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Insight

Platform lenders: Prospering in uncertain times

Toby Price
17/04/2020
For many years, platform and other alternative non-bank lenders have provided a vital funding option for (particularly SME) borrowers, by operating outside of the credit and operational constraints to which many bank funders are subject.

It is crucial that the UK's pool of established platform lenders successfully navigate current challenges and are able to play their role as an excellent source of liquidity for challenged borrowers at this difficult time.

 

Author's note: This article is adapted from a presentation given as part of Fieldfisher's recent webinar on the challenges presented by COVID-19 for our financial services clients.

For the purposes of this article, I use the term 'platform lenders' to refer to lenders that (broadly) share the following characteristics:
  • non-bank;
  • leveraged with one or more funding lines;
  • reliance on technology (being the platform); and
  • lending principally into the SME market
The importance of the platform lender community can be illustrated in the continuing difficulty with the deployment of CBILS, which it appears (to a greater degree) is being driven by the lack of scheme-accredited lenders who would, in a non-COVID impaired world, lend to those borrowers in the greatest need in the first place.

This is one of the core eligibility criteria for CBILS borrower applicants i.e. that they need to demonstrate a borrowing proposal, which the lender would consider viable, were it not for the current pandemic and is exactly where platform lenders could play a pivotal role. They should have the appetite to lend (and to lend quickly through some of the excellent platforms that are available) and present further vital conduits to facilitate scheme access and uptake.

It is to be hoped that approval of platform lender accreditation applications will accelerate and that the implementation gap for the otherwise highly laudable CBILS scheme can be narrowed. Like any other business, platform lenders are facing diverse challenges to their viability. Origination has become more difficult, both from an underwriting and execution perspective, with some long-established loan administration principles needing to be dragged into the 21st Century and our new 'remote' existence.  In addition, and the focus of this article, platform lenders are facing some very specific funding challenges.

Unique to many platform lenders in considering next steps to address the difficulties presented by COVID-19 for their loan book, is the need to have the perspective of both a borrower, in relation to the platforms' funding lines, and a lender in respect of the underlying loan portfolio.

Underlying loan portfolio borrowers will have urgent needs for support and effective loan portfolio management is going to be key to weathering the COVID-19 storm. However, platform lenders cannot form responses in isolation - they must take into account the parameters for action and covenant compliance requirements dictated under platform funding lines, if platform lenders are not to compound their difficulties.
 

So, how should platform lenders respond?

The first task is to undertake an early review of funding lines, at least alongside scenario modelling and creation of response plans for loan portfolio borrowers in distress. This ensures full understanding of covenant packages, and that those response plans can actually be deployed.

Platforms must understand what impact action to manage the underlying loan portfolio might have on the platform as borrower under its funding lines, based on the simple premise that it is these loan receivables which dictate the platforms' ability to raise and maintain financing and; in turn, to continue to play an active role in the market.

Key pressure points are likely to be the potential impact on eligibility of the underlying loan receivable for financing, with secondary considerations arising around concentration limits where the terms of loan receivables are altered such that they transfer between concentration baskets.

Both of these points are likely to adversely affect the platforms' borrowing base metrics (that is, the pool of loan receivables against which a funder will advance funding), in turn leading to pressure on financial covenants and potential funding line prepayment obligations.

A good example of the difficulties presented for funding line covenant compliance can perhaps be seen in the context of granting repayment holidays. Doing this may make good sense from both a relationship and loan portfolio management perspective, but, can it be done? In many cases, because of loan eligibility criteria hurdles, the answer will be "not without funder consent".

If a platforms' desired management strategy offends funding covenants we would suggest that it is important to think creatively - can alternative proposals (which would be permitted within the terms of the funding line providers covenant package) create the same economic effect?

For example, in the context of a repayment holiday, could a small loan increase, including a payment-in-kind interest loan retained by the platform, to provide the breathing space required by portfolio borrowers? Are term extensions, with a flattening of amortisation obligations, a viable alternative? 

One point seems clear: to do nothing will invite an inevitable increase in payment defaults, which will ultimately present a greater threat to the viability of platform lenders. In that respect, whilst many platform lenders' March figures have shown limited negative impact and, anecdotally, we are told that April is not expected to present a 'COVID-cliff edge', challenges will manifest themselves in time.

With that in mind, it is time to get on the front foot – difficulties are there to be managed and the sector can and will emerge positively, if they are managed.

 

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