TitoPuente
Member of DD Central
Posts: 624
Likes: 655
|
Post by TitoPuente on Jul 7, 2015 13:39:12 GMT
The obvious natural market alternative would be to let bidders bid what they think the loan is worth. For some reason Faucet Clogged is stubborn with their fixed pricing for property loans. A truly natural market would be two sided, with the borrowers also participating in determining the market rate. I'm not entirely sure that the "lenders bid a rate and borrowers have to take it or leave it" method is necessarily any more "natural" than "borrowers set a rate and lenders have to take it or leave it"... Either way, one or other party is left with a "take it or leave it" deal and no real power to negotiate. For a property loan, the borrower needs to plan the development on the basis of a known cost of funding. Who on earth would enter into a multi-million pound development with only the terms of an initial small first tranche agreed, and absolutely no idea of the cost of funding of the subsequent tranches? In your proposed solution, what is the borrower supposed to do when, due to a large amount of activity on the marketplace at the time their second (or third, or fourth...) tranches are in auction, they're left at an unacceptably high cost of funding - having made plans on the basis of being able to borrow at 8% (plus arrangement fees), it's probably not economical to borrow at up to 15%, nor to leave the project half-completed. Neither is it likely to be convenient to source funding from any other lender (who would probably not offer very good terms whilst subordinated to FC lenders, and thus would need to lend a large amount in order to take out the FC loan too). Well, the market is not limited to FC only. It is the entire SME lending market. Within FC borrowers do participate in the auctions by presenting their case and answering questions. They have that opportunity and some of them use it well while many others are just passive rate takers. If FC would eliminate (or significantly widen) the max and min rates, good borrowers would benefit from being able to push down the rate by defending their case. For property loans financing cost is as key as in any other business. Property loans in FC are broken into tranches because they have trouble to fill at the given fixed rate. If they were offered as an auction there would be no need for tranches so there would be no issue with unknown future financing costs.
|
|
am
Posts: 1,495
Likes: 601
|
Post by am on Jul 7, 2015 15:24:05 GMT
There are a couple of other (related) reasons for tranches. The one FC publicises is that it allows the loan to be paid back in stages, which is useful to the developer when the completed project is sold in stages. (FC doesn't otherwise allow partial capital repayments.) The other is that not all of the development costs are needed up front, and the developers don't want to borrow the money for the last 3 months of a 15 month project a year earlier, with the extra 8% interest involved.
|
|
sl75
Posts: 2,092
Likes: 1,245
|
Post by sl75 on Jul 7, 2015 19:19:58 GMT
For property loans financing cost is as key as in any other business. Property loans in FC are broken into tranches because they have trouble to fill at the given fixed rate. If they were offered as an auction there would be no need for tranches so there would be no issue with unknown future financing costs. I'm not sure I follow... Suppose a borrower requires the following financing (numbers and timings purely illustrative and made up off the top of my head, but broadly following a similar sequence to what I've seen on some multi-tranche developments): January: £800,000 to buy the land and commence groundworks (perhaps split into two £400,000 tranches listed sequentially for convenience, as FC's inflexible systems only allow full early repayment of an entire tranche). May: £400,000 to commence the initial construction of the building once groundworks are completed. August: £400,000 to finish off the construction of the building and commence fitting it out. November: £400,000 to finish off fitting apartments within the building to a satisfactory standard so that sales can occur. £2,000,000 total estimated funding requirement, with drawdowns spread over several months, and later tranches often contributed to by lenders who were not even members at the point the first tranche drew down (or who otherwise missed the opportunity the first time round). How does your proposal fix the rate for the subsequent tranches? Is the borrower expected to purchase the property and commence groundworks in January with absolutely no idea what the cost of funding will be for the remaining £1.2M? Do you expect borrowers to pay interest on funds they will not be in a position to draw down for several months? Do you expect lenders to commit to lend money several months into the future?
|
|
|
Post by GSV3MIaC on Jul 8, 2015 9:45:42 GMT
But are we not trying to square the circle here? The borrower wants £xk available in Y months time at a known fixed rate of (usually) 8%. Lenders are not going to commit to that without some bribery -- either 'you pays interest at 8% from right now', or 'when you get there you may have to pay me a bung to get me to lend it at 8%, coz interest rates may be higher'.
Try ringing your broker and saying 'I want a million quids worth of BAE shares .. £600k now, at today's market price and I don't need the other £400k for 6 months, but I want them at today's market price. He'll probably refer you to something called a call option, which you pays real money for. These multi-tranche borrowers are getting a free call option on all the subsequent tranches, as far as I can see, with FC either carrying the costs, or juggling with autobid (and other listings) trying to fill the loans.
|
|
blender
Member of DD Central
Posts: 5,719
Likes: 4,272
|
Post by blender on Jul 8, 2015 10:22:07 GMT
But it's not shares, it's cash, and it's not an option, it's a schedule. Surely no problem in giving a fixed interest rate for a known and fairly short term cash requirement schedule? Essential to shield the developer from the unpredictability of a sequence of reverse auctions. I don't think I would want to lend to a borrower who did not have control of the financing costs.
|
|
TitoPuente
Member of DD Central
Posts: 624
Likes: 655
|
Post by TitoPuente on Jul 8, 2015 10:56:33 GMT
For property loans financing cost is as key as in any other business. Property loans in FC are broken into tranches because they have trouble to fill at the given fixed rate. If they were offered as an auction there would be no need for tranches so there would be no issue with unknown future financing costs. I'm not sure I follow... Suppose a borrower requires the following financing (numbers and timings purely illustrative and made up off the top of my head, but broadly following a similar sequence to what I've seen on some multi-tranche developments): January: £800,000 to buy the land and commence groundworks (perhaps split into two £400,000 tranches listed sequentially for convenience, as FC's inflexible systems only allow full early repayment of an entire tranche). May: £400,000 to commence the initial construction of the building once groundworks are completed. August: £400,000 to finish off the construction of the building and commence fitting it out. November: £400,000 to finish off fitting apartments within the building to a satisfactory standard so that sales can occur. £2,000,000 total estimated funding requirement, with drawdowns spread over several months, and later tranches often contributed to by lenders who were not even members at the point the first tranche drew down (or who otherwise missed the opportunity the first time round). How does your proposal fix the rate for the subsequent tranches? Is the borrower expected to purchase the property and commence groundworks in January with absolutely no idea what the cost of funding will be for the remaining £1.2M? Do you expect borrowers to pay interest on funds they will not be in a position to draw down for several months? Do you expect lenders to commit to lend money several months into the future? Conceptually, I don't see why a business investing in machinery or a developer investing in property would have different rights. FC is not offering project finance, is offering something akin to corporate debt. The tranche approach is just a way to mimic project finance with the big difference that it does not have commitment from the lenders (i.e. lending in the first tranche does not create a commitment to lend in the subsequent tranches). So it is expected that tranches, which are no more than series of independent loans, would attract different interest from lenders. Trying to fix the rate is a makeshift way to bridge the gap. And in many cases does not work. In a market without FC going out to save failing tranches, a property borrower should have to borrow all at once, at market rate, and then administer the funds as they see fit.
|
|
adrianc
Member of DD Central
Posts: 9,635
Likes: 5,034
|
Post by adrianc on Jul 8, 2015 11:37:56 GMT
So it is expected that tranches, which are no more than series of independent loans, would attract different interest from lenders. Trying to fix the rate is a makeshift way to bridge the gap. And in many cases does not work. I disagree. In the vast majority of cases it DOES work, and it works very well. The number of tranches that have required the Flexible Claw of the work experience yoof to be brought to bear is small. Even within those tranches, the proportion that they've had to Frequently Click is small. Within those projects, the proportion requiring Finger Capturing is tiny. Within the overall sector? It's a Feeble Comparison.
|
|
am
Posts: 1,495
Likes: 601
|
Post by am on Jul 8, 2015 11:59:07 GMT
As I've said before they could offer tranches on the whole loan market, which would (if the institutions would accept them) partially solve the problems.
Perhaps the problem is that they've trained us to diversify across loans. (I would have anyway.) FC should have looked at their lender base, and calculated in advance how big a loan could be supported; perhaps they did and their assumptions weren't quite right. One possible fix would be to change the recommended maximum holdings (e.g. 2% for A+, 1.5% for A, 1% for B and C, 0.5% for D and E). Another would be to change autobid to take further bites of the cherry within the diversification limits. (It is generally believed that autobid won't bid on a subsequent tranche if you hold an earlier tranche, even if there's headroom.) Then there's increased rates, to increase the pool of autobidders, and encourage discretionary bidders.
|
|
am
Posts: 1,495
Likes: 601
|
Post by am on Jul 8, 2015 12:16:48 GMT
So it is expected that tranches, which are no more than series of independent loans, would attract different interest from lenders. Trying to fix the rate is a makeshift way to bridge the gap. And in many cases does not work. I disagree. In the vast majority of cases it DOES work, and it works very well. The number of tranches that have required the Flexible Claw of the work experience yoof to be brought to bear is small. Even within those tranches, the proportion that they've had to Frequently Click is small. Within those projects, the proportion requiring Finger Capturing is tiny. Within the overall sector? It's a Feeble Comparison. I agree and disagree. I agree that fixing the rate at the start is necessary. But, firstly, FC has found it necessary to spend a large proportion of their arrangement fees on cashback. This eats into FC's profitability. Secondly, no project has yet reached the full funding level of the biggest loans - if there's difficulty raising £1,500,000, raising £3,000,000 could be a tranche too far. Thirdly a portion of the lenders are suffering a loss of confidence in the viability of large property development loans, which is a self fulfilling prophecy to the degree that it results in a reduced lender demand. FC originally had £1,000,000 earmarked for underwriting property loans. Much of this must already have been spent. They recently raised a lot of money, so potentially they have more available for this purpose. If they do have more available a statement to this effect would have positive effects on lender confidence.
|
|
adrianc
Member of DD Central
Posts: 9,635
Likes: 5,034
|
Post by adrianc on Jul 8, 2015 14:02:02 GMT
But, firstly, FC has found it necessary to spend a large proportion of their arrangement fees on cashback. This eats into FC's profitability. Secondly, no project has yet reached the full funding level of the biggest loans - if there's difficulty raising £1,500,000, raising £3,000,000 could be a tranche too far. Perhaps, perhaps not. 3% of £3m is £90k. It's got to be a lot less work to bring in one £3m property project than 10 x £180k (or 20 x £90k) business loans to get the same £90k at 5%. The property market's certainly fairly saturated - but, otoh, it's about all I've bothered bidding on of late. Whatever the confidence, viability, demand - there's certainly not been much else tempting me. 'course, we have no way of knowing how many of the parts they've sold on the SM, freeing the capital...
|
|
jonah
Member of DD Central
Posts: 2,031
Likes: 1,113
|
Post by jonah on Jul 8, 2015 21:22:15 GMT
14056... 10% but no CB... A different slant from FC?
|
|
am
Posts: 1,495
Likes: 601
|
Post by am on Jul 8, 2015 21:30:24 GMT
14056... 10% but no CB... A different slant from FC? A bridging loan rather than a property development loan. There have been a few bridging loans before, and they've had similar rates. (IIRC, one was 12%.)
|
|
adrianc
Member of DD Central
Posts: 9,635
Likes: 5,034
|
Post by adrianc on Jul 9, 2015 10:23:05 GMT
Islington 1 - 13948. First £610k of £1.2m required, 14mo, 8%, 2%CB - and now at 88% with 22hrs to go.
It's getting close... Will they let it fail? If this one's struggling, where do they go with tranche 2...? More CB? Two smaller tranches?
|
|
SteveT
Member of DD Central
Posts: 6,874
Likes: 7,919
|
Post by SteveT on Jul 9, 2015 11:05:57 GMT
The other tranches look likely to be significantly smaller so my guess is that FCPF will heave this one over the line. In fact I wondered if this was a planned attempt at making the initial tranche as large as they can get away (or nearly at least) so that later tranches can be more modestly proportioned.
|
|
adrianc
Member of DD Central
Posts: 9,635
Likes: 5,034
|
Post by adrianc on Jul 9, 2015 13:03:17 GMT
The other tranches look likely to be significantly smaller so my guess is that FCPF will heave this one over the line. In fact I wondered if this was a planned attempt at making the initial tranche as large as they can get away (or nearly at least) so that later tranches can be more modestly proportioned. The PDF implies there'll only be two tranches, making the second the same size. Whether that's what'll happen in practice...
|
|