateral 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. Any required liquidations may interrupt your long-term investment strategies and may result in adverse tax consequences. Credit Lines may not be used 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 Premier Fixed Credit Line loans will be subject to an administrative fee and may result in prepayment fee. 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. For a full discussion of the risks associated with borrowing using securities as collateral, please review the Loan Disclosure Statement that will be included in your application package. UBS Bank USA is an affiliate of UBS Financial Services Inc. UBS Financial Services Inc. www.ubs.com 051227-2144-M006 UBS Financial Services Inc. is a subsidiary of UBS AG. 2006 UBS Financial Services Inc. All Rights Reserved. Member SIPC.