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Growth Street Review: Reserve Fund Gone & Lending Winding Down

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By on 30 July, 2020 | Read more by this author

Here's the Growth Street Review from one of our specialists. (You can see all the reviews in our comparison tables.)

Growth Street Logo, used in 4thWay's Growth Street review4thWay's Quick Expert Growth Street Review

Growth Street is in the process of winding down its existing loans

Growth Street, established in 2014 with a total lent of £52 million, is no longer taking on new borrowers. Nor is it re-lending existing lenders' money. Instead, it's winding down its current loan book by collecting payments from borrowers until the loans are fully repaid. It will then close its operations for good.

While we have no solid data or hard information, 4thWay currently thinks that the most likely result is that some lenders might incur some small losses overall. That's particularly if they haven't been lending for very long and have therefore earned little interest to offset bad debts.

Why is Growth Street winding down its existing loans?

In March 2020, there was a spike in lenders switching off their re-lending settings and lending orders fell. In other words, an unusually high proportion of lenders attempted to exit their Growth Street lending, all at the same time – most likely driven by the pandemic panic.

Growth Street reacted by putting a temporary hold on exiting lending, as there would otherwise not be enough money to keep open the facilities that had been granted to borrowers. This extraordinary decision was allowed for in Growth Street's terms and conditions, where it was called a “Liquidity Event”.

The Liquidity Event lasted 90 days, during which Growth Street stated that it would “set about positioning the business so that it could continue to be competitive at the end of the event, whilst protecting borrowers and investors.”

Growth Street was unable to sufficiently improve the imbalance between borrowing and the amount of willing lenders, so it declared a “Resolution Event”. The Resolution Event means that Growth Street’s loan book is recalled from borrowers in 90 days. Lenders will be reimbursed in quarterly instalments.

As per the terms of the Resolution Event, all outstanding loans were assigned to the Growth Street Loan Loss Provision: Growth Street's reserve fund to cover expected bad debts. Repayments will be collected from this and held on benefit for all investors. Interest will continue to be collected from borrowers and will now be held for the benefit of all investors.

Here's what Growth Street told us

“Once the current Resolution Event process is complete, Growth Street will begin the process of winding down its business operations.

“Growth Street remains solvent, which will allow for an orderly, controlled wind-down process. We assessed all of the realistic options that would enable us to build an economically viable business going forward whilst allowing us to offer a market leading proposition for our customers.

“Unfortunately, we came to the conclusion that this would not be possible and that an orderly, controlled solvent wind-down process is the only path forward. We will retain a core team to support our borrowers in finding new sources of finance, while maximising returns and distributions to our P2P investors.

“Returning the original investment for P2P investors as quickly as possible remains a key priority. We currently anticipate that we will continue with the same timescales established when we declared the Resolution Event, which will be up to 12 months from June 2020.”

Did 4thWay foresee this?

4thWay's research largely focuses on the risk of losses and not liquidity events. We consider liquidity issues to be part-and-parcel of this kind of investment. Regardless of how good the P2P lending company is at protecting lender money from losses and generating positive returns, we've explained right from one of our very first P2P lending guides that you'll sometimes have to wait longer for your money back.

Growth Street had a 1/3 “Fair” 4thWay PLUS Rating, which means that losses from bad debts are not expected during normal times, except if they are caused by oversized loans.

Growth Street fell short of a 2/3 “Excellent” rating, which means losses from bad debts aren't expected even during a minor recession. It also didn't have a 3/3 “Exceptional” rating, which means losses aren't expected even in a severe recession comparable to 2008. Both of these ratings can only be earned by P2P lending companies that appear to have sensible limits on oversized loans.

Growth Street fell into both categories: it has too many oversized loans and these are not normal times. COVID-19 has caused an extraordinary hit on the economy. With its defences not earning it a 2/3 or 3/3 rating, it's therefore no surprise if Growth Street's reserve fund has been overwhelmed, but we're still awaiting details on that.

Growth Street had previously had a 3/3 rating, but a growing number of oversized loans and improvements to 4thWay's rating methodology meant we had punctually lowered its rating some time before COVID-19 started, giving 4thWay users and subscribers adequate time to reconsider Growth Street lending.

The 4thWay PLUS Ratings are calculated based on the Basel method, which is used by international banks to test how their loans might perform during recessions and property crashes.

As far as we can tell from our web analytics, no-one using 4thWay to review Growth Street started lending through a new Growth Street account after we both lowered its rating and wrote our new guidance warning about its large loans.

What does this mean for Growth Street's lenders?

Lender losses are not inevitable, but I think that under the circumstances they are likely for some lenders, particularly those who started lending more recently.

Growth Street has told 4thWay that “there is a possibility that there will be some unavoidable losses”. I think that its warning means that lenders should brace themselves. Growth Street is attempting to close down the loan book within 90 days – or at least one year – which means all the good loans will swiftly disappear – along with all the interest they are paying. That will just leave the bad debts.

For that reason, right in the middle of a pandemic is possibly not the best time for lenders to see their loans rushed to a close, but Growth Street needs to manage its loan book and winding down its business in the best way it can. Indeed, it has no choice as this is written into its rules of operating.

I also think that rapidly closing existing loans might lead to legal costs. I'm thinking that borrowers might club together to try to take on Growth Street in the courts for calling in the loans with just three months' notice. That said, Growth Street doesn't have to be aggressive in enforcing the 90-day limit. It can continue to help borrowers find another lender to move to.

That said, we've got no reason at this stage to worry that any losses will be large. Lenders who have been lending for a year will have earned around 5% already, which adds a very substantial additional barrier against an overall loss. It's equivalent to having additional reserve fund on top. So the longer you've already been lending, the better protected you are from making an overall investing loss.

Growth Street has not supplied a full data submission of its entire book of loans to us for a few months. (And, as a result, was putting itself on track to have its rating removed. We need the data to continually assess performance and calculate our ratings.) So we can't see details about how the loan book is being hit and make estimates of any future losses.

We'll find out if there are losses and the extent of them when the last borrower payments have come in. Hopefully, Growth Street will keep us informed of its updated expectations sooner than that.

How long will it take for lenders to get their money back?

Growth Street currently expects that the entire process will take up to 12 months from June 2020. Lenders will receive money back at least once a quarter. If lenders want to leave early, they can't, even after the pandemic chaos dies down. Lenders will receive the last of their money back when the last borrower has made its final payment.

Further reading:

Future Reserve Fund Shock To Upset Many P2P Lenders.

The Shortcomings Of Bad-Debt Provision Funds.

Subscribe to find out the Best P2P Lending Accounts And IFISAs During COVID-19.

Visit Growth Street.

Independent opinion: the opinions expressed are those of the author(s) and not held by 4thWay. 4thWay is not regulated by the ESMA or the FCA, and does not provide personalised advice. The material is for general information and education purposes only and not intended to incite you to lend.

All the specialists and researchers who conduct research and write articles for 4thWay are subject to 4thWay's Editorial Code of Practice. For more, please see 4thWay's terms and conditions.

Our service is free to you. We don't receive commission from the above-mentioned companies. We receive commission from some other P2P lending companies when you click through from our website and open accounts with them. This doesn't affect our editorial independence. Read How we earn money fairly with your help.

9 responses to “Growth Street Review: Reserve Fund Gone & Lending Winding Down”

  1. Chris says:

    I mostly agree with this review.
    However, I am seeing 2-4 days lag between a loan order and the actual loan being taken up.
    As this happens for every loan, every month, this lag looks like it will reduce returns by 7-15% to approx 5.5% to 6%, still not too bad, but not the advertised 6.5%.

    • Neil Faulkner says:

      Thanks for pointing this out, Chris, because it would mean that, with the money being at risk for about 11 months a year, over that yearly period you would earn, as you say, approx 6% as opposed to 6.5%.

      During the (cumulative) month of the year when the money is not on loan and earning interest it is also not at risk. So while the annual return on your money is around 6% the annualised lending return when your money is at risk remains 6.5%.

      We have been wondering since 4thWay was founded in 2014 how on the website (in our comparison tables and reports) to clearly show the impact of idle money on both decreasing returns and eliminating risks. (We’re open to suggestions on that.)

      • Neil Faulkner says:

        …In our detailed comparison tables (you get to that by going to our Compare page, checking the boxes on the right next to the P2P lending opportunities that interest you, and then clicking the “Get more details” button at the top of the page), you can open up details about “idle money” under the section “Costs and Account Management > Receiving interest and payments”. According to Growth Street, on average just 3% of investor money is idle, on average, at any one time. This would indicate that the average lag is significantly less than 2-4 days.

        However, I will ask Growth Street to clarify whether money that is sitting between a loan order and the actual loan being taken up is included in this idle money figure. If it is, and if your average lag is typical across the board, idle money should be approx 10%.

        I would also like to clarify with them that it works the way you say. It would be very strange if the overdraft facilities that roll into the next month stop paying you interest for 2-4 days every month.

  2. Chris says:

    I’ve discovered a second issue – early repayment of loans.
    Of my first batch of loans only 1 ran for the full 30 days, the average term, taking into account early re-payment is just 19 days, which when adding the lending lag means returns could be much lower still.
    Disappointed, and hoping that this is the exception, else will have to look elsewhere.

    • Neil Faulkner says:

      Thanks for taking the time to share that, Chris!

    • Neil Faulkner says:

      Hi Chris, thanks for sharing that with everyone.

      Growth Street just told me that you have been a little unlucky, because most lend orders are matched within 24 hours.

      Growth Street publishes statistics on lending speeds that you can see if you’re an existing lender on this page:

  3. Shady Dave says:

    My experience with Growth Street has been very good so far – my loan orders have all been matched on the same day or at least within 24 hours – much quicker than with Zopa for example where it has taken anything up to 12 days to be lent out on some occasions. I agree though that it would be better to be able to see what the demand from borrowers is, what the queue for investors is and where your loan offer is in that queue at any given time so that investors can make an informed decision about when is the best time to deposit money. RateSetter does this and I find that very helpful!

  4. Tommy says:

    Is the £1million approx money that Growth Street founders put into the LLP non deductable by them? Even in the event Growth Street has some financial difficulty in the future?
    Thanks

    • Neil Faulkner says:

      The money in the reserve fund, including founder contributions, is ringfenced. It cannot be used for any purpose except to cover bad debts.

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