Lombard loan guide
Lombard loans, also known as advances on securities (used as collateral), originated in northern Italy in the Middle Ages, hence the name "Lombard". Used to finance the growth of trade, this type of credit was based on loans guaranteed by pledges. Today, Lombard loans remain a flexible and efficient financing solution, offering numerous opportunities for investors.
Find out more about lombard loans, how they work, the benefits and risks involved, and the eligibility requirements for financial securities.
What is a lombard loan: definition
A lombard loan is a flexible and attractive financing solution based on the pledging of assets that are freely negotiable on the stock markets. This type of loan can be an excellent opportunity to realise your life projects. For example, if you wish to finance the purchase of a boat, a car or any other investment, it enables you to achieve your liquidity requirements rapidly, without having to sell your positions in order to continue to benefit from market trends. It can be seen as an additional source of financing alongside your cash flow.
How does a lombard loan work?
Lombard loan works by pledging various financial assets as collateral for a loan. A Lombard loan can be used in the form of a current account limit, allowing flexible use according to financial needs, with interest paid only on the amount used. Another option is a fixed-term advance, with a fixed interest rate for a term of 1 to 12 months.
The benefits of a lombard loan
Lombard loans offer the advantage of providing rapid liquidity without having to sell positions in a securities portfolio. This form of loan can be used to supplement equity capital for a property purchase, or to meet short- or medium-term liquidity needs. What's more, it can be used to increase the value of a portfolio by purchasing other securities, a mechanism known as "leverage". For example, an equity portfolio with a 60% loan to value can theoretically see its value multiplied by 2.5.
Using a Lombard loan to acquire new securities can also increase the overall loan to value of the portfolio. This makes it possible to raise the credit limit and continue investing, thus creating a leverage effect. However, it is essential to ensure that the portfolio's profitability is sufficient to cover the interest charged on the Lombard loan, in order to avoid negative leverage.
The risk of margin calls
The main risk of Lombard loans lies in the possibility of downward fluctuations in the value of the securities pledged as collateral. The value of these assets fluctuates with the markets. To protect against a fall in value, the bank applies a security margin. This margin determines the potential loan to value of each security, thus influencing the credit limit. For example, a diversified portfolio of equities can benefit from a loan to value of up to 60% of its market value, while high-quality bonds benefit from a loan to value of up to 90% and cash up to 95%.
If the value of these securities falls significantly, the credit cover may become insufficient, resulting in a margin call. The bank may require that cover be re-established by various methods, such as partial or total repayment of the loan, provision of additional collateral, or portfolio reallocation. If these measures are not taken in time, the bank may be obliged to liquidate the collateral, sometimes at a time unfavourable to the borrower.
01.
Maximum advance rate > Credit drawn
The amount of credit drawn down is less than the maximum loan to value availably. The safety margin is sufficient. The situation is therefore in order.
02.
Maximum loan rate < Credit drawn
If the price of the pledged securities falls to such an extent that the security margin is no longer sufficient, or the amount of credit drawn down exceeds the maximum advance rate, measures to reduce the risk must be defined and implemented immediately.
Eligible financial assets / conditions
Securities eligible as collateral for a Lombard loan include:
- Cash (current accounts, fiduciary and money market investments, etc.)
- Debt securities (bonds)
- Equity securities (shares)
- Investment funds
- Certain commodities and precious metals
- Certain non-traditional financial products (structured products, etc.)
These assets must meet quality, liquidity and diversification criteria, and be denominated in freely convertible currencies. The bank evaluates each security individually to determine the potential loan to value, taking into account the security margin.
In short, Lombard loans represent a flexible and rapid financing solution, suitable for meeting short- to medium-term liquidity needs and increasing the value of a financial portfolio. By using a variety of assets as collateral, it enables borrowers to leverage their investments while gaining access to immediate liquidity.
Your Piguet Galland advisor will be happy to discuss the suitability of Lombard credit for your financing project. He or she will check with you whether this type of financing is suitable for your situation and adapted to your investor profile. Contact us to discuss!
Lombard Loans
Whether you want to invest, diversify your portfolio, or finance personal projects, you can use the value of your existing assets to access cash quickly and efficiently.
