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Downtown firm specializes in unusual loans: Equities First Holdings sees growing demand for stock loans as tight credit markets make borrowing tougher

May 19, 2008

With a cadre of six flat-screen monitors blanketing one side of his desk, Equities First Holdings LLC's Al Christy Jr. keeps a close eye on the performance of several stocks he's holding as collateral.

No, he's not some sort of loan shark. He's what's known as a stock lender. The unusual premise is that market investors in need of prompt funding transfer shares to Christy who, in turn, lends his clients up to 80 percent of the stock's value, although the amount rarely exceeds 60 percent.

Additional terms for the loans include an attractive 3-percent to 5-percent interest rate over three years.

The trading model and platform he has molded since founding Equities First Holdings in 2002 has enabled him to complete more than 400 transactions and manage roughly $40 million in assets. They also have provided him the means to operate out of a corner office on the 30th floor of Market Tower, where he has a bird's-eye view of Lucas Oil Stadium and a falcon nesting on the skyscraper.

"I wanted to be in the center of the financial district," said the 47-year-old Christy.

Large brokerage firms such as Goldman Sachs, Merrill Lynch and Smith Barney issue stock loans, but typically at higher interest rates, ranging from 6.5 percent to 9 percent. On top of that, Securities and Exchange Commission and Federal Reserve regulations limit them to lending no more than 50 percent of a stock's value.

Conversely, Christy refers to EFH as a private equity firm that is not subject to the same limitations. His clients, half of whom are repeat customers, are both retail and institutional investors who may need a loan for reasons ranging from paying off a residential mortgage to diversifying company holdings.

Not all are wealthy, though, acknowledged Christy, who said loans range from $100,000 to $8 million. The loans are usually secured through stocks that trade as pink sheets, over the counter, or on Dow Jones.

Tightening credit markets, in particular, have been a boon to Equities First Holdings' business lately. Banks have pulled back on lending as a result of the subprime mortgage meltdown, leaving borrowers to seek other avenues.

Uncommon business

The niche Christy has carved out is unusual. In fact, Mark Maddox, an Indianapolis securities attorney and former Indiana securities commissioner, was unaware of EFH.

"I personally have not encountered anybody doing these types of loans around here before," he said. "They may be doing these loans in Chicago or New York, but to me, it's kind of a new game."

Christy, a native of West Virginia, arrived in the Hoosier state in 1979 on a football scholarship to Indiana University. Recruited by Lee Corso, he played running back and excelled at baseball and track as well. He left college early to pursue a baseball career and was drafted by the team now known as the Los Angeles Angels of Anaheim. Trades to the New York Yankees and Detroit Tigers, where he failed to advance out of both minor-league systems, ultimately led him to retire his cleats after a 4-1/2-year career.

He dabbled as an entrepreneur, owning a production firm, advertising agency and electronics company, before arriving at the local office of Boston-based Fidelity Investments in 1994 as a loan originator. Quickly ascending to become its top producer, Christy branched out on his own and founded commercial lender Diversified Financial Group in 1997.

The roots of EFH stem from his encounter with a Michigan apple farmer whose lean yields left him few borrowing options. Armed with just Huntington Bank stock, the farmer handed it to Christy, who brokered his first stock loan.

"They got three million bucks," he said, "and I got a hug from his wife and 1 percent of the transaction."

After conducting thousands of independent trials, Christy became a lender using his own liquidity by brokering transactions.

Besides lower interest rates and higher loan values, two other features make EFH's business model attractive, Christy said.

If a stock performs well and is worth more than at the time the loan originated, Christy returns the entire amount of the collateral, and the borrower pockets the extra profit.

At the other end of the spectrum, if a stock falls below 80 percent of the loan value, borrowers can pay the difference to get the loan out of default status. Or, they have the option of walking away from the loan, and the stock.

Stock loans are less risky when the market is performing well, said Jim Young, president of Indiana Business Bank, which also offers the loans. What differentiates EFH, however, is that it allows clients to abandon the loan before the term expires.

"That is not something a bank would offer; I don't believe a brokerage house would either," Young said. "That's pretty impressive to do that, and at 3 to 5 percent."

In the meantime, EFH trades the stock and uses other instruments and positions to compound the firm's rate of return, to earn the firm additional revenue and also to offset risk. St. Louis-based Stifel Nicolaus holds the shares and acts as an intermediary during the life of the loan.

'Answer to a prayer'

Greg Crane, an entrepreneur from Scottsdale, Ariz., is a repeat customer who's done more than 10 stock loans with EFH. He flew to Indianapolis before committing to the loans to ensure Christy met expectations. Crane has not been disappointed.

"There are a lot of people out there who say they can do stock loans, but they really can't," he said. "When I found Al Christy's company, it was a real answer to a prayer, and they've been great to deal with."

An unrelated stock deal, however, left investors bitter. A lawsuit against EFH, filed in March in a U.S. District Court in Tacoma, Wash., seeks unspecific damages and alleges breach of loan agreement.

The complaint stems from a loan default that occurred following a two-for-one stock split. Shares of Washington-based Zumiez Inc.-a retailer of action sports apparel, footwear and accessories-had a market price of $31.84 upon the plaintiffs' loan agreement in 2005. The split in 2006 caused shares to drop to $16.31, below 75 percent of the agreed loan-to-value ratio.

Plaintiffs argue the total value of the shares, before the split, were more than enough to keep the loan solvent. A lawyer for the plaintiffs declined to comment on the case.

EFH said the stock split caused an irregularity in the company's calculations. In the meantime, the dispute is in the process of being resolved and the loan again is in good standing, according to EFH.
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