Defaults & Losses

Understanding Risk

Lending carries a risk of loss in the event of a borrower defaulting on a loan, so we have developed a model which indicates expected defaults and losses on our platform, prior to any possible coverage of those losses by the Provision Fund (which applies to several of our Investment Accounts).

How we manage the loan portfolio

At any point in time, our portfolio consists of all loans where borrowing remains outstanding. When a borrower takes out a loan, there are many conditions within the loan agreement that the borrower will have to adhere to. One of the simplest of these is that they make the agreed loan repayments on time. Where any condition of a loan has been breached we will monitor that loan more closely and more often (in Monitoring). Where there has been material breach of the loan terms a loan is classified as having had a Credit Event.

Loans that have had a Credit Event can return to being “performing” if they rectify the breach by, for example, catching up on payments. However, where the breach is not rectified or where information exists that casts sufficient doubt over the ability of the borrower to fully repay the loan, Credit Event loans are also classified as in Default. Exactly how we classify a Loan Status once a Credit Event has occurred is set out below.

Losses can occur on a loan after a Default, but not necessarily every time. It is important to understand the difference between the two. If a Default occurs and the borrower cannot cure the problem, then legal action can be taken to recover the money from the borrower. If subsequently the borrower does not have enough assets or security for the outstanding loan amount to be recovered then a lender could lose some or even all of their investment.

When a loan has had a Credit Event, trading in that loan will be suspended. Trading in a loan may sometimes also be suspended if the loan is in Monitoring and a Lender Vote is needed.

Loan Status Classification:

'Credit Event'

  • The loan is over 60 days past its expiry date and has not yet been fully repaid, or;
  • The loan repayments are more than 60 days overdue or greater than 2 payments in arrears.

A 'Credit Event' status loan will be also formally reported as a 'Default' when:

  • The loan is over 180 days past expiry and has not yet been fully repaid, or;
  • The loan repayments are more than 180 days overdue, or;
  • Where information exists that casts sufficient doubt over the ability of the borrower to repay the loan in full.

For Investor information, an extract from the European Banking Authority ('EBA') definition of a default (upon which our Loan Status classifications are based) is as follows:

A default shall be considered to have occurred with regard to a particular obligor when either or both of the following have taken place:

  1. the institution considers that the obligor is unlikely to pay its credit obligations to the institution, the parent undertaking or any of its subsidiaries in full, without recourse by the institution to actions such as realising security;
  2. the obligor is more than 180 days past due for exposures secured by residential property or SME commercial immovable property in the retail exposure class, as well as exposures to public sector entities.
Source:
https://www.eba.europa.eu/regulation-and-policy/single-rulebook/interactive-single-rulebook/-/interactive-single-rulebook/article-id/1738

A 'Loss' or 'Bad Debt' is the actual or expected loss to lenders, if any, on a loan in 'Default' after recoveries of the loan amount achieved and/or expected. Assetz Capital takes realisable security for all loans in order to mitigate some or all capital losses from a defaulted loan and Defaults should not be expected to lead to a bad debt or loss in many cases. The 'Default' rate can therefore be considerably higher than the 'Loss' or 'Bad Debt' rate on our lending.

Investors in Assetz Capital Investment Accounts that have a Provision Fund may have further coverage of losses beyond that provided by the loan security. In order to assess our track record, we have provided statistics below related to our loan origination, interest rates on loans and risk.

Assetz Capital loan book performance

Figures below are for loans originated in each year, correct as of 1st October 2018.

 

  2013 2014 2015 2016 2017 2018
For Current Loan Types Offered To Borrowers
(note: these figures do not include loan types that have been discontinued)
1. LOANS ORIGINATED £6.1M £21.6M £20.4M £79.9M £200.5M £225.3M
2. INTEREST RATE 13.0% 12.7% 10.4% 9.0% 7.5% 7.5%

This is the annual interest rate due to lenders, before any bad debts, if they had diversified (spread) their investment perfectly across all loans originated in the year in question (with the investment spread proportionately across the total amount originated on all loans).  Investors in Investment Accounts with capped interest rates would not have received these interest rates, with any surplus above the capped rate being added to the relevant Provision Fund.  These rates are not a guide to interest paid to any individual investor either in the past or in the future.

3. PROJECTED LIFETIME BAD DEBT RATE 6.3% 7.9% 0.0% 3.1% 0.2% 0.1%

Losses based on actual loan performance to date and a projected amount of further loan defaults in the future (each after actual and expected recoveries). This reflects defaults that arise at any time over the life of a loan and is not an annualised figure.

4. CURRENT ACTUAL LIFETIME BAD DEBT RATE 6.3% 7.9% 0.0% 3.0% 0.1% 0.0%

Losses based on actual loan performance to date (after actual and expected recoveries). This reflects defaults that arise at any time over the life of a loan and is not an annualised figure. Note: of loans in Default originated in 2013-2015, 85% of the amount lent has been or is expected to be recovered.

5. LOANS REALISED 92% 92% 92% 43% 26% 6%

The proportion of amounts lent which have now been repaid or are included as current actual bad debt (not now expected to be repaid).

6. CURRENT DEFAULT EXPOSURE 0.0% 7.1% 0.0% 11.9% 0.9% 0.0%

Loan principal amounts remaining on loans in Default that are over and above the expected bad debt on those loans. This reflects defaults that arise at any time over the life of a loan and is not an annualised figure. Note: in 2016, 88% of current default exposure is from Bridging Finance loans.;

 
For All Loan Types including those no longer offered to Borrowers
1. LOANS ORIGINATED £9.2M £38.1M £26.4M £101.1M £210.6M £225.8M
2. INTEREST RATE 12.5% 11.7% 10.5% 9.1% 7.5% 7.5%

This is the annual interest rate due to lenders, before any bad debts, if they had diversified (spread) their investment perfectly across all loans originated in the year in question (with the investment spread proportionately across the total amount originated on all loans). Investors in Investment Accounts with capped interest rates would not have received these interest rates, with any surplus above the capped rate being added to the relevant Provision Fund. These rates are not a guide to interest paid to any individual investor either in the past or in the future.

3. PROJECTED LIFETIME BAD DEBT RATE 6.7% 10.0% 1.0% 3.0% 2.1% 0.1%

Losses based on actual loan performance to date and a projected amount of further loan defaults in the future (each after actual and expected recoveries). This reflects defaults that arise at any time over the life of a loan and is not an annualised figure.

4. CURRENT ACTUAL LIFETIME BAD DEBT RATE 6.7% 10.0% 0.9% 2.7% 1.9% 0.0%

Losses based on actual loan performance to date (after actual and expected recoveries). This reflects defaults that arise at any time over the life of a loan and is not an annualised figure. Note: of loans in Default originated in 2013-2015, 85% of the amount lent has been or is expected to be recovered.

5. LOANS REALISED 94% 95% 90% 42% 27% 11%

The proportion of amounts lent which have now been repaid or are included as current actual bad debt (not now expected to be repaid).

6. CURRENT DEFAULT EXPOSURE 0.1% 4.1% 0.3% 10.5% 1.7% 0.0%

Loan principal amounts remaining on loans in Default that are over and above the expected bad debt on those loans. This reflects defaults that arise at any time over the life of a loan and is not an annualised figure.

7. ACTUAL LIFETIME DEFAULT RATE 52.3% 33.4% 9.2% 16.4% 5.0% 0.0%

This is prior to actual and expected recoveries (which are taken into account in the bad debt rate figures above). This reflects defaults that arise at any time over the life of a loan and is not an annualised figure.

8. EXPECTED LIFETIME DEFAULT RATE AT ORIGINATION 6.9% 6.7% 5.4% 5.9% 5.0% 4.6%

This is prior to actual and expected recoveries (which are taken into account in the bad debt rate figures above). This reflects defaults that arise at any time over the life of a loan and is not an annualised figure.

The discontinued loan types consist of (a) Renewable energy loans and (b) Secured SME term loans not secured by a First Charge on a property.

 Default rates, bad debt rates and Default exposure are expressed as a percentage of the loan amounts originated for the year. 

 

Our loan book, including all loans issued since inception, has been independently verified by Altfi Data who have calculated our net investor returns (after fees charged to borrowers and bad debt, but before tax) and display them compared to other platforms on their website:

http://www.altfidata.com/marketdata/

AltFi Data measures what an equal time-weighted exposure to every loan would have returned over the preceding 12-month period.  The return therefore reflects a portfolio that is perfectly diversified across all loans throughout any period.  Loans that AltFi Data treats as defaulted are written down to the actual historic average level of recovery by an originator and actual recovered amounts are reflected at the end of the recovery process.  The return figures assume that all income is re-invested immediately and that all capital invested is deployed in loans. 

Investment accounts and their performance under stress

We are currently in the process of updating our Stress Tests and when complete the results for each Investment Account will be included here.  In the meantime, information relating to the size of each Investment Account’s Provision Fund may be found on the home page for each account.

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