Defaults, Losses and the AC difference.
Jun 24, 2014 8:43:20 GMT
phlitb, oldgrumpy, and 12 more like this
Post by andrewholgate on Jun 24, 2014 8:43:20 GMT
I thought I would do a little piece on defaults given the number of questions and concerns recently.
The first thing to say is, if you lend money expect defaults. At some point, someone is not going to pay you back, is going to break the terms and conditions or get into some other form of problems. This is the nature of lending and why there is an interest charge to help off set that risk. Lending money is easy as you can give someone as much money as you want, getting it back is the hard bit. Defaults and default management is where the real skill lies.
What are defaults?
When a borrower takes out a loan, there are conditions within the loan agreement that the borrower has to adhere to. The simplest of these is that they make the loan repayments on time without fail. Breaking these conditions is known as defaults, which trigger further conditions in the loan agreement, allowing the lender to take action. The lender has the right to ask for immediate repayment of the loan, recognise the default but take no further action at this point, or to renegotiate the terms of the loan.
A prudent lender will want to build into a loan agreement a number of covenants to help govern the loan. These covenants will monitor the level of loan to value, debt to profits and profits against repayments. The covenant is there as an early warning mechanism to indicate where there may be a problem, but before it gets out of hand. All AC loans have monitoring covenants in place that are monitored regularly.
What are losses?
Losses occur after defaults, but not necessarily every time a default happens. The borrower will have stopped their repayments, creating a default and the lender will have asked for full repayment of the loan. If the borrower cannot repay the full amount outstanding, then the lender could take legal action to recover the money from the borrower. If the borrower does not have enough assets to repay the outstanding amount then the lender could lose their entire investment.
Losses and defaults should not be equal. Losses should be a much smaller number than the default percentage, and ideally a fraction of the default number.
How is Assetz Capital different?
How a lender deals with defaults, and the potential for defaults, can have a significant influence on the level of losses incurred.
At AC, our team have over 40 years of experience of dealing with distressed loans and businesses. Our Operations Director is a qualified Insolvency Practitioner - a person licensed to deal with insolvencies of individuals and companies. I think we are the only P2P lender to have a fully qualified IP in house. Our senior credit manager and I have spent at least 5 years in a "bad loan" department of a major bank, learning how to handle the defaults and how to stop losses. As I said above, from the very start of a loan we will have included covenants (special conditions), that if broken act as an early warning for possible problems. We act as soon as a default occurs. We do not wait for several payments to be missed before we move protect our lenders; we act straight away, engaging lawyers such as DLA Piper or DWF and accountants such as Grant Thornton or BDO to advise on the best course of action.
We bring in the best people and do not just farm out the work to a collections agency to handle. We are very much hands on.
We also take security in assets pledged to support every loan, so that if the borrower cannot repay, the assets can be sold to reduce or avoid losses. We cannot guarantee that there will never be a loss – lending money via any peer-to-peer lending platform carries some risk of capital loss – but our experience, our processes and the fact that we take asset security on every loan should help to reduce losses for our lenders.
The current round of defaults should go to prove how good AC are at handling these situations. I very much want us to show we are best in class (as I have been saying for the last 12 months). Having looked at the much debated loan and having spoken to FRP, we are confident of a good outcome from that one with little or no loss. The two bridge loans that are in default should also exit cleanly with no losses.
I want to finally add, I am not scared of defaults happening even if they ran at 10%. What I want to ensure is that those defaults do not become losses that are unacceptably high. It is your cash at risk, and I don't want to lose a penny of it.
Andrew
The first thing to say is, if you lend money expect defaults. At some point, someone is not going to pay you back, is going to break the terms and conditions or get into some other form of problems. This is the nature of lending and why there is an interest charge to help off set that risk. Lending money is easy as you can give someone as much money as you want, getting it back is the hard bit. Defaults and default management is where the real skill lies.
What are defaults?
When a borrower takes out a loan, there are conditions within the loan agreement that the borrower has to adhere to. The simplest of these is that they make the loan repayments on time without fail. Breaking these conditions is known as defaults, which trigger further conditions in the loan agreement, allowing the lender to take action. The lender has the right to ask for immediate repayment of the loan, recognise the default but take no further action at this point, or to renegotiate the terms of the loan.
A prudent lender will want to build into a loan agreement a number of covenants to help govern the loan. These covenants will monitor the level of loan to value, debt to profits and profits against repayments. The covenant is there as an early warning mechanism to indicate where there may be a problem, but before it gets out of hand. All AC loans have monitoring covenants in place that are monitored regularly.
What are losses?
Losses occur after defaults, but not necessarily every time a default happens. The borrower will have stopped their repayments, creating a default and the lender will have asked for full repayment of the loan. If the borrower cannot repay the full amount outstanding, then the lender could take legal action to recover the money from the borrower. If the borrower does not have enough assets to repay the outstanding amount then the lender could lose their entire investment.
Losses and defaults should not be equal. Losses should be a much smaller number than the default percentage, and ideally a fraction of the default number.
How is Assetz Capital different?
How a lender deals with defaults, and the potential for defaults, can have a significant influence on the level of losses incurred.
At AC, our team have over 40 years of experience of dealing with distressed loans and businesses. Our Operations Director is a qualified Insolvency Practitioner - a person licensed to deal with insolvencies of individuals and companies. I think we are the only P2P lender to have a fully qualified IP in house. Our senior credit manager and I have spent at least 5 years in a "bad loan" department of a major bank, learning how to handle the defaults and how to stop losses. As I said above, from the very start of a loan we will have included covenants (special conditions), that if broken act as an early warning for possible problems. We act as soon as a default occurs. We do not wait for several payments to be missed before we move protect our lenders; we act straight away, engaging lawyers such as DLA Piper or DWF and accountants such as Grant Thornton or BDO to advise on the best course of action.
We bring in the best people and do not just farm out the work to a collections agency to handle. We are very much hands on.
We also take security in assets pledged to support every loan, so that if the borrower cannot repay, the assets can be sold to reduce or avoid losses. We cannot guarantee that there will never be a loss – lending money via any peer-to-peer lending platform carries some risk of capital loss – but our experience, our processes and the fact that we take asset security on every loan should help to reduce losses for our lenders.
The current round of defaults should go to prove how good AC are at handling these situations. I very much want us to show we are best in class (as I have been saying for the last 12 months). Having looked at the much debated loan and having spoken to FRP, we are confident of a good outcome from that one with little or no loss. The two bridge loans that are in default should also exit cleanly with no losses.
I want to finally add, I am not scared of defaults happening even if they ran at 10%. What I want to ensure is that those defaults do not become losses that are unacceptably high. It is your cash at risk, and I don't want to lose a penny of it.
Andrew
