Our Distressed Loans and Recoveries Process
When investing in peer-to-peer loans, you are lending money directly to one or more borrowers. Like all other lending operations, there is always the risk that things don’t run smoothly, and the borrower cannot repay the loan, leading to a reliance on the property security taken for the loan.
Here, we take a look at our recoveries process, to help you to understand the methods we have in place to recover your investments should the borrower default.
At Assetz Capital, we take a proactive approach in dealing with distressed loans on behalf of lenders. We do this by regularly reviewing the loan book as part of the portfolio management process.
In a distressed loan situation, the goal of our experienced Portfolio Management team is to maximise recoveries, minimise losses and achieve the best outcome for our lenders. Therefore, we look to engage early with borrowers to seek workout and turnaround strategies in cases where there are signs of stress.
In some circumstances, those early actions can provide the corrective steps needed to return the loan to normal performance and no further action is required. Unfortunately, this is not always the case and if the borrower cannot meet their repayment obligations the loan will default and may then enter a formal insolvency process.
As a secured lender, we take asset security on every loan, the vast majority of which is property. Therefore, in a distressed loan recovery process we look to extract the best value from the security to repay all or part of the loan. In order to achieve this, we often seek a workout solution for the borrower to sell the property or refinance the loan. This approach relies on a cooperative borrower and can take time but with a view to a better outcome than a forced sale of security in insolvency. If a workout solution is not possible, we may appoint an Insolvency Practitioner or Receiver who, through an insolvency procedure, will look to realise the best value for the security in the prevailing circumstances.
There’s no ‘one size fits all’ recovery solution and each loan has its own set of unique and individual circumstances. We manage these cases proactively and there are some recent examples below where we’ve been able to take action quickly and effectively, using processes available to us leading to full recovery:
High-end Apartment Development – Working with the borrower on a managed workout deploying both a loan extension and COVID-19 forbearance to enable completion of the project, sales of apartments to reduce the loan enough to permit a refinance of the loan balance by another lender in August 2020. All c£7m of capital and interest were repaid without an insolvency appointment.
South-East Development Loan - Receivers were appointed in July 2019, however the borrower was co-operative throughout the process and they were able to refinance by December 2019. This saw over c£8m of lender capital, interest and default interest repaid in full.
North-West Hotel Commercial Mortgage - A deteriorating trend in the loan repayments led to the appointment of Receivers in September 2019. The borrower managed to refinance in February 2020, ahead of a proposed sale of property by the Receivers, which saw all c£2m of capital repaid.
It’s important to understand that quick workout turnarounds and full repayments are not always possible, and that insolvency can be a complex process. In fact, some insolvency procedures can take years before they are fully resolved, particularly in complex cases.
The recovery process can often be difficult and time consuming for a variety of reasons. In some circumstances where the loan is distressed, the borrower can become unwilling to assist the process and even become disruptive. Also, there are various other parties whose actions can affect the loan recovery, such as the borrower’s other creditors, tenants, contractors, sub-contractors and guarantors, whose interests very often do not align, and can cause difficulty or delay. Further, economic and market conditions may change. Consequently, we seek to hold together the various moving parts to deliver the best possible result for lenders.
Our recoveries process has been effective and delivered full return to lenders in many cases, but it cannot always prevent lender losses on some loans, even with property security.
The impact of COVID-19 on defaults and recoveries
Before the global onset of the Coronavirus pandemic, the levels of loans in default and recoveries were broadly where we would expect them to be. Whilst there are certain statutory restrictions introduced as a result of COVID-19 that restrict enforcement action for the time being, we certainly expect there to be an increasing number of defaults and recoveries, caused by the subsequent recessionary pressures. This is a consequence of the economic cycle and like many other lending operations we will not be immune to that.
At present, with the various government stimulus packages and borrower forbearance avoiding many short-term defaults, the full future impact of COVID-19 on businesses is still largely unknown. We have been proactively dealing with COVID-19 related issues as the pandemic has evolved and will continue to deploy well established recoveries methods to best protect your loan investments. The property security is a critical aspect of that protection and we continue to only carry out new lending with that particular security in place.
- September 16, 2020