Loan Book Update from Chris Macklin, Chief Risk Officer
Here, our Chief Risk Officer, Chris Macklin, explains in more detail how we have managed the loan book throughout the pandemic and provides an update on the forbearance measures that have been put in place to support borrowers and to help safeguard your investments.
“In April last year, after seeking feedback from our lenders, we put in place measures to offer forbearance to our borrowers, to help support them through the difficult times ahead. This involved reaching out to them to provide the option of deferring repayments and interest for an initial period of three to six months, which was then extended for those who required additional support.
Despite the regional restrictions in the run up to Christmas and the subsequent national lockdown, we have a seen a substantial reduction in the number of borrowers requiring forbearance, especially property developers. It remains a difficult time for borrowers in sectors such as non-food retail, leisure and hospitality and we continue to work closely with them to understand the challenges they face and provide ongoing forbearance where we are able to do so.
The Loan Book
As a property-secured lender, it’s worth highlighting that our loan book is weighted towards property-backed development loans, which make up around 50% of our total value of the current loan book. The biggest impact on the development side of the business was felt early on during the first lockdown. Back in March 2020, there was a great deal of uncertainty which resulted in closed sites, disruption to supplies and delays with planning – so we inevitably had some borrowers asking us for support during that time. Following that initial period however, through Government support packages, and strong borrower management and resolve, we’ve seen the vast majority of sites reopen, with sales of properties continuing at a good pace in spite of the ongoing economic downturn.
Our exposure to the most affected city-centre areas is modest too. Our focus has typically been suburbs of cities and further afield, with around 88% of housing that we fund situated outside London and the South East. This regional focus outside of city centres has given relative strength to the overall loan book performance.
Of the remaining trading customers (Commercial/Buy To Let/Bridging), there was initially a reasonably high proportion of borrowers who needed forbearance in the second quarter of 2020, which then continued into further support in the quarter beyond that. As restrictions eased in the later part of 2020 many were able to contribute more and meet some of their interest and loan repayments. The outlook for borrowers in the most affected sectors, which represents a relatively low proportion of the book, is still uncertain and we are working with them closely to offer bespoke arrangements where they are needed to support them through these challenging times.
We have seen unprecedented levels of Government support during this period which has lessened the impact on many of our borrowers. The introduction of the Coronavirus Business Interruption Loan Scheme (CBILS) has meant that we have been able to fund the remaining tranches of existing development loans where eligible and have been able to provide new loans to borrowers in need of finance throughout this difficult period. Other Government initiatives such as the furlough scheme and business support grants/loans have also helped to ease some of the problems faced by borrowers and have enabled many of them to assess their businesses and restructure accordingly.
On the development side, as mentioned previously, sales are going through at a steady rate, which has been facilitated in some part by the reduction in stamp duty for homebuyers. The market remains very buoyant with the number of mortgage approvals for house purchases in the UK at their highest level since August 2007. (Source: Bank of England).
As well as the Government schemes, we have been working with borrowers who require further support by putting solutions in place that do not increase the risk profile of the loan above a sensible level and don’t increase the chance of the borrower failing through taking on too much debt or impacting on their ability to repay the loan. We also take a view on the long-term viability of the borrower, using our experience and what is happening in the market, so that we can determine the strategy we want to employ for that particular loan. As part of this process, we put solutions to lenders via a lender vote.
When investing in peer to peer loans, there is a balance of risk vs reward and despite the supportive measures we’ve put in place for borrowers, there is always a risk that some loans will fall into the recoveries process and as a result there is risk of capital loss as explained here. The difference between Assetz Capital and some other peer-to-peer platforms is that we’re a property-secured lender, so we take tangible security assets on every loan. In the event that a loan does become distressed, it is the job of our Portfolio Management and Recoveries teams to maximise recoveries, minimise losses and achieve the best outcome for our lenders, as highlighted in some recent cases below:
Development of a single high-spec residential property: A dispute with a contractor resulted in legal action against the borrower. Attempts to agree a settlement with the contractor remained unresolved and the loan expired with the property still only part completed. We appointed receivers in summer 2020 and listed the property to be sold at auction in September. The borrower was able to raise sufficient monies to refinance before the auction resulting in all costs of the receivership, lender principal and default interest being recovered, amounting to over £950,000.
Mixed use residential/commercial property: This borrower company was subject to a winding up petition which resulted in liquidators being appointed. Due to access issues to utilities, we needed a joined-up approach with the liquidators and despite marketing the property, there was limited buyer interest with an offer of £300k pre-COVID, which was then reduced to £250k once COVID took hold. The property went to auction and sold for a significantly higher price than the pre-COVID offer of £300k. This resulted in full repayment of all lender principal, interest of over £240,000 plus costs.
Hotel: The hotel was loss-making and under the threat of bailiff enforcement action due to unpaid business rates and missed loan payments. The closed value of the hotel pre-COVID based on the Director’s valuation was circa £500,000, but after costs of enforcement the likely return would have been £420,000. This would have meant a loss of £330,000 on the outstanding loan balance of £750,000.
After seeking the assistance of an Insolvency Practitioner, we worked alongside the borrower over a 6-month period (March to September 2020) and agreed the sale of the hotel via a pre-pack administration. This avoided a significant loss and in turn, resulted in full repayment of the loan principle (£750,000) with an agreed way forward over the next 12 months to repay all accrued interest in full.
Whilst there are still uncertain times ahead, the roll out of the vaccine means that there is hope for getting this pandemic under control. Once we can return to some semblance of normality, businesses will be able to better assess their own future and put longer-term restructures in place. In the meantime, we will continue to offer support to our borrowers where it is needed and involve you, our lenders, on the steps that we take.
We are continually reviewing our credit appetite and are ever closer to restarting new lending outside of CBILS, via the Manual Lending Account (MLA) and Access Accounts. So we can support even more good credit-worthy businesses for you to invest in as we come out of this turbulent economic cycle.
Assetz Capital was formed following the Financial Crisis of 2008, and was born out of the need to offer finance solutions to those business that couldn’t access funds from the high street banks. This ethos is still at the core of what we do, and it is our intention to continue to support UK businesses when they need it most, whilst providing our lenders with a fair return on their capital investments.”