By Clint White
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.
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.