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Update on Proplend
Here's a quick update on Proplend.
Proplend's finally gone and got itself a bad debt
Proplend* has finally had its first loan funded by individuals turn bad, out of £70 million in lending and around 90 loans over five years.
Enough time has passed that I can now take a look at how recovering the bad debt is proceeding.
This is always a good time for lenders to assess how it does in recovering bad debt – which is an extremely important part of property lending.
First, some basics of the loan
The loan was against a property in West Sussex that is leased to a major high-street bank. As usual for Proplend, its an interest-only loan, meaning that the borrower just pays interest and repays the entire loan at the end, usually by getting another mortgage somewhere else.
It was for £625,000 and the property was originally valued at £980,000. Lenders in “tranche A” are earning 7.5% interest and have their exposure capped, so that they only lose money if the property sale, after all costs, only brings in less than half of the expected value.
There are also some tranche B lenders. They will only lose any money if the proceeds come to less than 63.8% of the original valuation. Since their tranche sits fully above A, it means they will lose one-third of their money if the return is just 59% and they will lose all their money if it is under 50%.
They are earning a little bit more to compensate for this risk, at 9.36%. Any interest they earned prior to the debt turning bad will also help to offset any losses.
Often, Proplend lenders spread their money across more than one tranche, with more in tranche A than anywhere else.
How well did Proplend respond to this bad debt?
It appears that Proplend acknowledged the bad debt swiftly enough. This is absolutely critical. The loan became past time to be paid off in February 2019, but the borrower continued to pay the interest. This happens from time-to-time.
Proplend tried minimising the damage for the borrower when it acknowledged its difficulties, but ultimately Proplend decided to call it a bad debt when it reached July and was still not repaid. This is a perfectly reasonable timeframe, since the borrower was still paying interest and Proplend did not have a strong enough reason earlier on to think it would definitely turn bad.
Proplend swiftly called in the receivers to try and get the best outcome and started to receive the rent from the tenant of the building directly. Unlike other peer-to-peer lending platforms, it has not kicked the can down the road, which is an excellent sign.
Proplend claims its lenders are happy with how they are proceeding, which indicates that it is keeping lenders frequently updated – that is also one of its vital tasks in this situation.
What's happening so far
It's a common theme time and again from property peer-to-peer lending websites that something has happened that makes recovery take longer than expected – which is why lenders should never “expect” a rapid recovery.
This has been the case here. The loan had gone bad after the tenant at the building – a high-street bank, was just in the process of renewing its long-term lease. The decision was then taken to wait until the contract was signed before trying to sell the building. It will be worth a good deal more with a “blue-chip” tenant tied to it for many years to come.
What's the prognosis?
Initially, 4thWay was told by Proplend's head of credit that he was “relatively comfortable we'll get out”. That was prior to the leasing issues showing up.
Today, Proplend still seem quietly confident of a good exit. If all ends well, it will be highly reassuring to Proplend lenders.
Nevertheless, there are always risks in peer-to-peer lending, and some loans ultimately will lead to losses from some lenders. Proplend's record up to this point has highly satisfactory and so one bad loan probably shouldn't be of concern to lenders in general. Indeed, its swift response is reassuring.
Read the Proplend Review, which was updated today with new details of the most senior people on its lending team.
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