Hi Marlon, I am not trying to downramp. I don't have a position...

Hi Marlon,

I am not trying to downramp. I don't have a position in the stock, nor will I be taking one. I am just putting the pieces of the puzzle together the way I see them fit. As an investor in these types of companies you should always be testing your bull case against bear cases.

Regarding Shortall's loan. It is actually fairly straight forward. He puts his UNS shares up as collateral and the other party (the lender) gives him a loan (cash), which Shortall pays an interest rate on (7% I believe, pretty good when interest rates are where they are in the US right now). In a particular form, where Shortall would use the loaned cash to buy more UNS shares, it is termed a margin loan (I don't know whether this is the specific type of loan he has).

The issue with using shares as collateral on a loan, particularly shares in highly speculative companies, is that the value of the shares are highly volatile and, hence, the amount of collateral the lender holds can change quite dramatically over time. To protect themselves, in the lending agreement, the lender will have clauses which require the borrower to provide more collateral if the value of the existing collateral drops below certain levels. This has happened to Shortall several times in the past. For a margin loan, this is termed a margin call.

Shortall can satisfy the lender by providing the lender more collateral. The collateral that can be used will be specified in the contract, but almost always includes cash. Shortall has chosen, however, to provide the lender with more UNS shares rather than cash.

For guys like Shortall, a major difficulty they face is realizing their holding. It can't be sold on-market easily, because the shear size of the holding would push the share price down 40%, 50% or even 60% for a relatively illiquid stock like UNS. Investors would also find out he is selling, see it as a lack of faith in the company and push the price down even further.

A loan like Shortall has allows him to realise some cash from his shares, without having to sell on market, which would cause the fallout I have just discussed.

Now, if the price falls far enough, the lender will be within their right to take his holding and realize cash for it. Lenders are not investors. They just sell, killing stocks. Lenders of this nature require quite a bit of collateral if it is in the form of dodgy shares. This is because they know what will happen to the stock price if they have to sell them and, obviously, will want to limit their losses.

No matter what the reason, I don't like seeing directors/CEOs using their shares as collateral. There is almost always a reasonable chance the lender will end up dumping them on market and the value of my holding will get poleaxed at the same time

Opes Prime, once owned by ANZ, is a classic study of what can happen with these types of loans when things go 100% pear shaped. There is plenty of info about it on the net. Knock yourself out.