Lesson 6 of 25 · 7 min
The month it is called, same person
Judgement does not deteriorate under a call; the choice set does, and the cheapest route out closes first.
The borrower in a call month is the same person who opened the line, with the same information and the same intelligence. What has changed is the set of things that can be done and the time available to do them.
Continue the facility from the previous lesson. The balance has capitalised to $453,390 and the collateral has fallen 46 percent, from $1,180,000 to $637,200. The threshold of 68 percent requires collateral of $453,390 ÷ 0.68 = $666,750. The shortfall is real but modest: $666,750 − $637,200 = $29,550 of collateral, or, stated as a repayment, $453,390 − (0.68 × $637,200) = $20,094 of cash.
Three routes close that gap and they do not cost the same. Cash from outside the account cures it for $20,094. Additional collateral posted from elsewhere cures it for $29,550 of market value. Selling pledged shares cures it for $20,094 ÷ 0.32 = $62,794, because each dollar of sale reduces the collateral as well as the balance — the forced-sale multiple of 1 ÷ (1 − 0.68) = 3.125 applied to the cash shortfall.
That spread is the shape of the month. The cheapest route requires money that is not in the account, which is precisely the money a borrower who drew against the account is least likely to have idle. The most expensive route is the one that is always available. So the routes are ranked in the opposite order to their accessibility, and the ranking was fixed by the threshold long before the decline started.
The peak price does not appear anywhere in a call month. The conversation runs entirely on the trigger value, which is a figure most borrowers compute for the first time that week.
Key terms
- Shortfall
- The amount by which collateral falls below what the threshold requires for the current balance. Expressible as collateral or as cash, at different sizes.
- Cure
- Any action that restores the position to the threshold: repayment, additional collateral, or a sale of pledged assets.
- Forced-sale multiple
- 1 ÷ (1 − threshold). The dollars of pledged collateral that must be sold to repair one dollar of cash shortfall.
Worked example
One shortfall, three prices
Balance $453,390. Collateral has fallen 46 percent to $637,200. Threshold 68% of market value.
- Collateral the threshold requires
- $666,750
- Cure by posting collateral
- $29,550
- Cure by outside cash
- $20,094
- Forced-sale multiple
- 3.125
- Cure by selling pledged shares
- $62,794
$453,390 ÷ 0.68.
$666,750 − $637,200.
$453,390 − (0.68 × $637,200).
1 ÷ (1 − 0.68).
$20,094 ÷ 0.32.
The same breach costs $20,094 or $62,794 depending only on where the money comes from. That is a 3.1-fold spread decided by the threshold, not by the market.
Check yourself
A balance of $453,390 sits against collateral of $637,200 with a 68 percent threshold. Why does curing by selling pledged shares cost more than three times as much as curing with outside cash?
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Educational only. Nothing in this lesson is investment, legal or tax advice, or a recommendation to enter into any transaction. Figures are illustrative and computed from the inputs stated in the lesson.