The trade off between loan cost and share growth
Protected equity lenders broadly offer two different ways to reduce the high interest costs of their capital protected loans. ‘Shared upside' simply offers the borrower a lower interest rate in return for sharing any capital growth at the end of the loan term with the borrower at a set proportion, eg. 25 or 50 per cent. Alternatively, some borrowers offer investors the ability to write call options over the stocks in their loan portfolio at preset “strike” prices. The sale proceeds from these options can be used to help fund the loan interest. But this also means that if the price of a stock in the portfolio rises above the option strike price, the buyers of the call options can then buy the stock outright from the investor, leaving the investor with only the capital growth up to the strike price.