Law firm Mayer Brown has said that with a rise in insolvencies predicted, secured peer-to-peer lending platforms could look at credit bidding as a possible tool for recovering funds from distressed loans.
Credit bidding is an unregulated tool that is familiar in distressed situations in the US and is gaining traction in the UK.
The process can be used as a way of recovering some of the investment in a distressed loan that the lender has security over.
Through one of a variety of structures, credit bidding allows a lender to recycle secured debt to support the acquisition of an asset from a distressed borrower.
Lawyers from global firm Mayer Brown have noticed that credit bidding is becoming a key part in UK lenders’ toolkits. Partners at the firm see it being used more often in a defensive way by lenders to protect their collateral in what they believe will inevitably be a period of increased corporate failure.
“It’s a way of giving a lender a chance to recover some of the investment made at some point in the future,” said Trevor Borthwick, partner at Mayer Brown.
“Foreclosures where the lender directly takes ownership of the asset are difficult. Credit bidding allows a lender to support a bidder seeking to buy an asset from a distressed borrower without having to lend additional cash.
“Forgiveness or write off of the lender’s original loan is the consideration for the purchase of the asset in question.
“The lender may or may not have an ownership interest in the bidder, but either way, the structure allows a lender to ensure that the bidding process is competitive, and the asset isn’t sold too cheaply.
“We haven’t seen peer-to-peer lending platforms use credit bidding yet but there’s no reason why platforms couldn’t do that if it is the best deal for their investors.”
“Sometimes with insolvencies even secured creditors can make a loss, but credit bidding might be a way for them to mitigate that loss,” said Amy Jacks, partner at Mayer Brown.
“It’s just a different way of looking at returns and insolvency. Some lenders will want to do it and we think unfortunately there will be more corporate failures so there will be an increase in the number of times credit bidding is used.
“Any lender can use it as long as they have security over the assets in question.”