Loan Stock
Loan stock refers to shares of common or preferred stock that are used as collateral to secure a loan from another party. The loan earns a fixed interest rate, much like a standard loan, and can be secured or unsecured. A secured loan stock may also be called a convertible loan stock if the loan stock can be directly converted to common shares under specified conditions and with a predetermined conversion rate, as with an irredeemable convertible unsecured loan stock (ICULS).
Loan Stock
Definition
Loan stock refers to ordinary or preference shares used as collateral to secure a loan from another party. Loan stock earns a fixed interest rate, similar to a standard loan, and can be either secured or unsecured. If the loan stock can be directly converted into ordinary shares under specified conditions and at a predetermined conversion rate, the secured loan stock can also be referred to as convertible loan stock, such as Irredeemable Convertible Unsecured Loan Stock (ICULS).
Origin
The concept of loan stock originated during the development of financial markets as a means for investors and companies to meet funding needs. The earliest forms of loan stock can be traced back to the 19th century when companies raised funds by issuing shares and used these shares as collateral to obtain loans.
Categories and Characteristics
Loan stock is mainly divided into two categories: secured loan stock and unsecured loan stock. Secured loan stock means the loan is backed by shares as collateral, allowing the lender to sell these shares to recover the loan in case of default. Unsecured loan stock has no collateral, posing a higher risk to the lender, who typically demands a higher interest rate.
Convertible loan stock is a special type of secured loan stock that allows the lender to convert the loan into ordinary shares under specific conditions. This type of stock usually has a predetermined conversion rate and conversion conditions.
Specific Cases
Case 1: A company needs funds for expansion but does not want to dilute existing shareholders' equity. The company decides to issue secured loan stock and uses these shares as collateral to obtain a loan from a bank. The bank agrees to provide the loan at a lower interest rate because the shares serve as collateral.
Case 2: A startup company seeks to raise funds, but due to higher risk, investors are reluctant to buy its shares directly. The company issues Irredeemable Convertible Unsecured Loan Stock (ICULS), allowing investors to convert these stocks into ordinary shares if the company performs well, thus achieving higher returns.
Common Questions
1. How is the interest rate for loan stock determined?
The interest rate is usually determined based on market rates, the borrower's creditworthiness, and whether the loan is secured.
2. How does loan stock differ from a regular loan?
Loan stock uses shares as collateral, whereas regular loans are typically secured by other assets or credit.
