Asset-backed P2P lenders use collateral as a key method of mitigating risk, which has attracted investors in turn. As the pandemic leads to a downturn in the economy, the valuation of those assets will now be put to the test. Michael Lloyd reports…
‘Lending is only lending when you get the money back’ is a well-known phrase in the world of peer-to-peer lending. And in cases where borrowers cannot repay, taking security is the most common form of risk mitigation to recover funds. Therefore, it comes as no surprise that asset-backed lending is incredibly popular among P2P investors and – according to those platforms that offer it – the most secure.
Property is undoubtedly the most common asset which is valued, lent against and used as collateral, but there is a myriad of alternative assets used by alternative lenders across the UK. From fine art, to vintage cars, to private jets, yachts and green energy stores – P2P investors have plenty to choose from when looking at asset-backed loans. Security gives investors confidence and on paper is an effective way to manage risk.
But in reality, it only works if the lending and risk mitigation is conducted properly, in a way that allows money to be recovered. But the Covid-19 pandemic and subsequent economic turbulence will test valuations and security to show which P2P lenders have been swimming naked.
Platforms have to ensure there is sufficient margin between the market value of the asset and the loan percentage to ensure if there’s a fall in the value there is still enough equity in it to repay. The idea is that the security should only be a fallback and should not detract from the lender’s quality of underwriting.
Assets aside, every borrower needs to meet their platform’s criteria, and the loan and security documentation should be fit for purpose. “The income, liquidity and profitability of businesses and individuals would have been affected by Covid-19, so platforms still have to satisfy themselves that applicants have the ability to repay,” says Frank Wessely, partner at business advisory firm Quantuma.
Sharon Davies, managing director, valuation services at Duff & Phelps, describes valuing assets as coming down to what someone would be willing to pay for the asset and the price at which someone would be willing to sell it at. For equipment finance, she looks at how much the equipment costs and its uses, as well as any improvements that can be made.
For patents or rights, Davies says that Duff & Phelps takes a forward-looking approach towards cashflows, but Covid-19 has made this particularly challenging as it is so difficult to predict what could happen. This means that it has become harder to assess these valuations in the same way. For a start, it is much more difficult for platforms to visit sites and view these assets in person – a crucial step which can often make the difference between a loan approval and a refusal.
It is also hard to predict what the market for a particular asset will look like in a matter of months or years. Already, the pandemic has driven down the value of properties, while assets such as construction equipment are lying dormant on newly-quiet building sites.
“Covid-19 has heightened the uncertainty and the risk profile of any investment is higher,” Davies says. “So, the way you see that coming through in valuations is investors expect higher returns.
“Some sectors will struggle. It depends on the flexibility of lenders and how they adapt to meet changing investor demands.”
Asset-backed P2P lender Ablrate takes everything from removal crates to business jets as collateral and currently is busy with battery storage energy. The platform’s chief executive David Bradley-Ward says if an asset is depreciating, you need to take that into account.
For example, if you have an asset which is worth £500,000 today but will likely be worth £100,000 in four years’ time, this all needs to be factored in. “I bet there are plenty of distressed asset funds being formed right now,” Bradley-Ward says.
Another asset-backed P2P lender, Crowdstacker, typically has large loan sizes and will consider property, renewable projects and equipment finance as security, with an independent valuer conducting the valuations.
The platform’s principal security is a debenture of a company, but this may differ for specific loans. Crowdstacker has had a few borrowers requesting forbearance amid the pandemic, although chief executive Karteek Patel is hopeful that over time businesses will recover and start repaying investors.
Meanwhile, ArchOver carries out a thorough analysis of the business, management, industry, collateral, financial performance and risks surrounding each potential borrower as part of its credit process and due diligence.
On top of this, the P2P platform also monitors the asset to ensure it doesn’t lose its value. The collateral used for this type of lending is typically the trade debtors or accounts receivables owed to the borrower. Though it doesn’t take other assets into account, Archover always takes a first charge. During the pandemic, the platform has focused on the needs of current borrowers and has been funding its unsecured advance service with a handful of borrowers. It has also requested a ‘Covid-19 statement’ from businesses, including how they have adapted to the pandemic, how trading has been and how it is expected to fare.
“There is definitely a place for P2P platforms to exist alongside traditional asset-backed lending facilitators going forward,” says Charlotte Marsh, managing director of ArchOver.
The consensus among platforms is that Covid-19 will lead to a rise in defaults. However, if this happens, the asset-backed P2P sector can still prove its worth. For instance, defaults can be mitigated by a secondary market, where investors who are opposed to any loan extensions can sell the loan to other lenders, depending on liquidity.
“We believe that initially there will be a default spike across the sector for the businesses that were already in a poor state, but generally, default rates should hold as long as businesses have access to the government schemes, and banks and P2P lending platforms continue to supply working capital needs,” says ArchOver’s Marsh.
More recoveries are likely to be needed, and platforms are confident in their recoveries processes. But recoveries should only ever be a last resort, and before reaching the recoveries stage, it is useful to work with the borrower, as this often addresses the underlining business issue surrounding possible default or poor performance.
Ablrate is one such lender that layers security and has a robust, aggressive recoveries process. “If you have plenty of levers to pull you find people can be more cooperative,” says Bradley-Ward. “That could involve repossessing the asset or calling in a personal guarantee, for example.
“I think that people will be able to look back on some investments they had and decide which performed better and over a period of time I’d imagine asset-backed would have done better than unsecured.”
Despite talk of defaults, during this uncertain time there are a range of opportunities that present themselves to platforms. In a marketplace like this, businesses which are asset rich look to turn their assets back to cash and lease them back, something which asset-backed P2P lenders can play a part in. Furthermore, businesses know that there are borrowing options outside of the main high street banks, and this will carry on driving demand to other lenders, including P2P.
Asset-backed P2P lending has been growing in popularity over the past few years and Marsh forecasts this upwards trajectory to continue as investors look to seek reliable returns over a very volatile stock market or savings accounts with near-zero interest. “We believe that the market will thrive for those platforms that can weather the current storm,” she says.
Covid-19 presents a big test for asset-backed P2P lending platforms – one which will sort the strong from the weak. However, within every cloud, a silver lining emerges. The consensus among platforms and stakeholders alike is that asset-backed P2P lending will prove itself during the crisis and continue growing.
The platforms that have valued their collateral appropriately and undertaken robust risk management processes will weather the storm, which will in turn reassure investors and could help cement the P2P sector’s place in the mainstream investment space.