Some loans in AAs to become untradeable as PF depletes (AC)

We are writing today with an important update regarding the operation of the Access Accounts following the onset of the COVID-19 pandemic.

The Access Accounts have handled billions of trades since their inception and, prior to the pandemic, provided continuous and exceptional liquidity to lenders. Part of this was the way in which the Access Accounts allowed loans with credit issues to continue to trade while providing cash-backed protection, through the Provision Funds.

The operation of this is described in more detail in our published Provision Fund Policy in the section regarding “Ring-fencing”, which is the term we use to describe the process of Provision Fund money being set aside to cover a specific loan in order for that loan to remain tradeable within the Access Accounts. As well as describing how “Ring-fencing” works in normal market conditions, the Provision Fund Policy also describes what will happen if ever there is not enough unallocated money within the Provision Funds to continue “Ring-fencing” for any period of time. Specifically:
“If there is not sufficient money within the relevant Provision Fund to fully cover the assessment of the Loss Given Default then the loan will not be allowed to trade within the Access Accounts, thereby preventing lenders from gaining or increasing a holding in a loan which is in difficulty and which may ultimately face a loss.”
During the COVID-19 pandemic we have seen a steady increase in the amount of “Ring-fencing” required, as we continuously assess future potential loss expectations on the loan book. This has led to a steady decrease in the unallocated cash holdings of the Provision Funds. We are now reaching a point where continued “Ring-fencing” will not be possible, at least temporarily, so we will shortly be obliged to follow our published Provision Fund Policy and suspend from trading within the Access Accounts any loans with new credit issues which also cannot have unallocated Provision Fund monies “Ring-fenced” to cover them. Existing loans with a “Ring-fenced” Provision Fund allocation will not be affected and will remain tradeable, unless the “Ring-fencing” requirement for that loan increases and cannot be covered.

What does this mean in practical terms?
When we have to begin suspending the trading of specific loans in the Access Accounts as a result of this issue, the loan parts you hold in those loans will cease to be tradeable unless it becomes possible in the future to “Ring-fence” an appropriate amount of Provision Fund cash to cover that loan. This future “Ring-fencing” could happen because:

The performing loans within the Access Accounts continue to contribute to the Provision Funds each month.
As described in our Provision Fund Policy, it is possible for funds which have been “Ring- fenced” to protect a particular loan to be released back to the Provision Funds if that loan recovers and becomes tradeable within the Access Accounts again (typically because the borrower corrects the issue with the loan).

It is therefore conceivable that loans which have to be suspended may be “un-suspended” in the future if and when additional funds are added (or returned) to the Provision Funds balances. However, we cannot in any way promise that this will be the case and, indeed, regulations specifically preclude us from counting any prospective, future Provision Fund contributions in any figures which we publish.

Therefore, in at least the short term, this means that a small number of loans within the Access Accounts will become untradeable. That number could increase or decrease over time depending on the performance of the loan book and the ability of the Provision Funds to commence “Ring- fencing” again, in the future. You will not be able to sell your Access Account holdings in these untradeable loans unless they become tradeable again. This is in line with our existing disclosures in our Provision Fund Policy but we wanted to write specifically to explain the situation.

Separately, and in response to this situation, we have been exploring a potential alternative mechanism to “Ring-fencing” which would allow loans to remain tradeable even when there is no unallocated cash available in the Provision Funds for “Ring-fencing”. This is something that we are still working through and which we hope we may be able to offer in due course. However, it is too early today to confirm if and when we will be able to provide such an option. We will write again in the coming weeks when we have more information to share.

Finally, we do not presently assess that the economic impact of COVID-19 will affect the target rates of interest being paid on these accounts beyond the recent adjustment that we already made.

Kind regards,
Assetz Capital