Lesson 10 of 25 · 6 min
What the lender may sell
The permission is over everything pledged, and it is rarely a permission to stop at the threshold.
The scope of the lender's selling power is wider than the shortfall in two directions at once. It covers more assets than the ones that fell, and it permits a larger sale than the one that restores the test.
On the first: the pledge attaches to the account, not to a lot, so every eligible and ineligible holding inside it is available, along with cash balances, money-market positions, dividends received and the proceeds of anything already sold. An ineligible holding contributes nothing to the collateral side of the test and can still be sold to reduce the balance.
On the second: the language is usually any or all, and the amount is typically what the lender considers necessary or appropriate rather than the minimum that cures. Take a collateral value of $1,246,000, a threshold of 67 percent and a balance of $857,120. The permitted balance is $834,820 and the shortfall is $22,300, so the minimum sale is $22,300 ÷ 0.33 = $67,575.76. Suppose the lender instead sells one holding entirely, worth $168,000. The balance becomes $689,120 against a collateral value of $1,078,000, a ratio of 63.9 percent. That is 2.49 times the minimum sale, and it leaves the account not at the threshold but three points below it.
The over-sale is not arbitrary. Selling a whole line avoids a residual odd-lot, and stopping exactly at the threshold leaves an account that fails again on any further decline, which is the subject of lesson 17. The mechanism to hold on to is simply that the minimum is a floor on the sale, not a ceiling.
The arithmetic of a cure tells you the smallest sale that restores the test. Nothing in it tells you the largest sale the agreement permits.
Key terms
- Any or all
- Standard drafting giving the lender access to every pledged asset rather than a specified subset of them.
- Minimum cure
- The smallest sale that returns the ratio exactly to the threshold. A floor on what will be sold, not a limit.
- Buffer restoration
- Selling beyond the minimum so the account sits below the threshold with room, rather than exactly on it.
Worked example
The minimum and what was actually sold
Collateral value $1,246,000, threshold 67 percent, balance $857,120. The lender liquidates one holding worth $168,000.
- Permitted balance
- $834,820
- Shortfall
- $22,300
- Minimum sale
- $67,575.76
- Actual sale
- $168,000
- Ratio after the sale
- 63.9%
$1,246,000 × 0.67.
$22,300 ÷ 0.33.
2.49× the minimum.
$689,120 ÷ $1,078,000.
The gap was $22,300, the arithmetic required $67,575.76, and $168,000 left the account. All three figures are consistent with the agreement.
Check yourself
A shortfall of $22,300 at a 67 percent threshold requires a minimum sale of $67,575.76. The lender sells $168,000. Has it exceeded its rights?
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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.