sapphire
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Post by sapphire on Apr 23, 2020 13:09:31 GMT
Whilst Tranche A of the loan launched today (Southwark) has been fully subscribed in Autolend, a significant amount of Tranches B & C is currently available. (Not unexpected having regard to their size and the current economic conditions).
It appears to me that the interest rates for Tranches B and C for Southwark are possibly under-priced vis-a-vis that for Tranche A, especially having regard to the increased risk in Tranches B & C due to current economic uncertainty and the comments in the VR.
Any idea of the formula/method PL uses to set the interest rates between the three tranches? Is this is an internal (secret?) formula/method?
I would appreciate any formula/methods/info/articles others are able to share on how potentially the interest rate on such tiered tranches could be / should be set.
(I tried Google searches but was not successful. I am probably not using the appropriate search terms!).
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Post by uksoul on Apr 23, 2020 19:50:08 GMT
Maybe B+C rates are undervalued due to the 15 month interest payment paid upfront. Less risk with the full interest sweep paid upfront. I'm not sure there is a fixed formula for tranches, seems to vary among business models. Some platforms have a ceiling for interest rates and never exceed it no matter how risky the loan is. Proplend explain their tranche formulation on their site. www.proplend.com/news/assessing-investment-risk-loan-to-value-ltv/ |
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Post by overthehill on Apr 24, 2020 10:51:10 GMT
Proplend haven't had any properties like this to compare against - walk-in prime residential. For interest uplift between A and B tranche, Luton had 16% and West Ewell had 40%, I don't have details on the latter so I'm not sure why the uplift was so high.
The uplift between A and B on this one is 22%. It's apparent from the sale that you are not alone thinking the B and C uplifts might be a little light although the reduced LTV and valuation reduce the risk for the B and C tranche considerably if you look at the maths.
There will be a calculating algorithm but with a lot of inputs and a pinch of negotiation.
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p2pfan
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Full-Time Investor
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Post by p2pfan on Apr 27, 2020 12:25:35 GMT
Only Tranche B basically left now to fill (£1k left on Tranche C).
I personally think the 13.57% on Tranche C and 10.45% on Tranche B are very generous considering this is prime London real estate. THe property is currently for sale for an asking price of £3m which is unrealistic, and £2.5m might also be unrealisable in a post-Corona economic environment, but the £750k gap between that figure and the amount being loaned is more than enough headroom to cover a reduction in the property's price and legal fees.
As has been commented above, a vital ingredient in making this loan very appetising is the 15 month Interest Reserve. 15 months of almost-guaranteed interest at 10.45%+ (Tranche B) is not easy to find with other lending.
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Post by uksoul on Apr 27, 2020 14:00:59 GMT
Only Tranche B basically left now to fill (£1k left on Tranche C). I personally think the 13.57% on Tranche C and 10.45% on Tranche B are very generous considering this is prime London real estate. THe property is currently for sale for an asking price of £3m which is unrealistic, and £2.5m might also be unrealisable in a post-Corona economic environment, but the £750k gap between that figure and the amount being loaned is more than enough headroom to cover a reduction in the property's price and legal fees. As has been commented above, a vital ingredient in making this loan very appetising is the 15 month Interest Reserve. 15 months of almost-guaranteed interest at 10.45%+ (Tranche B) is not easy to find with other lending. Tranche C now filled Tranche B has a lot left. The 15mth interest reserve indicates the sellers willingness to wait. You right, the asking price a tough ask in the current climate.
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sapphire
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Post by sapphire on Apr 30, 2020 10:17:58 GMT
Whilst there is a headlined 15 month interest reserve at the start of the loan and the borrower has "resolved" to have the Property sold within the next 12 months and is said to be pragmatic about the prices, there is of course no certainty that this will happen nor any compulsion on the borrower to do so before the loan maturity date.
As such, from my perspective, at the end of the crucial 12 month period, there is effectively only a 3 month interest reserve, which will keep reducing further if the loan is not redeemed in time and the borrower does not top-up this interest reserve. (assuming borrower is not able to refinance this elsewhere).
So, I think the key question for Tranche B holders (& potential buyers) is that in the event of a default (in 12-15+ months time), how certain/comfortable they are in a (uncertain/unknown) post-COVID housing market, that this property will realise at least 65% of the current (unrealistic) sale price valuation, in effectively a fire sale, after covering the associated fire sale costs & expenses.
Happy to be corrected if I am missing something.
*Edit*
If my understanding is correct, Tranche A holders have priority over the other Tranches for both Principal and Interest?
If so, in the event of a default, and a delay in the (fire) sale, any post 15-month interest payments due on Tranche A will need to be paid first from the sale proceeds before any amount is paid to the other Tranche holders?
So, Tranche B holders may need the property to realise more than 65% to help ensure no losses?
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Post by overthehill on May 1, 2020 8:38:04 GMT
Yes, interest owed to Tranche A is paid before capital to tranche B, I'm not sure if there are limits and conditions not put to the test yet, this is the first loss and the Tranche B shortfall recovery is still active.
A 3 month interest reserve minimum must be preserved if the loan is not repaid after 12 months. Otherwise, the loan 'effectively goes into default' then (not 3 months later), processes are set in motion. There are also penalty exit fees and penalty interest. All designed to make it very financially unattractive for otherwise wealthy borrowers not to act in good faith and with urgency.
Just making the point that there are number of factors to make it less likely that Tranche A interest payments will eat into the Tranche B capital payments in the event of a partial recovery. There are no guarantees of course.
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