Back to drought..Which loans are the weakest

The ones I am avoiding are

131 - Hull land, not convinced that Hull can support any additional retail developments; land prone to flooding

106 - Fife Industrial Estate, not convinced by the valuation in fire sale conditions

103  - Hastings dev land, awkward plot to develop plus uncertain demand for finished apartments

097 - Thames moorings, 2nd charge, uncertain of past planning consents

081 - Surrey house, uncertain valuation given the recent history

042 - boat sheds, unable to quantify any planning restrictions due to historical site

020 - Garden centre, not clear extent currently accruing interest will be covered

So basically most loans !

Blimey, some peoples weakest are my most invested

But also why the sudden drought.

/mod hat off

Because, as someone said upstream, ~£10m got paid back, and there was nothing else to spend it on. The MT cupboard is also bare, and IIRC ABL has had no new loans for a while, so there is a lot of money chasing few borrowers. Personally I'd rather have it sat as cash than stick it into some of the dregs, but other people seem to lack patience, or caution, or whatever it is that stops me investing in the first thing with actual availability, regardless of how feeble it looks (my ideas of feeble are rather like mrclondon 's ideas, plus a few where the valuation seems to be rather adrift from the last known selling price, with no visible means of support, and a couple of others where the history of the borrower raises eyebrows, if not actual hackles.)

1) I expect that the property doesn't generate enough income to service the loan. (But I was surprised to find an RSPB owned farm in Norfolk generating returns of around 10%, so it may not be quite as bad I was expecting.)
2) The valuation seemed rather stretched (£12,000 per acre, when a conservative valuation for agricultural land would be £8,000 per acre, but there are some buildings present which will add to the value). I didn't think the valuation ridiculous, but I was concerned that (excluding hope value) it was optimistic.
3) The only short-term exit strategy is refinance at a more sustainable rate. (There's reason to suspect that it is being at least partly refinanced by equity.)

So, basically we are dependent on the borrower successfully finding another source of finance. (A look on the web for indicative agricultural mortgage rates is coming up blank - the providers don't seem keen on publishing their rates.)

After the partial repayment and extension (if they happen) they become a better deal. Perhaps that's why it's disappeared from the secondary market.

1.  The value and quality of the security is my number one measure. Lower LTV is good, but also the reliability of the value, e.g. lending against a bog standard buy-to-let house will always trump a development project as the potential haircut in a distressed sale scenario will be significantly higher for the later. I also try to avoid any specialist properties (eg holiday parks ring a bell) due to a limited market and thus higher risk of suffering a larger haircut in realisable value in the event of default. The difference between the market value and 90/180 day valuation can give a good indication of the reliability of the valuation figure.



2.  A close number 2 is if there are circumstances which make the loan more likely to default. This is usually due to a change in valuation of the asset, eg failed planning permission etc etc, otherwise refinancing wouldn't be an issue and hence the value and quality of the security ranks ahead.


3.  A distant third is remaining loan term. I really only view remaining loan term as a liquidity risk, ie loans will tend to be less liquid in the SM as it approaches maturity - not too much of issue for me as my money on SS is a long term allocation (although it always nice to know you can pull your money out sooner rather than later should you need it). There is also higher reinvestment risk if loans are left to maturity or repay early as there may not be other investment opportunities at the precise time of repayment.

I think it is dangerous to assume that SM liquidity will always be there or discount the possibility of some disruption/termination of the SM altogether for a left field regulatory/legal reason. Therefore my base assumption is that I will hold loans to maturity and make sure I'm comfortable with the security. Maturity is a secondary consideration when considering how to reduce reinvestment risk when loans approach maturity to minimise cash drag.