EBLOC Deep Dive: Mechanics, Structures, and Failure Modes

If you skipped the framework and came straight here, go back. The mechanics only work inside the right structure. Without the decision architecture, this is a recipe for well-organized mistakes.

Selecting a Lender

Your brokerage will offer you an EBLOC. It will be convenient. It may also be the most expensive and least flexible option available to you.

Most major brokerages — Schwab, Morgan Stanley, Fidelity — offer pledged asset lines as a standard product. The terms are standardized, the process is streamlined, and the rate is whatever the rate is. For many borrowers, that's where the evaluation begins and ends.

It shouldn't be.

Private banks, regional banks, and credit unions frequently offer more favorable structures — particularly for portfolios above $1M. The rates can be meaningfully lower, the LTV ratios more generous, and the margin call terms more forgiving. The reason is straightforward: these institutions are competing for your broader relationship, not just servicing a product.

The variation across lenders is wider than most borrowers expect. I've seen rate differences of 100+ basis points on the same portfolio profile. Over a six-year deal horizon, that difference alone can represent a significant percentage of your total carry cost.

Here's what to evaluate across at least three lenders before committing:

Rate and rate structure. Most EBLOCs are variable, typically pegged to a benchmark (SOFR, Fed Funds, prime) plus a spread. The benchmark is standardized. The spread is where negotiation lives. Ask what the spread is, whether it's tiered by portfolio size, and whether it can be reduced by consolidating other accounts with the lender.

Some lenders will offer fixed-rate tranches for a portion of the draw. If you know your deployment timeline and your expected duration before ROC, locking a portion at a fixed rate adds predictability to your cost modeling. Variable exposure on the remainder gives you the benefit of rate decreases if they materialize.

LTV ratio. Lenders typically offer 50-70% LTV on diversified equity portfolios, with the specific ratio depending on concentration, volatility, and the types of securities held. A portfolio of large-cap diversified ETFs will command a higher LTV than a concentrated position in individual growth stocks.

The number you care about isn't the maximum LTV they'll offer. The number you care about is the maximum LTV that still leaves you a survivable cushion in a 30-35% drawdown. Back into that number from the stress test, not from the lender's ceiling.

Margin call mechanics. This is the most consequential term in the agreement and the one most borrowers spend the least time understanding.

Key questions to ask and get in writing:

At what LTV does the lender issue a margin call? How much notice do you get — 24 hours, 3 days, 5 days? What remedies are available? Can you deposit additional securities, deposit cash, or partially pay down the balance? Or does the lender have the right to liquidate automatically? If they liquidate, do you have any control over which positions are sold? Is there a cure period, and what are the specific terms?

The difference between a lender who gives you five business days and the ability to deposit additional collateral versus a lender who auto-liquidates within 48 hours is the difference between maintaining the structure during a correction and watching it collapse.

Draw and repayment terms. For the EBLOC-to-private-deal structure specifically, you need flexibility on both sides.

On the draw side: can you take the full amount at once, or is it released in tranches? If the deal requires a lump-sum capital call, a tranched draw doesn't work. Confirm that the draw mechanics match the deal's funding requirements.

On the repayment side: can you apply ROC proceeds directly to principal without penalty? Is there a minimum balance requirement? Are there restrictions on re-drawing after a paydown? Some lenders treat a paydown as a permanent reduction in the available line. Others allow you to re-draw up to the original commitment. If you expect to cycle this structure across multiple deals over time, that distinction matters.

Prepayment penalties. Most EBLOCs don't carry prepayment penalties, but confirm this explicitly. Any friction between receiving ROC and applying it to principal is a direct cost to the structure.

Interest calculation. Ask specifically: is interest calculated daily, monthly, or on another basis? Is it simple or compounding? On a variable-rate line where the rate itself is moving, the compounding method affects your actual cost in ways that aren't obvious from the quoted rate. Model this over your expected hold period, including a scenario where ROC is delayed by three to six months. The difference between simple daily interest and daily compounding over an extended carry period can be meaningful.

Negotiation leverage. Yes, these terms are negotiable — especially at the private bank level and especially when your portfolio exceeds certain thresholds. The rate spread, the LTV ceiling, the margin call cure period, and the draw flexibility are all variables the lender can adjust. Your negotiating position is strongest before you sign, when the lender is competing for your assets and your broader banking relationship.

Come to the table with competing term sheets. Lenders respond to specificity — "your competitor is offering me X basis points lower with a five-day cure period" is a conversation that produces results.

Understanding Your Terms at an Operational Level

Once you've selected a lender and signed the agreement, build a reference document for yourself. This sounds administrative. It's actually risk management.

The document should answer these questions at a glance:

What is my current LTV? At what LTV does the margin call trigger? What is my current cushion in percentage and dollar terms? If the market drops 10%, 20%, 30% — what is my LTV at each level? At which level am I in margin call territory? What are my remedies and how much time do I have? What is my current interest rate and how is it calculated? What is my monthly carry cost at the current balance? What is my monthly carry cost if ROC is delayed three months? Six months?

Update this quarterly at minimum. Update it immediately after any material market move. The investors who get surprised by margin calls are almost always the ones who hadn't checked their cushion in weeks.

Monitoring the Dual Position

You are now managing two positions that interact with each other but move on completely independent timelines. This is the operational reality that distinguishes executing this structure from understanding it conceptually.

Portfolio-side monitoring:

Set three alert thresholds on your LTV ratio:

Comfort threshold — the level below which you take no action. This should leave enough room that a normal week of market volatility doesn't trigger concern. Advisory threshold — the level at which you begin evaluating defensive options. Deposit additional securities? Partially pay down the balance from other sources? Reduce new spending? These decisions should be pre-made. If you're deliberating at this level, you waited too long to plan. Action threshold — the level just above margin call territory where you execute your pre-planned defensive move. At this point, you're not deciding. You're executing a decision you already made.

The gap between your advisory threshold and your margin call trigger is your buffer. If that gap is less than a 10% portfolio drawdown, your structure is too tight.

Deal-side monitoring:

Establish a regular cadence with the deal sponsor — monthly at minimum, more frequently around major milestones. The capital events you care about most:

Construction milestones (for development deals). Lease-up velocity (for real estate). Revenue milestones (for operating businesses). Any change to the capital stack, timeline, or ROC schedule.

ROC timing is the hinge. If ROC will be delayed, you need to know as early as possible so you can model the extended carry, assess whether your portfolio-side cushion can absorb a longer hold, and adjust your alert thresholds if needed.

The worst position to be in is a delayed ROC coinciding with a market drawdown. Both sides of the structure are under stress simultaneously. If you've been monitoring both, you'll see this convergence developing in advance and can take action. If you haven't, you'll learn about it from your lender.

Executing the ROC Paydown

When return of capital arrives, the execution sequence matters.

Step 1: Confirm the distribution. Verify the amount, the timing of the wire, and which account it's landing in. If the distribution lands in a different account than the one linked to the EBLOC, arrange the transfer in advance. Delays between receiving ROC and applying it to principal are days of unnecessary carry cost.

Step 2: Apply to principal. Contact the lender to confirm the paydown will be applied to principal, not to interest or held as a cash balance against the line. Some lenders will default to applying payments to accrued interest first. Specify principal reduction explicitly.

Step 3: Confirm the new balance and recalculate your LTV. After the paydown, your outstanding balance drops. Your LTV improves. Your margin call cushion widens. Update your reference document and recalibrate your alert thresholds.

Step 4: Reassess the remaining position. With the principal substantially retired, the risk profile of the overall structure has fundamentally changed. Your remaining exposure is a smaller carried balance against the same portfolio. The equity in the deal remains intact. At this point, ask yourself: does the remaining carry cost justify holding the position to maturity, or does it make sense to pay off the remaining balance entirely from other sources and eliminate the EBLOC exposure?

There's no universally right answer. If the remaining balance is small relative to your portfolio and the carry cost is modest, holding to maturity preserves cash and maintains the asymmetric structure. If the remaining balance is meaningful enough to affect your flexibility or your comfort during volatility, retiring it early buys you optionality. The decision depends on what else is happening in your portfolio and your pipeline.

Failure Mode Reference

Understanding how this structure breaks is as important as understanding how it works. These are the most common failure patterns, drawn from how these instruments actually behave under stress.

Failure Mode 1: Margin call during ROC delay. The market drops 25%. ROC is delayed by four months due to a construction setback. Your LTV breaches the covenant. The lender issues a margin call. You're forced to sell equities at depressed prices to cover the line — the exact outcome the entire structure was designed to prevent. Prevention: maintain an LTV cushion that can survive a 30%+ drawdown even at full EBLOC balance, and build a three-to-six month ROC delay into your base case assumptions.

Failure Mode 2: Deal failure with full recourse exposure. The deal returns zero. The full EBLOC balance remains outstanding and secured by your portfolio. You now owe the full borrowed amount plus accrued interest, collateralized against securities that may have also declined. Prevention: never deploy EBLOC capital into a deal where total loss would create financial distress. The survivability gate exists for this reason.

Failure Mode 3: Rate escalation on variable EBLOC. Rates rise 200 basis points during your hold period. Your carry cost increases by 30-40%. The spread between your borrowing cost and the deal's return compresses. The structure still works mechanically, but the economics weaken. Prevention: model your carry cost at current rates plus 200-300 basis points. If the deal still makes sense at the higher cost, the structure has margin. If it only works at current rates, you're making a bet on the rate environment, which is a different risk than the one you underwrote.

Failure Mode 4: Liquidity trap. Capital is committed to the deal on one end and pledged against the line on the other. A new opportunity emerges — a deal with better terms, better timing, or higher conviction. You can't act on it because your portfolio is encumbered and your cash is deployed. You watch it pass. Prevention: never encumber your entire portfolio. Maintain a meaningful unencumbered reserve — both in securities and in cash — that preserves your ability to act independently of the EBLOC structure.

Failure Mode 5: Conviction decay. Six months into the hold, new information emerges about the deal. The operator's execution falters. The market shifts. Your conviction drops from high to moderate. But you're already deployed, already leveraged, and exiting the deal early would mean absorbing a loss on the EBLOC carry without the return to justify it. Prevention: establish decision criteria in advance for when you would exit early, even at a loss. Define what "conviction has changed" means in specific, observable terms — not just a feeling. Revisit those criteria at each monitoring interval.

A Note on Repeatability

If you execute this structure successfully, you'll be tempted to repeat it immediately. The asymmetry is compelling. The mechanics are familiar. The next deal will feel easier.

That's the moment to slow down.

Each iteration of this structure adds incremental encumbrance to your portfolio. Two simultaneous EBLOC-funded positions means twice the margin call exposure, twice the monitoring burden, and a correlation risk that doesn't exist with a single position. If both deals experience ROC delays during the same market drawdown, the compounding stress is more than additive.

One position at a time. Retire the EBLOC fully before considering the next deployment. The structure works because it's disciplined. The moment it becomes a habit is the moment it starts behaving like the leverage the first section of this newsletter warned you about.