Protecting your security

 

Daniella Lipszyc is the Senior Partner of ULS Solicitors.

ULS specialises in the origination of vanilla through to complex development loans, to on- and off-shore borrowers; property litigation (including repossessions and LPA Appointments). ULS also operates an extensive redemptions unit as well as loan management services to formalise communications with borrowers.

Monitor LTVs

Short-term lending is essentially an asset-based lend, where the main consideration is the security’s Loan-to-Value (LTV), rather than the status of the borrower.

Whilst at the outset of a new loan, the LTV may fall within a Lender’s acceptable range, the LTV may increase over the life of the loan, thereby jeopardising capital in the event of a realisation.

The increase in the LTV may be due to a downgrade in the property’s valuation or an increase in debt (or a combination of the two). As simplistic as this sounds, lenders are often too slow at picking up these movements.

Once a loan is drawn-down, it is all too easy to focus on the next deal, rather than concentrate on managing each live loan through to a successful exit. Key to that is maintaining up-to-date information.

In monitoring the LTV, one should not fall in to the trap of relying on historic metrics provided by the firm’s accounting function, who may not fully appreciate the dynamics of loan servicing.

Changes in Debt and Value

The “V” in the LTV may have altered significantly, for a whole host of reasons, not least market sentiment. It could simply be a reflection of works undertaken in the case of a development (where values tend to drop, before they recover).

Whilst the “L” may be clear-cut on day 1 of a loan, it may well increase over the life of the loan, due to late payment fees, asset manager/QS visit fees, adjustments for default rate interest, legal fees etc. There may also be an Exit Fee to apply. Cumulatively, these can have a significant impact on the “L”, particularly if default rate interest has been applied.

Further valuation considerations include: how up-to-date the “V” is and which “V” to be focussed on.

Don’t rely on Historic Valuations

All too often, valuations are only reviewed when the lender picks up that there may be a delay in exit. Conceivably, this could take place some 12 months after the valuation was undertaken. In today’s uncertain and stagnant property market, a valuation pre-draw down is likely to be too old to rely on. In the intervening period, realisation values will have probably been downgraded.

In the current economic client, lenders should be re-valuing their security at least every 6 months.

90 Day Valuations

Further, they should be focussing on the 90 day valuation figure, not the 180 day figure. Lenders are generally not in the business to speculate on market movements or to sit on property hoping for some recovery in value – they are in the business to lend money and should be re-circulating that money as quickly as possible, to maximise short-term returns. If a lender appoints an LPA Receiver, a relative quick sale will be expected, to satisfy funders, whether institutional or private. Taking 180 days to realise the asset would be considered far too long, so why base lending decisions on an unrealistic 180 day basis? The answer may be that lenders may be too focussed on short-term objectives (increasing their loan book) and want to offer the highest LTVs to their broker networks to maintain/increase market share. This can lead to toxic loan books which will be highly susceptible to any significant market corrections.

Developments

If a lender is relying on a GDV, this can also fluctuate according to prevailing market sentiment and can be influenced by actual build quality. Regular monitoring by Asset Managers or QSs is critical to assessing when a development is on target, both in terms of timescales and build quality.

Additional Equity

As a further way of protecting capital, lenders should be looking at a borrower’s other property assets and identify what additional equitable may be available. In practical terms, this can be far more effective than taking/relying on personal guarantees, as realisation of guarantees can be very time consuming, costly and are likely to be legally challenged at every possible opportunity. Whilst the taking of additional security sounds entirely logical, some lenders succumb to pressure from brokers not to do so, as the broker seeks terms that are as vanilla as possible – and will shop around if necessary, to obtain them.

Act Promptly

When there are signs of a loan not performing, it is imperative that action is taken quickly. All too often, the borrower or his representatives will give plausible explanations; advise of (and even provide copies of) DIPs; tell you that the property is just about to be sold, or that family money will pay off the loan. Whilst such statements may be accepted in good faith, time will pass; resolution will be slow or non-existent. In the meantime, the LTV will be rising, increasing the possibility of a capital default.

In such circumstances, an action plan should be agreed with the borrower to resolve the situation over a relatively short timescale. If the plan is breached, the lender should appoint an LPA Receiver without hesitation – the lender cannot allow the borrower’s problems to become their problems.

Legal Remedies

Before any legal remedies are instigated, a lender needs to ensure that it has complied with the relevant procedures and notifications set out within its loan and security documentation. This should be done in conjunction with its lawyers, to avoid any unnecessary implementation delays.

Tactical Use of an LPA Receiver

Whilst the appointment of an LPA Receiver may sound draconian, capital preservation is of paramount importance. The appointment of an LPA Receiver should be used as a tool to gain leverage. The appointment will need to be made through the lender’s lawyer, who will have to confirm the enforceability of the the lender’s charge. Good Receivers are not prima donnas – they will work with the lender and its lawyer to optimise the outcome. This may take the form of a very light-touch approach, where the very appointment itself catapults the delinquent borrower in to action. On the other hand, this could involve the repossession and sale of the security.

In summary

  • Don’t rely on valuations provided at the time the loan was drawn-down;
  • Regularly revalue securities, at least 6 monthly;
  • Focus on 90 day values;
  • Ensure you are getting accurate readings on the level of debt;
  • Monitor the state of the property market in the areas you operate in;
  • If you spot any emerging problems, act quickly;
  • If the borrower prevaricates, be decisive;
  • Ensure that all enforcement steps have been documented and in accordance with your loan/security documentation;
  • Use an LPA Receiver tactically. This will keep costs down.