Growth Street Review: Reserve Fund Gone & Lending Winding Down
4thWay'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 “Event”.
TheEvent 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 “”. The 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, all outstanding loans were assigned to the Growth Street Loan Loss Provision: Growth Street's 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 currentprocess 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, 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 notevents. We consider 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”, 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'shas 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.
Theare 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 additionalon 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.
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