Aside from being just a great idea (in my opinion at least), the real real beauty of Quindell's RNS on 5th of November is that it allows me to kill two bird with one stone and cover this loan agreement and also a description of the Repo market.
I can cover both of these in the same context, because the loan agreement is effectively a Repo:
What is a Repo?
Effectively, the market for a Repo is a glorified version of the pawnbroking market.
So, as a pawnbroker would take my (hypothetical I might add) Rolex as collateral against a £3,000 loan, large companies and institutions can use securities as collateral against borrowing.
Cash
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Repo Provider Borrower
<------------------
Securities
Before this agreement is taken out, the Repo Provider will assess whether the value of the securities they're getting is significant enough to fully collateralise the loan. If they don't think this, then something called a "haircut" is put in place, which is when they will ask for more than the value oft he loan to be posted in securities terms to hedge against the securities falling in value and exposing the provider at the other end of the trade.
When this then comes to an end, the "repurchasing" aspect of the Repo, is the when the borrower returns the cash along with the repo rate (the interest - you can't borrow money for free).
Now, it's worth pointing out that a repo can also work the other way around as well, meaning that cash can be swapped for securities - usually to settle short selling obligations, etc.
The somewhat secretive Repo market has gotten people into trouble before and all of this came out in the wash in the 2008 financial crisis, which uncovered the now famous accounting tricks, like "Repo 105".
In basic terms, the accounting reference to Repo 105 because famous when it transpired that Lehman Brothers had been using it to flatter their balance sheet and make it appear that a significant proportion of its debts had vanished. This was because they realised that with high grade securities the haircuts on a Repo were very small, but most importantly that if they posted to the Repo Provider more in securities than the value of the cash they were receiving they could count these transactions as sales on their balance sheet.
Companies have also gotten in trouble for an insufficiently hedged arbitraging processes in the Repo market, with one example being MF Global, who arbitraged the difference between the interest received on bonds and the interest from the Repo involving those bonds, which was fine until the bonds began to fall in value and the Repo was called in.
The Case With Quindell:
Three directors of Quindell, Robert Terry, Laurence Moorse and Steve Scott have effectively signed a repo agreement, in that they can use their shares as collateral against a cash loan, which they can then use to purchase more shares with.
They have the ability to post up to 51,959,658 shares to Equities First Holdings LLC and then at the end of the loan agreement the directors are required to collect their shares:
"To fund the acquisition of shares the Purchasing Directors have each entered into a loan facility that may result in the transfer of up to 51,959,658 Ordinary Shares as security. The Purchasing Directors are each required to redeem the transferred shares at maturity when the loan is repaid at the end of the two year term and it is their full intention to do so."
Contrary to some of the (dare I say it?) "Moronic" posts on certain bulletin boards regarding this deal, Equities First are contractually prohibited from short selling or voting with the collateralised shares:
"Under the terms of the facility, the lender is contractually prohibited from short selling or voting the transferred shares during the term of the loan."
The really good point about this deal, in my opinion, is that it retains the cashflow Quindell, but without adding company related debt - this is a deal between the three directors, not the company.
More Detail:
1. The Haircut of The Deal:
- The haircut of the deal seems to be made pretty clear in the point below, taken from the November 10th RNS (33%):
"in return for the Purchasing Directors receiving a payment from EFH of a sum equal to 67 per cent of the three-day average market value per share less a financing arrangement fee of 3 per cent."
- It's worth pointing out that generally, the nature of these contracts is that if the collateral significantly decreases in value either more collateral needs to be put up against the loan or the loan itself is called in. The haircut itself exists in order to prevent this becoming an issue.
- In the case of Quindell, Equities First Holdings are contractually unable to sell the repo agreed shares - information clarified in the November 10th RNS:
"In entering into the sale and repurchase agreements to provide finance, each of us Purchasing Directors relied upon assurances from EFH that, notwithstanding EFH's legal rights, the custom and practice of EFH was that the shares transferred would not be disposed of outright, other than in a default event and will be held by their custodians throughout the term of the agreement"
All the best,
The Masked Stock Trader (once the Masked AIM Trader)
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