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Post by andrewholgate on Nov 19, 2014 13:17:38 GMT
Given a few comments and questions on the forum in the last few days, I think it would be useful to do a brief piece on when enforcement actions should be taken.
In general terms, we follow a process of early warning indicators (EWIs), breach, forbearance, formal default and then resolution or collection. The work the team do in setting up the loan is crucial. When we are making an assessment of the facility we are always asking "What can go wrong?" and "How do we stop it or identify it?". What this leads to is covenants being put into the loan documents that allows us to measure the performance of the business and take action where necessary. These are our EWIs, a bit like our seismographs telling us of a possible earthquake. Sometimes there is no warning, the earthquake just hits be we do our best to be prepared.
Once we analyse the breach of the T&Cs we have to make a decision as to the seriousness of the breach. If a covenant says rent must be 1.5x the loan repayments and it drops to 1.48x, the breach is not material but puts us on warning that a more serious issue could be developing. We can then take steps to rectify the problem. This is known as forbearance where we are actively working with the borrower to find a solvent solution. In many cases the breach is rectified very quickly, such as a missed payment made good in 3-4 days, and we move on. In other cases the breach is more serious and we have to act. The forbearance process is necessary for a number of reasons. It is often cheaper to enact a solvent solution and allow for a full recovery of the debt. It ensures the borrowers credit history, whilst tarnished, is not ruined. It is also required under Treating Customers Fairly requirements of the FCA. As a lender, to jump straight to recovery may be the wrong option. A willing customer is easier to work with and is more likely to get a solution. Also, where residential property is taken as security, the reputational risk of evicting a family is not one to be dismissed easily.
If no solvent solution is found, or forbearance runs to a certain timescale, we will declare a formal default at that point. Only at this point do we consider a formal process. A process is costly as you have to engage qualified individuals who know the law around insolvency and can act within it. Only someone with a licence to act can be appointed and given an Insolvency Practitioner has trained for 3 years to become an accountant, then 10 years industry experience and then sat 2 years worth of JIEB exams to get a licence, they are not cheap to hire. Bringing in a partner from a Big 4 firm is likely to cost in excess of £750 per hour, and there is often a team working to support the appointment taker. A typical appointment on an SME transaction runs well into the tens of thousands of pounds. Therefore, caution is required before exercising this option.
However, in some cases it is the only and most sensible option. With the two loans that have entered a formal process under AC, we have moved very quickly to go into a process as this is the most effective way to ringfence the business and take control to protect lenders. There was no time for forbearance in these cases and the process is the most appropriate action.
In all cases, we are very aware that it is your capital at risk. Our aim is to ensure you get all of it back, with as little fuss as possible and in the most efficient manner.
I hope this helps give a bit of colour.
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hendragon
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Post by hendragon on Nov 19, 2014 13:24:58 GMT
could you please elaborate on what range of options a "solvent solution" might entail?
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mikes1531
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Post by mikes1531 on Nov 19, 2014 21:24:39 GMT
With the two loans that have entered a formal process under AC, we have moved very quickly to go into a process as this is the most effective way to ringfence the business and take control to protect lenders. There was no time for forbearance in these cases and the process is the most appropriate action. : Thanks for the explanation. As for the issue of forbearance, I question the statement that there was no time for it. In the case of the Ip***** loan, it was a 6-month loan due on 5/Sep. That was two and a half months ago, so it appears to me that AC have been quite patient and have given the borrower ample opportunity to rectify the situation. Presuming the other loan referred to is G** Con********, it would seem that AC are about to get a third, as I expect that the loan cross-linked with the Ip***** loan will progress to that stage very shortly.
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sqh
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Post by sqh on Nov 20, 2014 0:28:35 GMT
andrewholgate. From above, I understand what your saying, and presumably you raised this thread as a direct result of the I****** vote. The problem I have, as a lender, is to make decisions based on the information provided, and the risk of loss. Here are 5 reasons why I feel insecure about BL's in default. 1. Pre-October the BL's displayed the total payments due, not just the repayments owed to lenders. From that I calculated the interest rate paid by the borrower to be substantial. This means the LTV is being eroded faster than expected. 2. Lender capital repayments and default interest come behind the Introducer's fees & interest and AC's fees and interest. That presents a potential conflict of interest in the case of the Introducer, who keeps getting default interest with "no skin in the game". 3. I've been nervous of property valuations ever since the B***** BL went into default. Property prices are stable or rising, but the residential property in this loan was sold at a massive discount, and I haven't seen any explanation. 4. I have no understanding of the net wealth of each borrower, so I am unable to evaluate the value of a PG. 5. Two months ago I suggested to you on this forum that the K*** loan #84 be extended. Other lenders have also stated this numerous times, but nothing has been done. It has consequently drifted into default. I would like AC to address all these concerns ?
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pikestaff
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Post by pikestaff on Nov 20, 2014 9:08:13 GMT
With the two loans that have entered a formal process under AC, we have moved very quickly to go into a process as this is the most effective way to ringfence the business and take control to protect lenders. There was no time for forbearance in these cases and the process is the most appropriate action. : Thanks for the explanation. As for the issue of forbearance, I question the statement that there was no time for it. In the case of the Ip***** loan, it was a 6-month loan due on 5/Sep. That was two and a half months ago, so it appears to me that AC have been quite patient and have given the borrower ample opportunity to rectify the situation. Presuming the other loan referred to is G** Con********, it would seem that AC are about to get a third, as I expect that the loan cross-linked with the Ip***** loan will progress to that stage very shortly. I think the two loans referred to are FF and G2C, not Ippy where, as you say, there has been a reasonable period of forebearance. Ippy is about to go into formal process but I'm not sure it's happened yet (and won't have when AH wrote his piece).
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niceguy37
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Post by niceguy37 on Nov 20, 2014 9:18:08 GMT
andrewholgate. From above, I understand what your saying, and presumably you raised this thread as a direct result of the I****** vote. The problem I have, as a lender, is to make decisions based on the information provided, and the risk of loss. Here are 5 reasons why I feel insecure about BL's in default. 1. Pre-October the BL's displayed the total payments due, not just the repayments owed to lenders. From that I calculated the interest rate paid by the borrower to be substantial. This means the LTV is being eroded faster than expected. 2. Lender capital repayments and default interest come behind the Introducer's fees & interest and AC's fees and interest. That presents a potential conflict of interest in the case of the Introducer, who keeps getting default interest with "no skin in the game". 3. I've been nervous of property valuations ever since the B***** BL went into default. Property prices are stable or rising, but the residential property in this loan was sold at a massive discount, and I haven't seen any explanation. 4. I have no understanding of the net wealth of each borrower, so I am unable to evaluate the value of a PG. 5. Two months ago I suggested to you on this forum that the K*** loan #84 be extended. Other lenders have also stated this numerous times, but nothing has been done. It has consequently drifted into default. I would like AC to address all these concerns ? On Point 1, could the LTV shown on the website be recalculated overnight, to show the current LTV including outstanding interest? Regarding point 2 surely Introducer's fees and AC's fees should come after lender's capital? Lenders should at least get their capital back before anyone makes any profit from the deal.
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Post by andrewholgate on Nov 20, 2014 10:51:39 GMT
could you please elaborate on what range of options a "solvent solution" might entail? This could include: - sale of a property through normal markets (ie not an auction) - sale of plant and machinery - restructuring the loan - refinance to another lender - injection of equity into the business and many more options. Solvent just means outside of the formal insolvency procedures.
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Post by andrewholgate on Nov 20, 2014 10:52:56 GMT
With the two loans that have entered a formal process under AC, we have moved very quickly to go into a process as this is the most effective way to ringfence the business and take control to protect lenders. There was no time for forbearance in these cases and the process is the most appropriate action. : Thanks for the explanation. As for the issue of forbearance, I question the statement that there was no time for it. In the case of the Ip***** loan, it was a 6-month loan due on 5/Sep. That was two and a half months ago, so it appears to me that AC have been quite patient and have given the borrower ample opportunity to rectify the situation. Presuming the other loan referred to is G** Con********, it would seem that AC are about to get a third, as I expect that the loan cross-linked with the Ip***** loan will progress to that stage very shortly. Every loan is different and there is no stereotypical default. Some move quickly, others move more slowly.
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Post by andrewholgate on Nov 20, 2014 11:00:19 GMT
andrewholgate. From above, I understand what your saying, and presumably you raised this thread as a direct result of the I****** vote. The problem I have, as a lender, is to make decisions based on the information provided, and the risk of loss. Here are 5 reasons why I feel insecure about BL's in default. 1. Pre-October the BL's displayed the total payments due, not just the repayments owed to lenders. From that I calculated the interest rate paid by the borrower to be substantial. This means the LTV is being eroded faster than expected. 2. Lender capital repayments and default interest come behind the Introducer's fees & interest and AC's fees and interest. That presents a potential conflict of interest in the case of the Introducer, who keeps getting default interest with "no skin in the game". 3. I've been nervous of property valuations ever since the B***** BL went into default. Property prices are stable or rising, but the residential property in this loan was sold at a massive discount, and I haven't seen any explanation. 4. I have no understanding of the net wealth of each borrower, so I am unable to evaluate the value of a PG. 5. Two months ago I suggested to you on this forum that the K*** loan #84 be extended. Other lenders have also stated this numerous times, but nothing has been done. It has consequently drifted into default. I would like AC to address all these concerns ? Some good questions here: 1 - In most cases on the BLs we hold the interest owed from drawdown so the final repayment should be just the outstanding capital. You are correct that accruing interest would cause the LTV to erode therefore we would not allow forbearance if the interest owing wasn't being covered. 2 - This is the issue over short-termism vs long term sustainable businesses. the fat cat bankers remain fat, whilst the rest of the world struggles out of the mess created. We are looking at new systems around this and the new Green Account we have launched is one way of doing this. AC is placing its profits into the account to cover potential losses after the recovery via security. Therefore, if we get it wrong our profit is used to repay some or all of the losses incurred. 3 - These loans came from one introducer and I have already stated we will not be dealing with them again. 4 - BLs are an arbitrage against the property price. Where we do have PGs in place we try and ensure there is also a charge on assets behind that. Where it is just a PG we do check the wealth of the person. However, PGs are light weight when it comes to recovery which is why we look for asset security. 5 - Noted.
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sl75
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Post by sl75 on Nov 20, 2014 13:08:02 GMT
1 - In most cases on the BLs we hold the interest owed from drawdown so the final repayment should be just the outstanding capital. You are correct that accruing interest would cause the LTV to erode therefore we would not allow forbearance if the interest owing wasn't being covered. I personally fail to see this mechanism as an overall advantage... Suppose a borrower receives £900,000 and repays £1,000,000 after N months. Normally, this could be described as about 11.1% interest over the lifetime of the loan (annual rate depending on the value of N). Through the magic of "withholding" the £100,000 of interest, the borrower now has to apply for £1,000,000 in order to receive £900,000... and lenders' return is reduced to just 10%, as lenders need to provide the £100,000 that has been "retained" in addition to the original £900,000. Either lenders collectively get a lower return than the 11.1% they could have got without this withholding, or the borrower pays more than they would otherwise have needed to (in the presence of lenders who are collectively happy with a return of 10% over N months, the borrower should have been able do a deal where they'd repay £990,000 in the absence of the withholding). Generally it seems to me something of an odd concept (depending on exact perspective) either to be effectively paying interest on money you never received, or setting aside capital in order to pay yourself interest on money someone else has... Great for the lenders holding the loan units during the early part of the loan, where they receive most of the risk premium whilst taking on almost none of the risk, but not so great for those lenders who get stuck with the default at the end of the term having received little of the earlier interest. 3 - These loans came from one introducer and I have already stated we will not be dealing with them again. Just wondering out loud - given Assetz have publicly (and privately beforehand?) stated this, and the introducer appears to continue to act as a key intermediary even when discussing repayment of the loans, what incentive is there for the introducer to provide any assistance whatsoever to Assetz in obtaining repayment?
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jonno
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Post by jonno on Nov 20, 2014 13:25:02 GMT
I follow your logic, but I'm sorry,I'll gladly take 10% with guaranteed payment of interest across the term versus 11% with the risk of non payment at any time.If I want to offload near term end,and someone is prepared to buy, then where's the problem?
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sl75
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Post by sl75 on Nov 20, 2014 14:44:17 GMT
I follow your logic, but I'm sorry,I'll gladly take 10% with guaranteed payment of interest across the term versus 11% with the risk of non payment at any time.If I want to offload near term end,and someone is prepared to buy, then where's the problem? "the problem" is with the (in this example) £100,000 of completely dead funds doing nothing useful, and thereby dragging down the potential return on investment. Given the following 2 examples: Example 1 [equivalent to present system of "retained interest"] Alice lends £900k to Bob with payment of £1,000,000 due in 10 months. Alice also pays £100,000 into a separate account from which she can help herself to £10,000 a month (or sell this pot together with the loan). Alice refers to this as a £1,000,000 loan with £100,000 of retained interest. Immediately, Alice can sell this loan to Charlie for £1,000,000, who gains the right to be paid £1,000,000 and also the right to help himself to the £100,000 over the next 10 months. After 5 months, Alice (or Charlie) will have already helped themselves to £50,000 and can this loan to Dave for the same £1,000,000 price. He receives the right to be paid £1,000,000 in 5 months, and also the right to help himself to the remaining £50,000 over the next 5 months so should get £50,000 profit. Finally, whoever is holding the loan on the day payment is due can sell it to Fiona for £1,000,000. She gets the right to receive the Bob's £1,000,000, and also to charge default interest to Bob if it doesn't show up... everyone else already has their share of the £100,000 "interest". Example 2 [otherwise the exact same cashflows, without "retained interest"] Alice lends £900k to Bob with payment of £1,000,000 due in 10 months. Alice refers to this as a £900,000 loan with £100,000 of interest due to be paid by Bob. Immediately, Alice can sell this loan to Charlie for £900,000, who gains the right to be paid £1,000,000 by Bob in 10 months. After 5 months, Alice (or Charlie) have received no money up-front, but can sell this loan to Dave for £950,000 (Dave pays for £900k of capital and £50k of accrued interest). He receives the right to be paid £1,000,000 in 5 months so should get £50,000 profit. Finally, whoever is holding the loan on the day payment is due can sell it to Fiona for £1,000,000. She gets the right to receive Bob's £1,000,000, and also to charge default interest to Bob if it doesn't show up... everyone else already has their share of the £100,000 "interest" (in this case paid by Fiona rather than by Bob). In Example 1 and Example 2, the effect on Bob is identical - he receives £900k, and is expected to pay back £1,000,000 after 10 months (accruing at £10,000 per month). However, Alice and/or Charlie only need to commit £900k of funds in example 2, rather than £1,000,000, and similarly Dave need only commit £950k rather than the full £1,000,000. Either way Fiona is primarily interested in the higher rate default interest, so is happy to pay face value for Bob's promise. I don't see why any of the participants would actively prefer Example 1 over Example 2. Under the retained interest system, Alice, Charlie and Dave pay more for the same future value giving a lower overall return. (obviously there are other ways to structure it too... for example a deferred interest model, where the first £1M paid by or recovered from Bob is used to pay the capital and any contractual interest due, and any further amounts go towards the higher risk/higher return default interest)
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niceguy37
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Post by niceguy37 on Nov 20, 2014 15:04:25 GMT
Perhaps a loan with a initial repayment holiday would be more efficient if the loan is for a development project with no income generation until it is at least partially completed.
For example, building and operating a bio-digester, than might take 6 months to build and commission before it starts to generate income. Unless the borrower has other income with which to make repayments, the loan is likely to be set up with 6 months "retained" interest. This interest is indeed likely to not be earning optimal interest, held in some secure AC account.
TC are much more flexible in allowing this kind of loan. I don't know how much overhead this causes for TC's back-end systems, but I think it would be a good idea if AC could include this type of loan model in their systems going forward, as it is more efficient and provides a better fit to the borrowers requirements.
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Post by andrewholgate on Nov 20, 2014 15:08:20 GMT
3 - These loans came from one introducer and I have already stated we will not be dealing with them again. Just wondering out loud - given Assetz have publicly (and privately beforehand?) stated this, and the introducer appears to continue to act as a key intermediary even when discussing repayment of the loans, what incentive is there for the introducer to provide any assistance whatsoever to Assetz in obtaining repayment? The fact that AC is holding the payment of their fees.
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hendragon
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Post by hendragon on Nov 20, 2014 19:10:43 GMT
good for you..........get hold of them by their fees and twist if required!
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