Securities-Backed Lines of Credit (SBLOC): The “Buy, Borrow, Die” Liquidity Engine
Securities-Backed Lines of Credit (SBLOC): The “Buy, Borrow, Die” Liquidity Engine
๐ WHO THIS IS FOR (Prerequisites)
- Required Profile: Asset-Rich, Cash-Poor individuals holding large concentrated stock positions or diversified portfolios.
- Primary Objective: Liquidity Access (Spending power without triggering the 23.8% – 37% tax bill).
- Disqualifying Factor: High leverage aversion or portfolio volatility that exceeds risk tolerance (Margin Call risk).
โ ๏ธ STRATEGY ELIGIBILITY CHECK
We are not talking about buying more stock on margin (Reg T). We are talking about borrowing against the portfolio to buy real estate, boats, or fund lifestyle (Reg U/X).
- โ๏ธ LTV Limits: Typically capped at 50-70% for Equities, 80-90% for Fixed Income.
- โ๏ธ Rate Sensitivity: Viable only when (After-Tax Cost of Debt) < (Portfolio Return).
- โ๏ธ Asset Type: Public Securities are easiest. Private Stock/Funds can be leveraged via “NAV Lending” but at lower LTVs.
- โ๏ธ Purpose: Cannot use proceeds to buy more marginable securities (purpose credit). Must be “Non-Purpose” (Real Estate, Business, Taxes).
EXECUTIVE SUMMARY
- The Premise: You need $2M for a down payment. You have $10M in Amazon stock. Selling $2M triggers $500k in tax.
- The Edge: You pledge the $10M portfolio as collateral for an SBLOC. You draw $2M cash. No sale occurred, so $0 Tax is due.
- The Result: You keep the Amazon stock compounding. The interest you pay on the loan is often far less than the opportunity cost of the tax bill + lost compounding.
- The Endgame (“Die”): Upon death, the estate sells the stock (Tax-Free via Step-Up in Basis) to pay off the loan. The heirs keep the difference.
For the Ultra-Wealthy, “Income” is for the poor. The rich live on “Debt.” Debt is tax-free. Selling assets is taxable. Source: McCaffery “Buy, Borrow, Die” Thesis
- Scenario: Need $2M Liquidity.
- Option A: Sell Stock (Basis $0, 23.8% Tax).
- Option B: Borrow SBLOC (5% Interest Rate).
- Portfolio Return: 7% Annual Growth.
- Horizon: 10 Years.
Performance Simulation (Cost of Liquidity)
| Metric | Option A: Sell to Spend | Option B: SBLOC (Borrow) | Delta (Alpha) |
|---|---|---|---|
| Gross Amount Needed | $2,624,671 (Gross Sale) | $2,000,000 (Loan) | Sell $624k less stock |
| Tax Bill (Immediate) | ($624,671) | $0 | Save $624k Tax |
| Remaining Portfolio ($10M start) | $7,375,329 | $10,000,000 | +$2.6M Working Capital |
| 10-Year Growth (7%) | $14,508,460 | $19,671,513 | Compound Growth |
| Loan Payoff (Year 10) | $0 | ($2,000,000) | Repay Principal |
| Interest Cost (Paid annually) | $0 | ($1,000,000 total) | Cost of Carry |
| Net Ending Wealth | $14,508,460 | $16,671,513 | +$2.16 Million |
*Chart Note: By borrowing, you keep the $2.6M (that would have been sold) growing at 7%. This growth outpaces the 5% interest cost, creating “Positive Arbitrage.”
Advanced Mechanics: The “Interest Deduction”
*Making the debt even cheaper.
| Usage | Tax Treatment | Efficiency |
|---|---|---|
| Personal Spend | Interest is Non-Deductible. | Low. Use only if portfolio return > interest rate. |
| Investment Real Estate | Interest is Investment Interest Expense. Deductible against investment income. | High. Effectively lowers borrowing cost by ~40%. |
| Business Injection | Interest is Business Expense. Fully deductible. | Maximum. Debt becomes a pre-tax expense. |
Beating the Bank Rate:
- The Problem: Bank SBLOC rates (SOFR + Spread) can be expensive (e.g., 6-7%).
- The Fix: Use a Short Box Spread using SPX Options.
- The Mechanism: This is a synthetic loan executed directly in the options market. You borrow from “The Market,” not the bank.
- The Result: You can often borrow at near the Risk-Free Rate (Treasury Rate) + 0.3%, significantly undercutting Prime/Broker rates.
โ BOUNDARY CLAUSE: Structural Risks
- Maintenance Call (Margin Call): If your portfolio drops by 30-40%, the bank will force-sell your assets at the bottom to cover the loan. You trigger taxes AND realize losses simultaneously. Never borrow > 20-30% LTV to stay safe.
- Floating Rate Risk: SBLOCs are typically floating rate (SOFR+). If rates spike (like in 2022), your cost of carry can explode, destroying the arbitrage.
๐ค DECISION BRANCH (Logic Tree)
IF LTV Needed > 50%:
โข Input: Aggressive borrowing.
โข Output: Danger Zone. Sell assets instead. The risk of a wipeout during a crash is too high.
IF LTV Needed < 25%:
โข Input: Buying a vacation home.
โข Output: Execute SBLOC. The probability of a margin call is near zero. You preserve the tax-deferred compounding of your core portfolio.
Taxes are a friction on velocity. SBLOCs allow you to maintain asset velocity (compounding) while extracting utility (cash). It is the cornerstone of dynastic wealth preservation.