Margin-lending market turns corner

By ROB STOCK – Sunday Star Times

There are signs that growth is returning to the margin-lending market after 18 months from hell.

Investors using margin lending facilities borrow in order to buy shares hoping leverage will magnify gains if the shares rise in value.

But since sharemarkets entered the beginning of their perfect storm of banking crisis in October 2007, what many investors have had are magnified losses, and the horror of margin calls.

For while investors with investment properties do not expect a call from their lender demanding they top up their equity should their property fall in value, leveraged share investors know they will get a call should their shares fall far enough simply because unlike houses, the prices of shares can be tracked precisely.

And they have received such calls in their droves.

Alan Nixon of Forsyth Barr- owned Leverage Equities said:

“The fact is we have had unprecedented margin calls over that period just because people were  purely taken unawares.”

For an investor who’s leveraged a share portfolio by 60% (ie, they borrow 60% of the money needed to buy the shares), a rise or fall in the value of those shares is magnified by 2.5 times, so a fall of 30% translates into a capital loss of 75%.

But unlike in Australia, where some margin-lending companies like Tricom and Opes Prime hit trouble as a result of lending too freely to investors, the New Zealand margin lenders have managed to keep a lid on their bad debt. “I doubt any of the New Zealand operators committed the sins that took place in Australia,” said one industry source, who asked not to be named.

Nixon said Leveraged Equities has never had a bad debt, meaning those who received margin calls paid up. Other lenders appear to have managed similarly well as there appears to be no credit crunch for the margin lenders.

Unlike standard home loans, where loan to value ratios have dropped to 80% maximum, there has been little or no fall in the loan to value ratios being offered by margin lenders, said Nixon.

ASB Securities will lend up to 70% to buy Telecom shares, while Leveraged Equities will lend up to 75%. For most shares, the LVRs required are in the 50-65% range.

The only lending tightening has been as a result of lower trading volumes on markets. Some shares are off the lending lists as the lenders limit their exposure to easily disposed of positions.

But despite the investor carnage, low share prices are tempting investors to borrow to buy shares again in hopes of a recovery. “We have had an upturn month to date in April and we are reasonably confident that this could be a start because the equity markets tend to lead the other markets down and then up again, however, you can’t say anything with any great confidence at the moment,” said Nixon.