Loan 869659053 Australian Paintings

having taken a little time to reflect on the auction result I am starting to develop a rather unpleasant suspicion that FS realised that the valuation of these paintings was at best over-enthusiastic and at worst completely innaccurate. Hence no reserve, just get rid of them as quickly as possible. What I am unable to understand is the root cause. Were they overvalued?, were they sold at the wrong auction?, or more likely a combination of both. If FS are going to lend on the strength of the more unusual items it may be the case that they can only realise their full value if they can be sold at the right time and place, which may be 6 to 12 months away. I do seem to be getting deja-vu with some of the bridging loans from ac.

thankyou FS your honest answer has helped a lot as has  the return of the money. Mistakes do happen. I would suggest that if you continue to communicate with your lenders as you have done today mistakes will not grow into great misunderstandings

I appreciate the fast and open response by FS to serious concerns about the outcome of this deal. Inflated valuations on works of art by less than well known artists or of various supposedly "primitive" (in the artistic sense, not derogatory) ethnicity should be taken from "enthusiast" valuers with plenty of salt and loans maximised at 25% LTV on moderate valuations.

Just my opinion, of course. I will not lend on art works without very solid provenance (and even that can prone to "creativity", not just by the artists).

Note: I seem to have managed to write the message below and fail to post it for a few hours.  And I didn't learn about what FS have decided to do until after it was posted.  It's not totally irrelevant now, however, so I'll leave it since it might help others understand the impact of capital losses a bit better.

I have similar thoughts. 

As for how much it will affect FS, I accept that there's been an excess of lenders lately, and FS could fund just about anything at just about any rate of interest.  I don't know how many lenders pay attention to FS's statistics page, but this loan is going to have a noticeable effect on those, increasing the cumulative loss -- shown as £512 through April -- by a factor of nearly ten.  Unless, of course, FS decide to dig into their own pocket to mitigate the loss.  Which I really think they need to do considering the total fiasco this loan has turned into -- from the initial valuation, through to the auction (timing and setting of reserve prices).

I don't know how many lenders FS have these days -- they used to publish this info, but AFAIK they've stopped doing that -- but there were about 50 in this loan, and I expect that's a fair proportion of their active investors.  I also expect that all of them will be rather shocked by the result of this auction and seriously re-think their FS investment strategy.  I know I am.

Are you sure about that doughnut? 

If a loan defaults, and a bit of capital is lost, it might be expected that it wouldn't take too many successful loans to recoup that loss.  And if the capital loss is about 10%, then a couple of successful loans would be sufficient to get the lender back to break-even.  But it would take an additional couple more successful loans to bring the investors overall return up to about half of the nominal interest rate.  For example, consider an investor that makes a series of £50 loans at 12%.  Since we're dealing with 6-month loans, a successful one would produce a £3 return.  A single default losing 10% of capital would mean a £5 loss, so one default and two successes would be a net return of £1.  (£3 x 2 - £5 = £1)  £1 earned over three loans is an overall return of 1.3% p.a.  And that ignores the unfavourable tax treatment of losses.  The entire £6 of income is taxable, so a basic-rate taxpayer has to pay £1.20 of tax on their £6 of interest, so their after tax return actually is negative.

Having a couple more successes means a pre-tax return of £7 (£3 x 4 - £5 = £7).  Spread over the total of five loans, that's a 5.6% p.a. return.  The basic rate taxpayer's return from the five loans would be 1.8% p.a.  If ten loans are made and one of those results in a loss of 10% of capital, the results are returns of 8.8% pre-tax and 6.6% after basic-rate tax.  A higher-rate taxpayer would have a rather less impressive 4.5% return after tax.

With these paintings, a loss the size of this one (70%) is much more difficult to offset.  The example investor would lose £35 of capital, so would need a dozen successful loans just to break even before tax, and another dozen successes to produce a return of 5.9% p.a.  Can we expect 24 out of 25 loans to be successful?  FS don't think so, as their statistics page shows a expectation that 7% of loans, or 1-in-14, will default.

Once the tax effects are included, the returns to taxpayers are rather disappointing, to say the least.  How many investors will realise the impact the loss on these paintings has had on their overall returns is anyone's guess.