The importance of knowing your lender – Part I

Last year, we suddenly received an increase in loan applications from developers in the midst of projects who wanted a new loan.

Such applications make us wary as typically a borrower looking for a new loan in the midst of a project means something has gone wrong. We soon discovered the reason was that the borrowers could no longer make further drawdowns under their existing facilities as their lenders had funding issues.

The press has widely reported the fate of Amicus, but we have also seen other lenders which seem to have funding issues. As everybody may remember from the RBS small business loans controversy, a lender with problems can destroy a lot of businesses.

There are principally three types of lenders that can threaten a borrower: those that lose their funding, and those that are either not sustainable or not ethical.

Lenders who lose their funding

Some bridging lenders depend on bank funding lines, some on P2P funding and some on institutional funding. Bank lines can be pulled easily, while P2P funding can dry up rapidly as a consequence of negative press and herd behaviour.

This will usually happen at the worst moment for a borrower: when it is difficult to get a loan from another lender. It may leave a borrower with a half-finished development, unable to make drawdowns or with an inability to extend their loan if the exit is delayed. The consequence is enforcement with a loss of equity in the process. 

For borrowers, it’s often impossible to understand a lender’s funding model, but brokers frequently have this insight. Lenders with non-diversified funding and loan book performance problems are most at risk of losing funding. 

Non-sustainable lenders

The fintech and P2P boom meant a lot of venture capital came flowing into our sector. This meant a lot of lenders were able to pursue a cash-burn business model.

The problem arises when venture capital investors run out of patience before the lender has become cash flow positive. A lender fearing something like this happening can create a vicious circle: the lender, knowing it needs to demonstrate growth to meet its original business plan projections, grants loans it should never have granted and portrays a much rosier picture than reality — until the card house collapses.

An enormous number of bridging lenders have been established over the past few years, and not all of them will prove to be sustainable. The broker plays an important role here, as he or she knows from industry gossip who is doing well and who is in trouble.

Non-ethical lenders

Unfortunately, we believe that some lenders’ business models are based on making money out of defaults or, even worse, lend-to-own. This does not mean they break the rules. It is easy enough for a borrower to have a project or exit delay, or to fail to comply with an administrative covenant. Indeed, the loan documentation is typically drafted to protect the lender, allowing it to easily declare a default.

Ethical lenders will work with the borrower to resolve the issue; others find it hard to resist the temptation to charge default interest and hefty fees. We continue to be amazed by the number of borrowers who fall into this trap. Clearly, more education is required on an industry level, although associations such as the ASTL have done good work to improve standards.

In part two we will look at why, particularly in 2019, knowing your lender is important, and give some practical steps for avoiding lender risk.

Trees grow on money

In June 2018, Fiduciam granted a €1.3 million, three-year commercial loan to Hatton Farm in the Republic of Ireland.  Hatton Farm, which operates under Hatton Produce Ltd, is one of Ireland’s leading potato producers and is renowned for the high quality of its potatoes. As Hatton Farm grew and diversified over the years, it also became an important Christmas tree grower, in fact it has 150,000 of them. Like many other Irish farms, Hatton Farm was really let down badly by the traditional banks in the aftermath of the financial crisis.  Marina Hatton commented: “Fiduciam believed in us when the big banks were simply there anymore. This farm has been in our family for three generations and it’s thanks to the loan that we got from Fiduciam that we can grow our business and secure our children’s future.”  As a thank you for the loan, Hatton Farm offered Fiduciam one of its home-grown Christmas trees for their office. As a bit of fun, Fiduciam sent two of its BDMs to chop down the tree and carry it home, and filmed the whole lot.

That was the year that was

A year of many highs and lows, perhaps echoed in England’s journey in the World Cup, 2018 gave us much to deal with, but amazingly we have emerged into 2019 relatively unscathed.

Unemployment remains low, real wages are outpacing inflation for the first time in years, the economy is growing (slightly) and, despite being constantly threatened with rising interest rates, we only faced one quarter per cent increase in twelve months.

Storms battered the UK in January and snow covered much of the country in February and March. The inclement weather always has an impact and many were counting the cost once things started to thaw. Retailers were hit because many people just stayed at home, builders were unable to carry on building and many saw their insurance premiums rise following what was dubbed ‘The beast from the east’.

However, it wasn’t long before the UK was basking in the hottest temperatures the country has seen since records began. The heat was also rising in the political arena and fears over our fate once we leave the EU became a fierce debate, which will unfortunately continue right up until the deadline in March. This has cast quite a pall over the economy with many predicting a massive fall-out, which has filtered down into the wider community and consumer confidence took quite a knock as the year went on.

Of course, there’s nothing like a good wedding to get people out and about and spending money, and the royal wedding in May did exactly that. There were 193million credit card purchases in May, seven per cent more than the same month in 20181.

Nonetheless, it was the retail sector that took the brunt of Brexit uncertainty and the impact of increased online purchasing activity. Forcing many retailers, including some big names, to shut-up shop for the last time. Although the Treasury recognised the plight of the retail sector in the Budget announcement, the steps proposed to help our beleaguered high streets may not be enough to save some retailers.

Although uncertainty surrounds our exit from the EU, there is also an air of ‘what will be will be’ for many. Our fate is in the hands of the politicians now, so we might as well carry on, regardless. Interest rates are low, most lenders want to lend and criteria has never been so diverse or accommodating for so many borrowers. However, funding for SMEs is still an issue. Some are reluctant to invest because of Brexit, but for those that do want to grow through investment more needs to be done and that’s where specialist lenders will come into their own.

We’ve had an interesting last 12 months, and there is surely more to come, but look at it from another angle. We may be leaving the EU and we may have some difficult decisions and times ahead of us, but there is an old saying that is apt in our current circumstances: “Out of adversity comes opportunity.”

I believe 2019 will offer as many opportunities as we had in 2018, perhaps more.

TVR Automotive – a transformational multi-tranche facility

Following the take-over and recapitalization of TVR by a group of successful British entrepreneurs, the development of a new high-performance car was commenced in close cooperation with Gordon Murray Design. Fiduciam provided the cornerstone of the second capitalization round, closely working together with the Welsh government and equity investors, in order to finance a new production facility in South Wales, a project representing £30 million of capital expenditure and creating 150 direct jobs and many more in the supply chain. This transaction demonstrates Fiduciam’s ability to successfully complete ambitious transactions. The transaction required Fiduciam to work together with the Welsh Government and a company which provided third-party security for the transaction.  The challenge was to find a financing solution that met the needs of all stakeholders.  The overall security package consisted of real estate, farmland, manufacturing assets, intellectual property, cars and parts.  The transaction was brought to Fiduciam by a corporate finance boutique in the City which simultaneously worked on an equity raising for TVR.