Lesson 1 of 25 · 6 min
Why one name and forty names are not the same collateral
Two accounts can hold identical dollars and offer a lender two different exits, and the exit is the thing being priced.
Two accounts can hold the same dollars and not be the same collateral. Track 1 lesson 10 established the rule: a lender reduces the advance rate on a position that exceeds a stated share of the pledged pool. This track starts one step behind the rule and asks what the lender is actually measuring when it applies it.
It is measuring an exit. Forty holdings mean forty order books, forty separate sets of buyers, and reasons for falling that are only partly shared, so the lender can sell in parallel and the sales interfere with each other very little. One holding means one order book, one set of buyers, and one company's news able to move every pledged dollar in the same direction on the same morning.
The size of that difference is worth doing in numbers once. Take $2,340,000 of market value in each account. The forty-name account draws an advance rate of 68 percent, giving lending value of $2,340,000 × 0.68 = $1,591,200. The single-name account draws 52 percent, giving $2,340,000 × 0.52 = $1,216,800. The gap is $374,400, which is $2,340,000 × 0.16 — the same wealth, and $374,400 less collateral.
Notice what the gap does not say. It does not say the concentrated holder chose worse, or that the company is weaker, or that the diversified account will fall less. It says the lender's liquidation of one account runs through forty channels and its liquidation of the other runs through one. The discount prices the channel, not the holding.
Diversification is a statement about your outcomes. To a lender it is a statement about how many parallel exits exist, and that count is what the advance rate is built from.
Key terms
- Concentrated position
- A single holding large enough that its own price behaviour drives most of the pledged pool's value.
- Pledged pool
- Everything pledged against one line, taken together. Concentration is always measured against this total, never against your net worth.
- Exit path
- The route by which a lender would turn collateral into cash. More independent holdings mean more routes running at once.
Worked example
Same market value, two advance rates
Two pledged accounts, each worth $2,340,000. One holds forty names at a 68% advance rate; one holds a single name at 52%. Illustrative rates.
- Forty-name lending value
- $1,591,200
- Single-name lending value
- $1,216,800
- Difference
- $374,400
- Draw permitted at 65% of lending value, forty names
- $1,034,280
- Draw permitted at 65% of lending value, one name
- $790,920
$2,340,000 × 0.68.
$2,340,000 × 0.52.
$2,340,000 × 0.16.
$1,591,200 × 0.65.
$1,216,800 × 0.65.
Identical wealth produced $243,360 less permitted draw. Nothing about the companies entered the calculation; only the number of exits did.
Check yourself
Two accounts each hold $1,480,000 of market value. One is forty names at a 68% advance rate, the other a single name at 50%. How much lending value separates them?
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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.