Liquidity Event (GS)

Hmmm I'm not quite so pessimistic. Clause 7.7 doesn't bind them to anything particularly strict per se - it just says that if they can't 'remedy' the Liquidity Event they will declare a Resolution Event. I think they can define 'remedy' pretty broadly here just to mean that if it's possible to continue on, they will. For me, that 'remedy' would likely have to be some structural change to the withdrawal process, as outlined above. This could even happen right now as there is over 5% liquidity.

I'm pretty happy with the email - they're obviously doing a lot of work in the background to try to sort this out, with lots of different options being looked at. Particularly interesting, I thought, was that they're exploring selling the entire loan book!

On another note, I've realised that, as they wind down the loan-book more and more (if they continue to do so), there's going to be an increasing proportion of lenders who, completely fortuitously, get all their money out if a Resolution Event is called.

Can you clarify why this would be the case? My understanding is the Resolution Event aims to evenly distribute repayments to lenders - sounds like you think as loans are repaid whomever was invested in those loans would get that money back instantly. I thought that money would just be split amongst all investors and paid out quarterly? If that's not the case, it does seem pretty unfair and totally against the spirit and intent of what the Resolution Event aims to do.

Utilisation hitting 90% this morning, so moving in the right direction!

Bearing in mind their salaries are most likely not affected by the liquidity event!

I have enquired as to whether any of their staff/Directors are taking a salary cut to assist their borrowers, or its only the lenders that have to suffer, as yet, no response!!

Not impressed at all, we take a hit, and the Directors prefer to stay quiet and ignore my query.

Well it's just the logical extension of my last response to you above. If (and only if) there is a Resolution Event (RE), a lucky few lenders will not have their funds invested when the RE is called and so will get a 100% return. This will be made up of money that some borrowers have repaid (reducing the deployment rate); but it will only be borrowers that can repay that do, and this money would have been helpful for the majority of lenders who don't get a 100% return.

Here is an overly simplified example:

- Let's assume that total lending is £10m, made up of 10 borrowers each borrowing £1m.

- Of these 10 borrowers, half are in a good financial position and could repay/re-finance if they needed to (100% return, no haircut for lenders), while the other half of borrowers are in a worse financial position such that they can't repay/re-finance and there would be an average 50% capital haircut for lenders in the event of enforcing the loan.

- Let's also assume that all lenders are lending an equal amount.

Scenario 1

When the RE is called, the deployment rate has reached 80% because over the course of the Liquidity Event (LE), two borrowers have been able to repay/re-finance. By definition these are borrowers who were in a financial position to be able to do so. This means that 20% of lenders get 100% of their money out. The remaining 80% are left with five borrowers in poor finance (50% haircut) and three borrowers in good finance (no haircut). So, out of £8m capital, only £5.5m is repaid (roughly 68% of capital) to the remaining lenders.

Result = 20% of lenders get a 100% return; 80% of lenders get a 68% return.

Scenario 2

When the RE is called, there has been no material reduction in lending, and the deployment rate is still close to 100% (let's assume, just for simplicity in this example, that it's exactly 100%). In this case, all lenders are invested when the RE is called, so no one gets out with 100% capital. All 10 borrowers are also still around, with five of them repaying in full and five resulting in a 50% haircut - as above. This gives an average of 75% return for all lenders.

Result = 100% of lenders get a 75% return.


Clearly, the lower the deployment rate goes, the more pronounced the difference between the two scenarios becomes (although obviously it's a little more complicated than this in reality). Essentially, if you're not one of the lucky few who gets a 100% return by not being invested at the time the RE is called, you probably don't want the borrowers in a good financial position to be repaying/re-financing until after the RE is called.

Again, this is only if an RE is called. We hope that it won't be!

Hope that makes sense now... took longer to write out than I'd imagined...!!