What can the short term lending market learn from Lendy’s demise?
By Jonathan Newman -
According to administrator’s last report, the headline statements are as follows:
- Lendy book included 54 outstanding bridging and development finance loans worth a combined £152m
- Lendy received full authorisation from the FCA just months before the administration.
- The development finance book had 25 live loans worth £116m and a total gross development value (GDV) of £226m, with 14 in the insolvency process
So what lessons might be learned?
The default record is astonishingly high. In fact, it is so high, that these statistics bear no resemblance to anything seen or experienced across the traditional suppliers of short-term finance.
At Brighstone Law, we’ve worked along a broad range of suppliers, from family offices making the occasional advance at one end, to the volume challenger bank providers.
In my experience, not one, has exhibited a default rate approaching that found by the administrators.
So, no one ought to panic about the underlying strength of the sector. Default, in whatever form is a statistical inevitability and high street banks will say the same.
The sector remains robust and is working well. Loans are carefully underwritten, work well and in the vast majority of cases, exit to strategy.
Professional partnerships remain key. Those partnerships need to be made up of stakeholders who have, service excellence, broad market range experience and long term responsibilities.
Once engaged, each stakeholder has to consider their role, not just on a case by case basis, but in terms of their client relationship developing over time and the wider responsibility for the business space we operate in.
So for the introducers, think not just about the fee, think more about customer profile and detriment, your long term business case and for the lawyers, are you sufficiently aware of the market to know and then have the confidence to have a difficult conversation with a client? ; “this isn’t right, this isn’t representative, do you need to reconsider your model”
A book which comprises a small number of loans at high ticket values is never a good idea.
It becomes extremely vulnerable when the property market is tricky, stagnant or even receding.
That’s mainly because risk is not spread widely enough, so if one or two loans fail, the book may not survive the damage. That was a lesson learned from the last recession, but clearly not by all.
Development finance is not straightforward and is strictly for those who know what they’re doing and have the right resources to underwrite, monitor and step in.
In my view, development lending has double the risk. The usual risks of lending continue to apply, but then layer on top of that, the customers’ professional ability to manage and complete a project and their own third-party suppliers’ abilities to perform (e.g. builders, quantity surveyors, material suppliers).
And even if the customer and team are up to it, there’s an unavoidable gamble on the appeal of the project to another unknown – a property market in a year or two’s time which may be quite different to the one which exists at the date of lend.
So, if you’re a specialist, you get all of that. But if you are not, it’s extremely risky to skew the book with development lending.
FCA regulation is not a cure all. Authorisation is no endorsement of skill, or knowledge, or experience.
Education remains an important key and there’s plenty of resource to tap into.
By actively involving oneself in the wider lending community, engaging regularly with trade bodies such as the ASTL, FIBA will encourage best practice, provide the means to engage with established professional partners and enable open and useful dialogue with your peers.
Such dialogue is invaluable. It can early flag to a lender, a book which is performing significantly worse than market and provide some indicators on what might be wrong and how to correct a failing business model – long before the administrators are called in. So don’t operate in isolation.
JONATHAN NEWMAN, SENIOR PARTNER AT BRIGHTSTONE LAW