Fiduciam, the institutionally funded short-term lender, has just completed a Coronavirus Business Interruption Loan Scheme (CBILS) loan for £840,000.  The loan was to a children’s nursery in Leytonstone, in North East London, called Harvey House. 

The CBILS was designed to support the continued provision of finance to smaller UK businesses (SMEs) that have been impacted by the COVID-19 pandemic. The loans are delivered through lenders accredited by the British Business Bank (BBB).

CBILS has been playing an important role in supporting local business and communities throughout the Covid-19 crisis, as the case of Harvey House demonstrates well.  Navneet Bansal, who has been a child carer for many years, took the initiative to open up her own children’s nursery, addressing a shortage of childcare in Leytonstone.  It was a proud moment when Harvey House opened in December 2019, but only four months later it was forced to close because of Covid-19.     

This hit the owners hard as they had to make debt service payments of £113,000 per annum, which quickly became unsustainable as the nursery waited months to hear when children could return to nursery care.

Fiduciam provided a two-year CBILS loan which decreases the debt servicing cost by 64% for the next two years.  This puts the nursery on a stable financial footing, also allowing it to deal with potential future Covid-19 hurdles.

The nursery qualified for the CBILS loan because it met the requirement of being a viable business before the outbreak of the pandemic and one that is expected to do very well in a more normal trading environment.  The nursery employs 17 staff to provide a high-quality childcare service, which is reflected in its 9.5/10 rating on daynurseries.co.uk.

Despite such rapid success and Navneet having an excellent personal history in the childcare sector, the high street banks were unable to provide a CBILS loan as the nursery businesses did not yet have a track record for the required length of time.

For Fiduciam, as an alternative lender, this was not an obstacle. The lender got to know the owner, Navneet, and inspected the nursery in operation. Having witnessed the professionalism and passion of the staff and owner, it was clear that such a nursery was very much in need in Leytonstone and therefore offered a very strong proposition. 

The Fiduciam CBILS loan now allows the nursery to establish a track record the next two years so that it can then refinance with a cheap high street bank loan.

Johan Groothaert, CEO of Fiduciam commented, “As a start-up SME, it is difficult to get finance in the best of times.  Thanks to CBILS we have been able to lower the financing costs for such SMEs.  Harvey House is run very professionally by experienced and passionate staff – we love to lend to such enterprises.

“It is thanks to the brave step of Navneet, setting up their own children’s nursery that Leytonstone’s shortage of high-quality children nursery places is being addressed.  We are confident that Harvey House will be very successful and provide an excellent early learning experience for hundreds of children in the coming years.” 

Navneet Bansal, owner of the nursery, commented, “We are very glad to have received the Fiduciam CBILS loan.  Without it, finance costs would have been overbearing and we did not want to pass on the cost to the parents or cut the quality of our childcare.  The Fiduciam CBILS loan puts our nursery on a very stable financial footing and ensures that all children continue to receive the discovery and learning experience they deserve.  We were also impressed by the efficiency of the Fiduciam CBILS loan application process.”

Fiduciam is used to dealing with the unexpected, so while Covid-19 has been a particularly unwelcome shock – both for people’s health and for the economy– it is something we have tried to take in our stride as far as possible.

Successful short-term lending is all about being flexible and adapting to circumstances as you find them, so our team has been well placed to react to the challenging situation presented by the coronavirus.

Fiduciam was quick to see the potential of the UK Government’s Coronavirus Business Interruption Loan Scheme (CBILS). The scheme is designed precisely to help businesses whose plans and finances have been hit by the coronavirus outbreak, and this seemed to us to be an excellent match for the flexible short-term finance options Fiduciam offers.

The construction sector has been particularly hard hit, with figures from the Office for National Statistics showing that output fell by around two-fifths at the height of lockdown. The restrictions put in place to prevent the further spread of Covid-19 have derailed a number of development and refurbishment projects. When Fiduciam was accredited for CBILS by the British Business Bank last month, we therefore anticipated strong demand from this sector.

As it turned out, it was not long before we were approached by a housebuilder, who had seen a development project thrown off track by Covid-19. They had taken out an initial loan to purchase two adjacent properties in an up-and-coming town on the south coast of England, with a plan to convert them into a range of residences attractive to both first-time buyers and families. Covid-19 threw these plans off track and they came to Fiduciam aiming to refinance their existing loan and to procure additional funds to complete the conversion project.

From the borrower’s perspective, there are clear advantages to taking out a loan under CBILS. Firstly, the loan allows the housebuilder to resume the construction works immediately which were halted when the lockdown was introduced. Whilst the housebuilder had obtained leverage at the outset of the project, none of the housebuilder’s usual lenders were willing to finance the continuation of the project. Furthermore, under CBILS, the Government pays the fees and interest for the first 12 months. This turned out to be critical to make the loan affordable, in light of the much lower profitability of the project than the pre-Covid projections.

The scheme is also advantageous for lenders, who benefit from a partial guarantee from the Government, enabling us to unlock institutional funding more easily. This also means we are able to offer a lower interest-rate, which also provides an added benefit to our borrowers. Through the CBILS scheme, we were able to offer this housebuilder a £1.1 million topping out at 70% loan-to-value at an interest rate of around 0.8% per month, which is low for higher-risk development loans to small family-run housebuilders.

There are also direct benefits for the Government from the CBILS scheme. As well as helping to keep the economy moving and providing jobs, which is the primary objective of CBILS, this loan also served another Government objective, easing the current housing crisis by tackling the undersupply of residential accommodation. This project will create four new flats and three houses in place of one habitable property and a derelict farmstead.

The loan was not without complications, as the deal requires the transfer of land between the two properties, and the farmstead, although derelict, is also a listed building. However, Fiduciam is accustomed to dealing with all manner of complex lending scenarios and overcoming tricky issues, making us the perfect lender for this situation.

Our experience of CBILS so far has been extremely positive. Over the coming weeks Fiduciam is looking forward to helping many more high-quality businesses across the economy to get back on their feet, and return to growth, as the country gradually recovers from Covid-19.

The phrase ‘know your customer’ (KYC) is bandied about across many industries, but in the financial world it is mostly used in terms of identity verification and money laundering.  However, knowing your customer is important for other reasons.

From a lenders’ point of view it is much easier to make decisions if we can really get to know our customers, understand their needs and work together for our mutual benefit.  However, with many of life’s necessities available at the click of a button it appears that relationships between providers and their clients are becoming a rarer and rarer. At Fiduciam we believe there is little substitute to knowing our borrowers well and understanding their businesses. Our relationships with our clients and their agents are what make us stand out from the crowd and are a major factor in the amount of repeat business we enjoy. Fostering long term relationships is therefore at the heart of our business, which is ultimately about helping our clients grow theirs.

Over the last few years, we’ve assisted a number of developers to organically upscale their businesses.   From a credit risk perspective, we like to see repeat borrowers build a niche of projects and experience. Those who know their market and seek to expand on it.

Growth can come from gradually upscaling the projects taken on and carefully building the capital required to invest as equity.  However, as a lender we can also work with developers to accelerate this cycle and increase the number of projects undertaken.

In one recent transaction we helped a client who had originally come to us several years ago for a £200k development loan.  Since then he has continued to expand his business, working on bigger projects that require different types of funding.  We recently completed a £1.6m loan for a permitted development facility in South London with this client using our ‘Stepping Stone’ loan.

Having just completed a scheme, but not yet sold the available units, he was ready to start a new project.  However, without the sale of units he didn’t have the funds to move on.  Knowing this client, and his development capabilities, over a period of years meant we were confident in his business and wanted to ensure he was able to move forward and continue to grow.

Using the ‘Stepping Stone’ facility we enabled the borrower to transfer equity from the recently completed development to his new project without the need to wait for sales. This meant the new project could start earlier, and the developer would be able to take on more projects.  The borrower therefore grows by simply using the same capital more efficiently.

As COVID-19 slows the sale of completed projects it is also likely to generate attractive opportunities to purchase new sites.  The ‘Stepping Stone’ ability to transfer equity from one project to the next is something that could keep projects flowing more easily. Importantly, it starts with really getting to know our customers.  That way we are not only providing creative borrowing solutions and mitigating credit risk, but we are helping businesses to grow and cycle forward.

It goes without saying that the Covid-19 pandemic has caused significant upheaval in the lending markets, with many lenders impacted in terms of their ability to lend, particularly bridging lenders, many of which pulled out of the market for a period of time, but in the medium term the bridging market is likely to do well due to Covid-19.   

In the immediate term, we have seen disruption due to some lenders being unable to lend or their funding appetites changing due to the uncertain risks during this time. 

During the lockdown, new valuations have been difficult to obtain and solicitors’ response times have slowed, while some small solicitor firms appear to have shut down, all creating issues for lenders.  So funding right now is difficult and likely to be for the immediate future whilst the country gets moving again.

In the economy in general over the short term, it appears we are looking at a contraction which has not been seen in the UK for centuries.  The reduction in economic activity has already been compared to the Great Frost of 1709, and the bursting of the South Sea Company Bubble in 1720. 

I believe that the recession is likely to be a “V” shape contraction, with a sharp increase in economic output once business gets back up and running.  However, the right-hand side of the “V” i.e. the recovery, will probably be lower than the left-hand side – we are yet to see by how much.

Not all areas of the economy are impacted equally due to Covid-19.  For example, whilst the hospitality industry is being devastated, supermarkets have seen an increase in sales.  So what property will make for good lending security in the medium term? 

Take the classic bridging for refurbishment in order to let out a property.  I think that demand for this product may fall in some of the larger cities, such as London, as a number of holiday lets come back onto the market as standard rentals (due to a reduction in tourism requiring fewer holiday lets) – which will in turn reduce the housing shortage. 

In general, areas relying on large numbers of foreign tourists are likely to suffer the worst so we could see a sustained impact for example, if social distancing is required long term in bars, clubs, restaurants, theatres, a lot of these businesses will fail. 

On the other hand, domestic tourism is likely to rise when the government allows people to travel in Britain, so hotels focussed on the domestic market will probably outperform overall, particularly in British holiday resorts. 

Where I see more demand for bridging is where businesses require funding to fit the new demand – for example hospitality businesses serving domestic tourism i.e. cafes, pubs, hotels in UK resort towns.  Banks generally aren’t keen to support new businesses, so bridging finance is likely to be key here.  Towns serving domestic tourism are also likely to buck the trend and see an increase in refurbishments as people convert houses to holiday lets to accommodate the additional demand in these areas.

Refurbishment for longer term lets may rise in the medium term as prospective homeowners find it harder to buy now so rent for longer. Residential property in general should hold up better than some other property classes, but not all residential is the same.  Affordable residential in higher-employment areas is likely to outperform other residential.  An exception to this potentially, is London prime and super-prime; my view is this was under-priced from an international perspective prior to Covid-19, so this micro-market might hold up well.

Good security for bridging loans in the medium term are supermarket and minimarket retail with good tenant covenants.  This subset of retail is currently performing well, with the larger players reporting increases in sales.  

Industrial and distribution businesses are also likely to perform well, particularly as retail declines. Particularly those business with modern, good quality properties and well located.

Amongst the most difficult property types is general retail.  Retail has been on the decline for years, and Covid-19 will make this worse.  A combination of internet sales and high rents and business rates will continue to squeeze retailers and we will see a lot more vacancies in our local high streets. 

In the short and medium term, I think bridging will see more enquiries.  I suspect some banks will look to leave some sectors, and so businesses will need to refinance their loans, and bridging lenders are likely to fit those gaps nicely. 

The key issue for these businesses is that banks might be concerned because of poor business performance, so understanding that poor performance is short term only is important.  In these instances, introducers could ensure that borrowers have a workable plan in place to improve business performance, so they can go back to the banks once the market improves.

Overall, as and when the banks won’t lend to businesses and developers, it is the bridging lenders which step in to help.

Fiduciam Ireland has started 2020 with a substantial increase in new business, both north and south of the border, and is bullish about the prospects for rest of the year. 

It aims to lend €50 million in Ireland this year, an increase on its original projection, and will also be opening a Belfast office.  The company has already hired a new Irish case manager to help with the increase in enquiries. 

Overall, the Irish property market has been improving with property price rises seen in the main centres. This is now spreading to commuter towns and some of the key county towns throughout Ireland. Northern Ireland, which is in a unique economic and political situation, should benefit significantly from Brexit and is likely to continue to perform well over the next couple of years.

Although the main banks in Ireland are still negotiating debt settlements with borrowers, Fiduciam has been proactive in providing exit solutions for many of the thousands of borrowers left in debt following the financial crisis.

Fiduciam began lending in Ireland in early 2017 and to date has loaned a total of €72,244,088 in the Republic and Northern Ireland, across residential property, hotels, farms, care homes and other commercial enterprises.

Kenneth Duffy, country manager for Ireland, says: “From an Irish perspective, the past three years have been incredibly challenging. The country has navigated Brexit and is now dealing with an outbreak of the Coronavirus. Throughout all the economic uncertainty, Fiduciam has remained fully committed to the Irish market. Fiduciam’s investment in Ireland continues into 2020, our team is growing and we are opening a Belfast office.

“Our commitment has paid off thus far, our market share has increased year on year and we fully expect this will continue into 2020, when Coronavirus has run its course”.

I recently found myself staying in a provincial budget hotel which, given the number of bugs flying around, was an experience I prefer not to repeat. I have encountered many cheap (and nasty) hotels on my travels and, especially as I hate spending money on accommodation, it upsets me that I continue to encounter them. The rise of Airbnb and other internet-based operators, that are offering rooms in private houses, means that lower starred establishments such as these are facing a new risk. Often private accommodation is superior and, as a result, some hotels are closing down and being converted to residential properties.

According to PwC research, hotel revenue per available room (RevPAR) is expected to rise slightly in 2020, but it is likely that much of the increase will come from hotels with better standards of accommodation. “Flying bug” hotels are unlikely to see an increase in revenues and will continue to lose market share to higher quality hotels and the likes of Airbnb.

One way to prevent this deterioration is for the hotelier to spend money to upgrade, to look at the hotel as a whole and assess how best to improve. Can they alter the configuration, increase room numbers and improve the overall standard of the hotel? If so, they can potentially increase revenue as well as the value of the hotel. The first step is design, then, assuming planning permission is obtained, funding needs to be put place to finance the works.

There are a large number of lenders who like to lend on hotels (although I have seen evidence some are leaving this market), and a sizeable number that are happy to lend on development works. However, the number of lenders willing to lend on ‘hotel developments’ is relatively few, particularly if the hotel continues to trade during the works. Fiduciam is a lender willing to lend on hotels operating during upgrades but, as a prudent lender, we also like to know that the works are properly managed and the risks associated with the works are mitigated.

Borrowers should engage with their lender at an early stage and this is when a lender can add real value. For example, we have in the past worked with architects, planning consultants, contractors and even have fire engineer contacts and have a suite of professionals who have worked successfully on previous hotel developments. Whilst we, unfortunately, can never make recommendations to our clients, we are happy to put them in touch with people we have worked with before, and provide suggestions on how a transaction may be structured and works undertaken to best suit the hotel owner.

For hotel owners that know it’s time to upgrade the most important step is getting funding in place. Find a lender, like Fiduciam, that will work with them to engage with professionals, plan the hotel upgrade and fund the works through to completion. At the end of this, the owner should have a better hotel, with more stable revenue and they can share in some of the expected RevPAR growth that PwC is forecasting for 2020.

Here at Fiduciam, we lend on care home assets when the underlying business model is strong, where experienced management is in place, but often due to special situations high street banks have vacated the playing field. Often these SMEs find it difficult to finance their expansion or are abandoned in times of short-term operational or financial difficulties, even though the issues faced by the business are generally resolvable in the medium-term. Fiduciam will take the time to analyse the business plan to determine how an expansion can best be financed.  Equally Fiduciam will take the time to understand any underlying issues and endeavour to provide the business the short-term liquidity required to bridge their way back to sustained growth.  Put simply, through our short-term finance, experienced entrepreneurs are able to grow and protect the equity which they often have built up over many years.

For example, Fiduciam was approached to refinance a loan a family-owned care home group had with a high street lender which was seeking to foreclose the loan despite the business still being in profit. A 24-month bridging loan from Fiduciam allowed the care home group to rectify their issues with the Care Quality Commission (CQC), improve their profitability and then, in fact, re-finance with a bank at lower interest rate after only c. 12 months. If the previous high street lender had proceeded to sale by administrators, the principals would have lost c. £8m in equity built up over twenty years of trading. Furthermore, by keeping the care homes operating, numerous jobs were saved and much-needed patient beds maintained. 

Fiduciam also looks to lend to care homes in other situations where high street banks have limited appetite. Our team will work with borrowers who are expanding an existing care home or seeking to establish or acquire a business.  Individuals experienced at operating care homes can approach us to fund their new projects, even if the borrowing entity does not have an established trading record.  Fiduciam would also lend against a care home asset when the borrower is not the operator but has a formal lease in place with an experienced care home operator.  Our care home finance is available to borrowers throughout the UK, including Scotland, and throughout Ireland.

From an underwriting perspective, there are several unique risk factors we consider when conducting our credit due diligence on a specialist care home asset:

Experience of UBO / Care Home Manager

One of the key elements we look at is experience of the underlying principal(s) of the transaction in the highly specialised care home sector. If the principal does not manage day-to-day operations, we also carry out due diligence on the care home manager to ensure he or she has the relevant experience to run a care home successfully.

We have seen many examples in which a care home business runs into financial difficulty because of operational mismanagement of the care home, which in turn leads to problems with the regulator – the Care Quality Commission (CQC).

Care Quality Commission (CQC)

CQC regulates all health and social care services in England, which also includes care homes.  A common breach in covenants for a care home business with their high street banks is the downgrading of their CQC rating, which range from “outstanding” to “inadequate”. If, after a site inspection by CQC, the care home gets downgraded to “inadequate” then potentially they will not be able to enrol new patients to the care home. Naturally this will have a material and adverse impact on their cash flow / profitability. 

Fiduciam is happy to support care home businesses where they run into short-term difficulties with CQC but have a plausible and detailed strategy / plan to improve their CQC rating; we will take the time to understand the proposed strategy and work closely with all parties to ensure this is achieved during the term of the loan.  

Vacant Possession Value vs Open Market Value

Fiduciam will lend against the trading or Open Market Value (OMV) of a care home asset, but given we are a short-term asset lender, we still need to ensure we are comfortable with the vacant possession (VP) value and not just the OMV value of the care home asset. 

Given the above, Fiduciam generally prefers lending to care home assets where they are located in good areas where this is a proven demand for properties.

Cash flow – Capital Expenditure (CAPEX)

Given the specialist nature of care homes, they will tend to have a significant annual capital expenditure  (CAPEX) requirement which needs to be factored into the overall cash commitments (compared to say a standard residential property); Fiduciam will always carry out due diligence on what the CAPEX requirements are for a care home business to ensure it is realistic and sufficient to ensure it continues to be compliant with the CQC.

As a broader point, Fiduciam will also carry out in-dept due diligence on the cash flow of the care home to ensure it is sufficient to service the debt over the term of the loan. 

Supply side risk of quality staff

The potential impact of labour market shortages on staff supply (and consequential use of agency staff) in the care home sector is a risk factor that Fiduciam will always assess by evaluating whether the borrower is recruiting and retaining staff of the right quality, and also to understand how they incentivise their staff to stay.   

Given the highly regulated nature of care homes, we would also check whether there are formal training plans in place for all staff.

Generally speaking, if there is a heavy reliance on agency staff and we note that this is a high percentage of the overall staff payroll expense, then we would consider this as a material adverse warning sign.   Use of agency staff tends to add significant extra cost to a P&L, and by itself has been known to make a care home financially unviable.

Concluding notes

Our bridging loans are in strong demand in the care home sector and generally serve to finance acquisitions, refurbishments, expansion plans and corporate turnarounds.  Our specialized underwriting team has built up extensive experience in this area.  All our care home loans have performed well, which is also thanks to Fiduciam’s practice of developing a productive relationship with the care home operators during the term of the loan. 

As many entrepreneurs and SMEs discover to their despair, it has become difficult to count on the traditional banks when they need a loan for a new project or to expand their business.  Traditional banks across Europe continue to reduce their commercial loan books as a result of the Basel III rules.  A check-the-box culture, a sharp reduction in number of relationship managers and lengthy and unwieldly loan application processes make it increasingly difficult for many entrepreneurs and SMEs to rely on traditional bank finance.  This void is being filled by a number of alternative lenders, such as Fiduciam.  2019 has been a good year for Fiduciam. We continued our rapid expansion by hiring 25 additional staff members. Our loan book surpassed €260 million in size and monthly production has been increasing rapidly through the year. October was a record month with over €51.7 million of new loans provided to entrepreneurs and their enterprises. In 2019 we also successfully expanded into Germany by opening an office in Frankfurt and we closed our first Scottish loan.  We are looking forward to an even more successful 2020 and wish all our clients a happy and prosperous new year.

The world of finance and corporate culture are not always the best partners, as I have been able to witness extensively during my city career.  There is the culture of greed, but greed is a biological imperative and not really culture.  During my days at Merrill Lynch the board wanted to define a clear culture and launched the “five principles”, I still remember them by heart:  client focus, respect for the individual, teamwork, responsible citizenship and integrity.  But as the synthetic CDO debacle demonstrated during the financial crisis, these principles did not mean a lot to a number of Merrill Lynch employees and managers.  Had they done, Merrill Lynch would still be around as a successful independent firm.

For a corporate culture to be successful, it cannot just be a declaration, it needs to be embraced by all employees and be part of the DNA of a company.  It pulls employees together behind a mission, brings meaning to their work, gives them a sense of belonging, allows them to take pride in their jobs and motivates them.  This in turn leads to better performance and more satisfied clients, as research has shown over and over. 

In the financial services industry, the importance of corporate culture goes well beyond this, as it keeps a check on the biological imperative we are all born with: greed.  Financial services and greed are like fuel and fire.  Therefore, corporate culture has a very important role to play here, to channel this biological imperative into something constructive and sustainable. 

In this respect too much focus tends to be on rules and policies.  These can easily be circumvented and rarely deal with all situations in our complex world.  I am of the strong belief that for risk management to be successful, corporate culture is much more important than rules.  Yet it beggars belief that most of the focus of regulators and bank managers still tends to be on the latter, whilst largely neglecting the former.  The financial crisis did not happen because of a lack of regulation, it happened because too much reliance was placed on regulation and nobody cared about the corporate culture of financial institutions. 

It is the role of management to install a corporate culture, it does not grow simply by itself.  Therefore it is crucial for each manager to live the corporate culture day in, day out.  Just proclaiming a few principles does not make a lot of difference, as the Merrill Lynch example shows. 

The corporate culture I try to embody every day at Fiduciam is one of diligence, integrity, hard work and fairness, in an environment that is diverse, young, pleasant and ambitious.  No policy can ever replicate the benefits such culture brings and, most importantly, such strong culture is the necessary foundation for our rapid growth as a successful marketplace lender.

There has been much focus on the UK property market and whether house prices are rising or falling and whether this may or may not be due to Brexit.  What we hear less about is what is happening with property prices with our closest neighbour The Republic of Ireland.

Ireland is most often quoted these days purely in relation to the potential backstop. What few papers report on is the current housing crisis in Ireland.  Just a few years ago Ireland had one of the world’s highest rates of home ownership, but this ownership has dropped and both property prices and rents have risen dramatically. In fact, in May of this year, research by Deutsche Bank declared Dublin in the ‘Top 10 most expensive places to rent in the world’.

The shortage of affordable homes is a huge issue, with Ireland’s Department of Housing, Planning and Local Government in August announcing €84m in funding for 25 local authorities providing 1,770 affordable homes nationally. As a long-term solution, this is fine, but how does Ireland deal with this issue in the short term?

It is estimated that 685,000 houses were built in Ireland in Celtic Tiger years, between 1997 and 2007. Where have all these houses gone? Figures by the Department of Finance back in March of this year revealed that €24 billion of loans, including many substantial buy-to-let portfolios have been sold to funds at an average discount of 52%. Many of the sales were completed without the consent of mortgagees. Most of these were non-performing loans and the purchasing fund often wastes no time in foreclosing on the loans. This cycle still continues with Ulster Bank announcing the sale of 4,000 loans worth €900million as recent as July of this year.

How can short term lenders relieve this pressure? The answer is simple, they fill the gap where mainstream lending is simply not available. For example, Fiduciam has provided numerous loans which have allowed borrowers to buy their old portfolios back from the funders. The borrowers can negotiate with the funders directly, safe in the knowledge that they have a reliable funder supporting them through the process. The properties are then brought back on the market and rented out or sold.

Loans such as these have also enabled borrowers to complete outstanding development works on “ghost estates” that have been sitting dormant since the collapse of the housing market. This brings more properties into the market which, in turn, eases the property supply issues. Borrowers can then refinance with a mainstream lender when their properties have been modernised and rents have been normalised.

Ireland’s businesses are also crying out for lenders to help them get out of a position where they might lose everything by restructuring their loans. This affords borrowers an opportunity to re-establish their business with a viable exit via mainstream finance, or the sale of the assets on the open market.  Such short to medium term loans provide the perfect ‘pit-stop’ for borrowers.  In essence, providing ‘mid-stream’ lending prior to the subsequent exit with a mainstream lender.

Loans for such purposes are relatively new in the Republic of Ireland, but they can be a positive life saver for borrowers whose loan has been sold and who are consequently at risk of repossession.

The opportunities within our industry are myriad, the trick is to attract the right people and then to make sure they are nurtured and given the chance to achieve their own goals, whilst also achieving your company goals.

Henry Ford, Founder of the Ford Motor Company, said “The only thing worse than training your employees and having them leave is not training them and having them stay”.

At Fiduciam we want our employees to stay for all the right reasons.

When recruiting, whether it’s a graduate, an intern, or someone with years of experience, the most important thing is to ensure the people you employ have the right attitude and fit your business. 

With the right attitude you have the foundations for someone to build a career, rather than just turn up for work.

For career progression to be valid you need to provide explicit support to allow your staff to thrive and develop.   You can then uncover potential and assist your employees to progress to more senior roles.

Structured training is therefore vital.  Here at Fiduciam, for instance, we have a training and development programme that is designed with career progression as the ultimate goal. However, there are other benefits including increased motivation and engagement and most importantly a reduction in staff turnover. Giving employees the tools to upskill throughout their careers also means you can reduce supervisory needs and enhance satisfaction and confidence.

The way we run our training programme is on a module basis using the talents of existing employees in every department to carry out the actual training. This not only showcases the experience of existing team members it gives them an extra sense of worth as they pass on their knowledge to new team members and help them rise through the ranks. Our multi-faceted training programme consists of 28 modules, such as cashflow analysis, real estate valuation, legal documentation, credit analysis, etc. Career progression is supported by the successful completion of relevant modules. There has been over 110 hours of training provided for Fiduciam employees over the last 9 months since the inception of the training programme.

The key thing with recruiting is that when you get the right person you never let them forget that you believed in them enough to hire them, and that you continue to believe in them throughout their career.

Clint White, director, adds "The recent EY UK Bridging Market Study has highlighted ‘access to talent’ as one of the two most important challenges for bridging lenders.  We place a huge emphasis on our training programme to not only attract new talent but, equally importantly, to cultivate and retain that talent.  By doing this we enhance our company reputation and profile as an employer invested in its staff."

Whilst the P2P model gained traction rapidly following the financial crisis, it exhibits a number of shortcomings.

Firstly, retail clients and investors are often simply driven by yield, not evaluating the risks sufficiently.

In some cases ‘mom and pop’ type investors are not sophisticated enough to analyse the risks, looking only at the headline rate of interest they believe they will receive.

Several P2P platforms also do not provide sufficient information to their investors for them to make a proper assessment of each individual loan, even should the investor be qualified enough to do so.

This information asymmetry between P2P platform and investor is easy to understand from a GDPR perspective, but it does make the investor very dependent on the assessment that has been made by the platform.

A key concern is that many P2P platforms position themselves as an intermediary, but then, unlike any other type of lender, they do not invest themselves into their own loans.

This can cause a lack of alignment with the retail investors and means that the platform risks comparatively little in relation to the investor.

Arguably it also means that some P2P platforms have less incentive to ensure that each loan is underwritten as diligently as it might otherwise be if the platform or lender had its own money involved.

The loan may also be managed less prudently as a result, this is clearly not the case with every P2P platform, but the failure of Lendy does highlight the shortcomings of this model.

With many P2P platforms competing for the same retail investors, the platforms often pursue the highest yield deals, which tend to be the riskier loans.

Lendy is a good example of this, but naive investors may well be oblivious to the fact that this is why they are promised the higher returns.

Finally, a number of P2P platforms also provide access to institutional investors at preferred terms. The question is, what downside such “preferred nation status” deals could cause for the retail investors.

There are obviously a number of high-quality P2P platforms out there, and the demise of Lendy has somewhat unfairly tarnished the image of this entire sector.

However, it is questionable whether a number of the P2P platforms can get to the necessary scale to operate profitably and to play a meaningful role in the lending landscape.

One could expect many sub-scale P2P platforms to have challenges and we expect further P2P lenders to disappear both this and next year.

Many developers who need additional finance to help fund new development projects have substantial equity tied up in Spanish holiday homes, but cannot take advantage of it as it is nearly impossible to get leverage against such assets from Spanish banks.

Very often the developer needs the money for a specific project in the UK for no more than three years, but the amount they can borrow or raise from property in the UK is insufficient to finance the entire project. While developers could raise mezzanine debt or preferred equity, the cost of such debt is often prohibitively expensive.

Borrowing against Spanish holiday homes

However, many UK developers own Spanish holiday homes, frequently at the top end of the market. As Spanish real estate prices have recovered, a lot of equity can be tied up in such properties. Spanish banks find it difficult to lend against them for two reasons: first, they do not have access to the credit profile of the UK owner, and second, as the owner has no regular income in Spain, other than occasional rent from their home, the Spanish banks would categorise such a loan as a commercial one. At the moment, Spanish banks are still reducing their commercial loan books, therefore, they are not eager to grant such loans. 

However, there is a solution. A small number of UK bridging lenders now offer loans against Spanish holiday homes. Typically with LTVs up to 50% of the RICS valuation and interest rates at levels similar to those in the UK bridging market at around 0.8% per month and a loan term of up to three years.  

Multiple drawdowns and repayments are often available, reducing the overall financing cost to the borrower as such facilities allow the borrower to ‘right size’ the loan amount at any moment in time. 

Personal guarantees are typically not required, although the lender will usually look for a corporate guarantee from the UK company using the funds for the development.  

The loan is secured by a mortgage taken in front of a Spanish notary and, in many cases, by a share pledge over the shares of the Spanish company holding the property. As the property is in the eurozone, the loan will typically be in euros.

A great advantage of the Spanish market is that conveyancing is much more straightforward and quicker than in the UK. A look at the ‘nota simple’ will give immediate insight into the land registry and planning status of the property.  

One challenge can be to get the valuation done rapidly, but when working with the right local valuers, it usually takes no longer than two weeks. If the borrower is efficient in providing all requested information, time from application to drawdown does not need to exceed three weeks.

Structuring aspects and foreign exchange

The loan can be granted directly to the Spanish company with a back-to-back loan to the UK development company, but can also be granted directly to the UK company.  

The advantage for UK borrowers who extract equity from their Spanish real estate is that the pound sterling is currently undervalued against the euro. This means a euro loan over Spanish property yields a larger amount of sterling than it would have done perhaps three years ago. Assuming sterling strengthens again in the coming years, the amount needed to pay off the loan could be less than the amount extracted today. Of course, for borrowers who do not want to take a foreign exchange risk, there are a large number of inexpensive foreign exchange hedging instruments available.

From my personal experience, I have been surprised by how many UK developers own holiday homes in Spain, and demand for the solution described above has been very strong.

Many bridging lenders are financed by a funding line provided by a bank or specialist debt fund.

Typically, these funding line providers will finance between 70–90% of the loan, with the remainder being financed by the equity of the bridging lender or through a junior funder.

While most bridging lenders use such funding lines, some are financed on a different basis. An alternative funding route is the P2P model, very popular a few years ago, but maybe less so today. The greatest risk with this is regarding investors’ money, rather than for the lender, which has increased FCA scrutinisation and the recent confirmation of new rules for P2P platforms.

Another alternative funding model is direct institutional funding, such as pension funds and institutional investors taking a direct stake in the loan book, but as there is no fixed template for this model, it takes longer to set up. Finally, there is the route of securitisation, but for such structures to be efficient, a large loan book is required. 

For that reason, many bridging and alternative lenders go for the traditional funding line model. There are many providers, it is a well-known template and it allows new bridging lenders to get out of the starting blocks easily. The problem is the funding lines are all quite similar in what they can offer, which restricts the options available to the borrower. 

In fact, many banks and credit funds have been attracted by the healthy returns of such funding lines and have been eager to find more interested bridging lenders.

The providers of the funding lines typically impose restrictions on the type of loans — for instance, the type of real estate, the loan term, loan size etc — that can be funded with the funding line and impose further risk parameters on the overall loan book. This is normal, after all, they are exposed to the risk of the loan book. Where the losses on the loan book exceed the equity buffer provided by the bridging lender, the provider of the funding line can start losing money.

Some restrictions stipulate that the lender has to buy back the loan after a period of time, say 90 days. In this case, the risk is greater for lender than for the supplier of the funding line. These restrictions mean the lender would need sufficient capital to be able to buy back the loan while continuing to support its business, as well as a robust internal process on the underwriting and servicing side.

Such risk management techniques become somewhat self-defeating, though, if all funding line providers impose similar risk parameters, creating a particular segment. This results in more money chasing bridging loans than the natural market demands in this segment, leading to an erosion of LTVs and interest rates. 

We believe that this is what we are currently witnessing in the UK market. Risk-return characteristics for bridging loans substantially improve when one moves outside of the segment that is backed by funding lines.

 ‘Fiduciam’ is Latin for “mortgagee” and the accusative singular of fiducia, which has as its root fido, which means “I trust/I rely upon”. 

Fiducia cum creditore (which should not be confused with fiducia cum amico) was one of the earliest types of Roman mortgage, in essence the property would have been transferred to by the borrower to the lender on trust as security in order to demonstrate good faith (bona fides). Today we might use the term bona fide to mean “genuine”, however a more technical translation might be “reliable/reliability”. 

The fiducia cum creditore created a system of mutual trust between borrower and lender because: 

• under the pactum fiduciae the lender agreed to return the property when the debt was satisfied; 

• the lender had possession of the property, their ownership of which would be perfected if the loan was not repaid; and 

• there was a further clause requiring the sale of the property in the event of default from which the lender, as trustee, would deduct the debt from the proceeds of sale, so that the lender would not be able to keep property with a value of more than the debt owed. 

For this to work there had to be a trustworthy borrower and a trustworthy lender. 

So successful was fiducia cum creditore that despite the advent of pignus (a “pledge”) it not only survived until the late Roman Empire, but it has more or less survived into the modern Dutch law, as bewind, and German law, as treuhand, and in 2007 fiducie was reintroduced into the French Civil Code in a form which require the property to be held by an independent trustee; Fiduciam sometimes uses fiducie when lending against security in France . 

This concept of fides or “trustworthiness”, “faithfulness”, “confidence” (which itself derives from the Latin for “with faith/faithfulness”), “reliability” or “credibility”, was so essential to Roman law that it became a principle virtue of the Roman moral code (the mos maiorum/“ancestral custom”) and deified into a goddess with a temple on the Capitoline Hill, near the Temple of Jupiter right in the spiritual centre of the ancient city between the Forum and the Field of Mars. Fiduciam seeks to embed this virtue right at the very core of who we are and what we do, right in the DNA of the company. A reliable borrower will always find in us a reliable lender with whom they can deal with consistently from one transaction to the next. 

There appears to be a growing trend of borrowers looking to refinance a development before it is completed.

This could be due to multiple reasons – the current facility is expiring and the lender does not want to carry on; there have been cost overruns which the lender is unwilling or unable to fund, or because the borrower is looking for a discounted interest rate.

Developments can be challenging even under the best of circumstances, and a ground up development carries a different set of risks to refurbishment or conversion works, while new build extensions are slightly different again. Even the best planned development undertaken by the most experienced of developers can experience issues.

On refurbishments or conversions, there can be issues with the building, including underpinning requirements, asbestos, or structural issues with the property.

On ground up developments, there is ‘in-ground’ risk including potential contamination on brownfield sites – while all developments can suffer from the need to increase specifications on developments. Issues with developments such as these, can result in cost overruns associated with the build and also cost overruns from time delays.  Time delays can become a real issue when they extend beyond the term of the loan with the developer still building when the loan term runs out.

From a lender perspective, it is important to make sure the developer has the extra time needed to complete their development as this presents the best opportunity for a successful outcome for both the borrower and the lender.

Despite this, some lenders are unable to roll, or extend, their development loans, or may be unwilling to do so.

Across the market there is anecdotal evidence that some credit lines are tightening.  Sometimes therefore, the best solution for a borrower can be to refinance the part-complete development with a new lender.

Lenders such as Fiduciam are happy to lend on part-complete developments, and we have on multiple occasions provided funding for this type of scheme both in the UK and abroad.

However, it is important the developer can show that the works to date are in good shape and that they have the ability to complete the remaining works.

If a developer wants to take this route, the new lender will want to check that the development works to date are compliant, with both planning permission and building regulations.

If you have a client in the situation of refinancing a part-built development therefore, it is wise to advise them to have a building surveyor and their architect ready to provide this evidence.

Often, a new lender will be happy to take this advice from the current lender’s monitoring surveyor.

The role of brokers has arguably never been more important than it is currently, in understanding who the savvy lenders are: which are the ones that truly understand what is involved in a development and have the financial strength to support the borrower.

While rate is important, what is more so is for a borrower to be with a flexible lender who understands the risks, can help a borrower to complete a development if they hit difficulties and who is flexible enough to ensure that they have a loan term that really is long enough for a project to be completed, no matter what unforeseen events may befall.

Metro Bank’s share price dropped to a record low earlier this month, down 75 per cent compared to January, a consequence of an error in risk weighting its commercial buy-to-let loans which came to light earlier this year.

As an alternative lender we were in a good position to observe some interesting developments in the commercial buy-to-let market over the past three years.

For example, in 2015 the majority of the bridge loans Fiduciam provided were related to buy-to-let. But progressively during 2016 and 2017 we lost this business as the challenger banks, including Metro Bank, became more aggressive in this segment, offering substantially lower interest rates.

This was incomprehensible to us as the international banking regulation framework, Basel III, requires a substantially higher risk weighting for commercial buy-to-let loans than for residential mortgages.

Basel III increased these risk weightings following the financial crisis to ensure that banks have sufficiently strong capital buffers when they have to write down loans during recessions and continue to have the confidence of savers at all times.

Eight per cent interest needed

According to reports, Metro Bank had erroneously put a risk weighting of 35 per cent on its commercial buy-to-let mortgages, which it had to increase to 100 per cent, as required by Basel III.

Considering the Basel III risk weighting and capital requirements framework, and assuming a 70 per cent cost-income ratio, which is an average for the UK bank sector, we have calculated that a bank would have to charge interest rates of approximately 8 per cent per year on commercial buy-to-let mortgages.

This would achieve a return on equity of 20% which would be a fair expectation set by bank shareholders.

Basel III did open a window for alternative lenders such as Fiduciam, which are financed by institutional risk capital rather than bank deposits or bank funding lines, to enter the commercial buy-to-let market, thereby reducing the demand on banks to provide such commercial buy-to-let mortgages, and consequently to lessen the risk on banks’ balance sheets.

Basel III did open a window for alternative lenders such as Fiduciam, which are financed by institutional risk capital rather than bank deposits or bank funding lines, to enter the commercial buy-to-let market, thereby reducing the demand on banks to provide such commercial buy-to-let mortgages, and consequently to lessen the risk on banks’ balance sheets.

More risk re-weightings to come?

We now understand better what has happened, at least at Metro Bank, however questions remain.  Some challenger banks continue to offer very low interest rates on commercial loans, which appear to be inconsistent with Basel III.

As an international lender we also observe that Basel III is implemented differently across the E.U., which is hard to understand considering there is an EU regulatory framework.

For instance, in the Netherlands a low risk weighting for commercial buy-to-let loans is standard, fuelling a frothy real estate market.

Finally, we notice an increasing number of challenger banks are lending to alternative (non-bank) lenders at low interest rates, which raises the question how those funding lines are risk weighted.

Metro Bank has tackled its Basel III risk weighting issues and has since raised more than £375m in equity, assisting in a recovery of its share price, but based on the above observations the question arises whether we will see similar risk re-weightings in the wider challenger bank sector and even internationally.

You might be forgiven for thinking that the opportunities in Europe will be under threat given our situation with the UK’s exit from the EU.

But, as a business that has been working in Europe for the past two years, we know that this is not the case.

Lending in Europe is not always easy, and in some countries not really possible, but we have made it our business to find ways to lend whenever, and wherever, we can. In some countries, other than local banks, there are very few lenders able to help investors and developers looking to obtain leverage over real estate in continental Europe. In fact, there are some countries where we are possibly the only other option.

When lending in a new country, the first step is to work out if it is indeed possible for a UK lender to lend, and if it is, then it’s a case of working out how. There are many nuances and almost every country has different rules and regulations, which can be quite different to the way we lend in the UK. There are similarities to the UK in Ireland, as you’d expect, but elsewhere lenders have to be very sure they are working in the right way. 

For instance, we can’t lend directly to French entities because French banks have a lending monopoly, but we can assist where borrowers have corporate entities outside France, but have French assets which can be used as security. 

In Spain, we face a different challenge. Although lending follows a more standard civil law process, assessing property values is much more problematic. Previous sales data is limited and often unreliable. This makes it difficult to compare anything but the most standard of property types. We set up our Spanish arm, with a full Spanish-speaking team, to deal with exactly these types of problems. 

In continental Europe, loan transactions are often cross border, for instance the loan being provided for a finance company in one country and the security being taken in another country. In Ireland and Spain, many loans are being used for debt restructurings, assisting in cleaning up the aftermath of the financial crisis.

One area we are particularly active in is enabling the directors of UK businesses to raise equity against their European property.

It has taken us a lot of time to develop our continental European bridging capability, but now that we are fully operational in Ireland, the Netherlands, Spain and France, we expect to double our lending volumes in these countries next year, with Germany, Switzerland and Luxembourg coming on top of that. Most of the jurisdictions we lend in are currently experiencing rising property markets, and the opportunities are multitude. We are there for the long run.

Based on observations and conversations over the past year, there appears to have been an increase in the search for international funds coming through London brokers.

A growing number of London brokers it seems, are being asked to access money by borrowers keen to do one of three things: either purchase an international property, carry out work on a property based overseas or, increasingly, release money from a property based in continental Europe in order to spend on property or business in the UK. In each of these cases there is another property that is being leveraged on a short-term basis in order to satisfy a development or business need.

There could be a number of reasons for this uplift, but it increasingly seems to be the case that if you have an international property and can’t find funds abroad then you look to London as an international finance centre. For flexible, short-term funding, London is still the place to come, even despite Brexit.

What is interesting is that the people turning to London brokers for help are not even all UK nationals, they are a number of different nationalities all of whom have property on the continent that they need to leverage on a short-term basis.

It makes sense that international brokers like Enness and Knight Frank will be approached for this business as they have international connections so may be contacted in multiple jurisdictions, but the demand seems to be wider than this with a much wider range of brokers being approached. It is not exclusive to London brokers either, but the demand does seem to be predominantly in this region.

The key reason seems to be that short-term finance is not generally available across the continent, but as awareness grows of bridging finance and how useful it is, this is increasing demand. And the key place to realise this demand is in London and the UK.

There has also been an uplift in UK business people releasing capital from properties they may own abroad in order to capitalise on business opportunities here. Many UK business people, especially developers, will have unencumbered property abroad. They are now seeing the opportunity to leverage it for their business or for property development. It is this segment of the market that is showing the greatest potential. This fast turnaround of short-term money can really make a difference to businesses needing to invest, or even needing working capital.

It is an exciting market and what that looks set to increase throughout the year as awareness of the possibilities increase, not only in the UK but across Europe.

In part one, we discussed why it is important to know your lender. Now, we explain why this is even more relevant today and what can be done to reduce lender risk.

In our opinion, 2019 will be a challenging year for the bridging industry — for three reasons:

Widening credit spreads:

We have benefited from a very benign credit environment for the last few years and this will inevitably change. This may dry up the funding sources for some lenders.

Falling property prices:

 We have not really had a proper real estate correction in the UK since the early 90s. We may be witnessing one in London right now. 

Brexit:

 If there is a hard Brexit, we believe the UK economy could go into recession and major dislocations and disruption in the capital markets could occur, also directly affecting the credit markets. It is also possible that the can is kicked further down the road, in which case the ongoing uncertainty could cause investment to be subdued. The ongoing Brexit situation also means that politicians may come to power who otherwise would have no chance.  

As a result of this environment, we believe that other lenders could become more conservative, making it impossible for certain borrowers to refinance. 

In good times, the choice of lender may not be that critical but, in bad times, it is. 

What can borrowers do to avoid lender risk? 

The key is to use a well experienced broker which understands the health and reputation of the different lenders, and which can lead the borrower to the right one. While as a broker, you need to really get to know the different lenders, to help establish those that will treat your client right.  

Pick a lender with stable funding

Lenders that are excessively funded by wholesale funding, hedge funds or leveraged vehicles may face serious balance sheet pressures when the going gets tough. They may therefore be more likely to trigger default as this is one way to reduce balance sheet pressures.  

Select a diligent lender

Yes, there may be a few more forms to be completed and information to be provided as part of the application, but a diligent lender’s loan book is less likely to get into trouble.  

Select a sustainable lender

Glitzy offices may be nice, but you want to make sure the lender is cash-flow positive.

Consider the reputation of the lender 

Choose a lender that truly cares about long-term client relationships. 

Resist the temptation to over leverage

It may make it more difficult or impossible to refinance if the lender which accommodated the very high leverage disappears.

Make sure the exit strategy is realistic with enough buffer embedded in the loan

Delays are normal, but you do not want to be in a situation where the loan expires before the exit has been achieved.

Have the borrower meet with the lender to develop a relationship  

Not only will this make it easier for the borrower to work out problems if they occur, it also helps to get a better feeling for who your lender really is.

Diversify across lenders

Never become too dependent on one single lender.