Employee Stock Loan

Bupp · 11-12-2009, 10:38 PM

My employer will lend me money to buy company stock (big 5 bank).

- fixed rate loan at prime
- stock dividend pays more than prime

Is it a good idea to take out the loan? Seems like a no brainer to me...

PROS:

- The principle paid down each month on the loan acts as forced savings
- The interest paid on the loan is more than covered by the dividend income
- Interest on the loan is tax deductible

CONS:

Ties up some cash flow each month
Stock price could go down
dividend may not increase

Is this the slam dunk opportunity I think it is? What am I missing?

humble_pie · 11-13-2009, 05:06 AM

have they not spelled out the full terms of the loan. Essentially it's a margin account but there are no other assets to generate supporting margin, which makes the deal even riskier.

what you're not mentioning is that the bank will undoubtedly call back the stock to protect their loan if markets turn really wonky. There's a percentage drop that the bank will tolerate. After that you could lose some or all of the stock in a margin call.

part of the risk that you might not have quite understood is that, even if the stock tumbles badly, you will still owe the bank the full amount of the loan.

meanwhile your employer is taking zero risk. Either way, the bank will win on the loan.

btw doesn't this bank have the standard canadian bank offer to employees. Last i heard it was something like for every 2 shares the employee buys, the bank will donate a share for free. The foregoing looks like an interesting offer, if it's available to you. The risk is that the stock will tank, but employee/owner is cushioned by the 33 1/3% share subsidy and doesn't have to fear a margin call.

all these recent posts in this forum about buying with leverage are telling me that the financial system is much more awash with cash to lend than one might have been thinking, even here in canada. Contrast that to one year ago. As the doom-criers would have it, the next bubble may already be forming ...

Dr_V · 11-13-2009, 09:37 AM

Quote:

Originally Posted by humble_pie

all these recent posts in this forum about buying with leverage are telling me that the financial system is much more awash with cash to lend than one might have been thinking, even here in canada.

Either that, or people are just getting more desperate to get good returns. It's a worrisome trend, if you ask me....

leslie · 11-13-2009, 10:35 AM

It appears the 'humble' knows first hand about how these are structured and his warnings seem appropriate. I would approach the question from a different angle. "Would you borrow $$ from your broker to buy those same shares on margin otherwise??" I will bet: NO. So what makes you think this is such a great deal?

I am guessing you don't have any other broker account of your own. So owning shares of your employer will further concentrate your economic risk in that one entity.

Consider the interest rate. Is it so great? I am borrowing from my broker at 1.5%. And I believe that Revenue Canada will allow an even lower rate before it becomes a taxable benefit. What happens when the bank-rate starts rising. Prime will rise, your costs will rise, and the bank's profitability will fall, leading to a possible fall in value of their stocks.

msimms · 11-13-2009, 03:06 PM

I guess if you have the assets to support the loan in case they call it... fixed rate at prime. pretty low, let inflation eat away at the principle of the loan (pay the minimum back) and pay the interest with the dividends, however opportunity cost would be the asset sitting on standby waiting to cover you in case the bank calls the loan. you wouldn't be sweating that asset to it's potential.
I dunno, i wouldn't do it unless they gave you the bank shares at a 15% discount right off the bat or so, just to give you a margin of safety in case the stock price goes down. even then I wouldn't treat this as serious transaction, just something to have fun with and be able to afford a loss if the unexpected happens.

Bupp · 11-13-2009, 08:08 PM

The terms of the loan are that no shares can be sold until the entire loan has been paid off in full. There are no margin calls if the shares reduce in value.

If prime increases it does not effect the loan, it is at a fixed rate of 2.25% for the life of the loan.

EDIT:

Because of my tax bracket i will not only be able to claim the interest paid on the loan but i will also get to reduce my other tax payable by $7.71 for every $100 in dividends earned while also paying no tax on the dividends. Sweet deal. http://taxtips.ca/dtc/enhanceddtc/negtaxrate.htm

Bupp · 11-13-2009, 08:18 PM

Quote:

Originally Posted by humble_pie

part of the risk that you might not have quite understood is that, even if the stock tumbles badly, you will still owe the bank the full amount of the loan.

Agreed this is the largest risk. Do you think there is much of a chance that in 15 years the banks will have lower stock valuation than they do today?

The thing that to me is the most tempting is that currently the dividends would cover 8/12 monthly loan payments each year and it is conceivable that within the next 10 years dividends will have increased enough to pay fully 12/12 monthly payments on the loan.

humble_pie · 11-13-2009, 11:54 PM

are you saying this bank is willing to make a 15-year loan @ guaranteed fixed rate of 2.25% regardless of the value of the collateral ... hmmmmn ... would they also lend money for ice-free year-round deep-water port development in tuktoyaktuk due to global warming ... maybe condo developments on banks island ...

only 8 short months ago canadian bank stocks were approximately half their present values. From sea to sea the sound of margin calls hung sweetly o'er the land. In the US, banks toppled to 1/10 their former values or vanished outright. News less than 24 hours ago that the 121st and 122nd US bank in less than a year have just failed. But your canadian bank is willing to lend @ fixed 2.25% to buy its shares regardless of how low said shares may drop in a bad scenario. And what happens if the employee leaves or worse gets fired during the 15-year interval.

perhaps you could kindly divulge the name of said bank. For my part i'll add insider trading reports (big insider liquidations in canadian bank stocks over past 9 months.) Might be a great shorting opportunity.

MoneyGal · 11-14-2009, 06:05 AM

oh, snap! Great post, Humble Pie.

Oldroe · 11-14-2009, 08:21 AM

My only question would be whats the max.

11-12-2009, 10:38 PM	#1
Bupp Junior Member Join Date: Nov 2009 Posts: 7	Employee Stock Loan My employer will lend me money to buy company stock (big 5 bank). - fixed rate loan at prime - stock dividend pays more than prime Is it a good idea to take out the loan? Seems like a no brainer to me... PROS: - The principle paid down each month on the loan acts as forced savings - The interest paid on the loan is more than covered by the dividend income - Interest on the loan is tax deductible CONS: Ties up some cash flow each month Stock price could go down dividend may not increase Is this the slam dunk opportunity I think it is? What am I missing?

11-13-2009, 08:08 PM	#6
Bupp Junior Member Join Date: Nov 2009 Posts: 7	The terms of the loan are that no shares can be sold until the entire loan has been paid off in full. There are no margin calls if the shares reduce in value. If prime increases it does not effect the loan, it is at a fixed rate of 2.25% for the life of the loan. EDIT: Because of my tax bracket i will not only be able to claim the interest paid on the loan but i will also get to reduce my other tax payable by $7.71 for every $100 in dividends earned while also paying no tax on the dividends. Sweet deal. http://taxtips.ca/dtc/enhanceddtc/negtaxrate.htm Last edited by Bupp; 11-13-2009 at 08:27 PM.

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11-13-2009, 05:06 AM	#2
humble_pie Senior Member Join Date: Jun 2009 Posts: 543	have they not spelled out the full terms of the loan. Essentially it's a margin account but there are no other assets to generate supporting margin, which makes the deal even riskier. what you're not mentioning is that the bank will undoubtedly call back the stock to protect their loan if markets turn really wonky. There's a percentage drop that the bank will tolerate. After that you could lose some or all of the stock in a margin call. part of the risk that you might not have quite understood is that, even if the stock tumbles badly, you will still owe the bank the full amount of the loan. meanwhile your employer is taking zero risk. Either way, the bank will win on the loan. btw doesn't this bank have the standard canadian bank offer to employees. Last i heard it was something like for every 2 shares the employee buys, the bank will donate a share for free. The foregoing looks like an interesting offer, if it's available to you. The risk is that the stock will tank, but employee/owner is cushioned by the 33 1/3% share subsidy and doesn't have to fear a margin call. all these recent posts in this forum about buying with leverage are telling me that the financial system is much more awash with cash to lend than one might have been thinking, even here in canada. Contrast that to one year ago. As the doom-criers would have it, the next bubble may already be forming ...

11-13-2009, 10:35 AM	#4
leslie Senior Member Join Date: May 2009 Posts: 376	It appears the 'humble' knows first hand about how these are structured and his warnings seem appropriate. I would approach the question from a different angle. "Would you borrow $$ from your broker to buy those same shares on margin otherwise??" I will bet: NO. So what makes you think this is such a great deal? I am guessing you don't have any other broker account of your own. So owning shares of your employer will further concentrate your economic risk in that one entity. Consider the interest rate. Is it so great? I am borrowing from my broker at 1.5%. And I believe that Revenue Canada will allow an even lower rate before it becomes a taxable benefit. What happens when the bank-rate starts rising. Prime will rise, your costs will rise, and the bank's profitability will fall, leading to a possible fall in value of their stocks.

11-13-2009, 03:06 PM	#5
msimms Member Join Date: Apr 2009 Posts: 48	I guess if you have the assets to support the loan in case they call it... fixed rate at prime. pretty low, let inflation eat away at the principle of the loan (pay the minimum back) and pay the interest with the dividends, however opportunity cost would be the asset sitting on standby waiting to cover you in case the bank calls the loan. you wouldn't be sweating that asset to it's potential. I dunno, i wouldn't do it unless they gave you the bank shares at a 15% discount right off the bat or so, just to give you a margin of safety in case the stock price goes down. even then I wouldn't treat this as serious transaction, just something to have fun with and be able to afford a loss if the unexpected happens.

11-13-2009, 11:54 PM	#8
humble_pie Senior Member Join Date: Jun 2009 Posts: 543	are you saying this bank is willing to make a 15-year loan @ guaranteed fixed rate of 2.25% regardless of the value of the collateral ... hmmmmn ... would they also lend money for ice-free year-round deep-water port development in tuktoyaktuk due to global warming ... maybe condo developments on banks island ... only 8 short months ago canadian bank stocks were approximately half their present values. From sea to sea the sound of margin calls hung sweetly o'er the land. In the US, banks toppled to 1/10 their former values or vanished outright. News less than 24 hours ago that the 121st and 122nd US bank in less than a year have just failed. But your canadian bank is willing to lend @ fixed 2.25% to buy its shares regardless of how low said shares may drop in a bad scenario. And what happens if the employee leaves or worse gets fired during the 15-year interval. perhaps you could kindly divulge the name of said bank. For my part i'll add insider trading reports (big insider liquidations in canadian bank stocks over past 9 months.) Might be a great shorting opportunity.

11-14-2009, 06:05 AM	#9
MoneyGal Senior Member Join Date: Apr 2009 Posts: 1,045	oh, snap! Great post, Humble Pie.

11-14-2009, 08:21 AM	#10
Oldroe Senior Member Join Date: Sep 2009 Location: Ont. Posts: 168	My only question would be whats the max.