Lendy Enters Administration – My Thoughts
** Lendy review updated July 15th, 2019 **
On May 24th, 2019, Lendy’s administration was announced. I knew Lendy was experiencing challenges handling all their defaulted loans so I wasn’t too shocked by this news. I was, however, disappointed. I never like to see businesses fail and it’s an unfortunate incident that highlights the importance of investment diversification.
Administrators: RSM Restructuring Advisory LLP
Contact: Damian Webb / Phillip Sykes
Tel: 020 3858 9653
What Happened To Lendy??
When I began investing through Lendy in 2015, things initially went well. But as the years passed and the loan book matured, the problems and default issues became apparent.
Investing in property development and bridging loans can be extremely high risk, but I believe some of Lendy’s lending practices caused its downfall through high fee generation, and poor quality loan offerings. Lendy’s loans were given to the borrower at high-interest rates with front end fees.
Property development loans present three major issues to a peer to peer lending company.
Firstly, development building has many factors that can delay development schedules and increase costs.
Secondly, in reference to property developing, there’s no exact science to valuing something that doesn’t yet exist. Once development is completed, the value may have fallen or risen. It’s especially hard to value land.
Thirdly, if a development loan falls into arrears midway, going through the legal administration process can be completed. Borrowers’ can cause issues, delaying the court process which can take months or years, Once the lender takes over the property, they must either take over the development or find a buyer.
Despite a development loan being asset secured, defaults are a major pain and costly to recover.
Before administration, Lendy was put under restrictions by the Financial Conduct Authority on its regulated activities. Lendy could not “in any way dispose of, deal with or diminish the value of any of its assets and must not in any way release client money without in either case the prior written consent of the authority.” This was the sign of Lendy’s unraveling.
I still think peer to peer lending has a place in one’s investment portfolio as long as sensible diversification is used. This means you should invest through many different companies and loans and never invest more than you can afford to lose.
As far as Lendy’s administrators recovering investor money, I expect an update within two months from the administration date of May 24th, 2019. I’m somewhat hopeful but I expect it will take a long time to see the full outcome and I do expect some capital losses.
Lendy: My experiences …
I have been investing through Lendy since June 2015. I knew Lendy offered higher risk loans but I was prepared to accept the extra risk for the higher return possibilities. I invested in various loans but as time passed the defaults mounted, my return rate dropped significantly.
Let’s Address The Defaults
If you are Lendy investor, you will know about the many defaulted loans. Most lenders’ are feeling disgruntled and rightfully so.
Property defaults are always concerning for peer to peer lenders’ as recovery can be complicated, expensive and lengthy and can sometimes result in a loss of capital and interest. Was I concerned about the defaults? Yes. I’ve been watching the Lendy situation for a long time and I was told by Lendy insiders these defaults were being appropriately handled.
After one of the largest loans on Lendy ran into difficulties, my faith in Lendy began to fade. I realised that Lendy had offered some low-quality loans in an effort to maintain its advertised 12% per year return rates to continue to maintain its customer base.
I have read the many negative online comments written by some of Lendy’s lenders. Some lenders were unhappy with certain loan offerings and the RICS valuations provided while others had miscalculated the risk and built up unreasonable expectations of peer to peer property bridging loans as a whole. The golden early days of 12% annual returns have passed as loan books mature and the true risks of high-interest bridging financing come to light.
When I began investing property backed bridging loans, I knew the risk. High-interest borrowers usually can’t qualify for standard bank loans so peer to peer lending is a good alternative for them. I always remember that higher risk borrowers are higher risk for a reason. Usually, it is either they have no credible development history or have a black market on their previous credit history.
As a peer to peer lender, I have to take personal responsibility where I place my money and I always have a choice where to invest.
I am disappointed that Lendy underwrote so many nonperforming loans, many of Lendy’s loans I purchased were early in my peer to peer lending experience and I was wrong about some of the loans I invested in. I expected Lendy to do its due diligence in order to protect my interests but I now know it’s ultimately my responsibility to trust but verify all information including RICS valuations.
I was also disappointed to learn that Lendy used their Provision Fund as security to obtain working capital. Basically, this means Lendy borrowed money against their Provision Fund. Provision Funds, while discretionary, are usually free-standing funds used to cover late payments or defaulted interest. I found the practice of borrowing against this asset troubling.
Lendy became a victim of their own accelerated growth. Lendy made a multi-million-pound profit during a single year of trading, highly unusual for a startup peer to peer company. I believe this profit was achieved through high fees paid by high-risk borrowers.
Before administration, many of Lendy’s executive staff and board members have left the company including COO’s Robert Kelly and David Gammon, Communications Office Paul Riddell and CFO Paul Thompson.
Successful Repayments And Default Recoveries
Loan DFL008: 100% of the £9,857,594 loan amount was repaid on December 13th, 2018 after the loan was two months past due
DFL027: 100% of the £3,448,289 loan was repaid on December 6th, 2018 after the loan was two months past due.
PBL120: 100% of the £651,886 loan was repaid on May 24th, 2018 after the loan became late in 2017.
Less Successful Default And Repayment Recoveries
Loan PBL001: This £5.98m loan became past due in July 2017 and receivers were appointed in September 2017. As of December 2018, the loan remains unrecovered.
DFL004: This £14.3m defaulted loan ran into issues in mid-2018. The loan remains unrecovered but is now in administration.
PBL017: This £7.45m loan ran into trouble in September 2017 and was appointed a receiver. As of December 2018, the loan remains unrecovered.
Lendy has also recently taken control of one of its larger loan projects (£10m loan) after it was deemed that the borrower couldn’t provide a viable solution to complete the project in the best interest of lenders.
In case you missed it, I interviewed CEO Liam Brooke and Paul Riddell. You can watch the interview here.
What Was Lendy?
Lendy was a peer to peer lending company that offers secured property bridging and development loans. A bridging loan is a short-term loan given to a property developer while they attempt to refinance while development loans are longer given to complete work whilst refinancing is sought.
Bridging and development loans are common in the real estate investment world. All Lendy loans were secured by the property or land being loaned against, In the event of a loan default, Lendy attempted to sell the security in order to cover lenders capital and interest.
When Did Lendy Launch?
Were They Regulated?
Yes, by the Financial Conduct Authority #622666 under full permissions. Investments made through Lendy are not covered under the FSCS (Financial Services Compensation Scheme). FCA regulation is nothing like the FSCS, which covers consumers when they deposit money in banks. The FCA reports to the UK government and has the ability to pursue criminal action against companies which violate its standards and codes of conduct.
Lendy was placed under an FCA activity restriction. This restriction states Lendy wasn’t allowed to dispose of, deal with or dimish the value of any of its assets, or release any client money without the written consent of the FCA.
What Investment Products Did Lendy Offer?
Lendy offered one peer to peer lending product. Lending on bridging and development loans. Lendy Wealth was a sister company that I did not invest through.
How Much Interest Did Lendy Pay Lenders?
Most loans paid 1% per month but return rates range from 9-12% per year when loans were current. Lendy also paid some bonuses on loans that are past their term date or in default.
How Long Were The Loans?
3-12 months but loans were often extended.
What Security Did Lendy Loan Against?
All loans were secured against property or land. Lendy used to loan against boats and other items but they veered away from these types of loans in favor of property developments. The loan-to-value ratios on the properties and land ranged from 11-70%.
Wasn’t There A Provision Fund?
Yes. The discretionary fund was advertised to hold a balance equal to 2% of the entire Lendy loan book total. There were rumors that Lendy used this Fund as collateral to secure extra capital.
The provision fund was held by Lendy Provision Reserve Ltd which also entered administration. The status of the fund is unknown as legal actions are taken to secure monies held in this account.
What Happens Now That Lendy Has Gone Out of Business?
All of Lendy’s affairs have been taken over by the administrators, RSM Restructuring Advisory LLP, who will be tasked with winding down Lendy’s loan book and overseeing all of the defaulted loans. The administrator will attempt to recover investor capital by taking ownership of outstanding properties and liquidating where possible and consolidating all financial accounts.
It’s still very early days but the wind-up process and I don’t expect to see any results for many months.
On a positive note, unlike Collateral, Lendy is FCA regulated so I hope the FCA will help to approve a sensible wind-up plan that will be handled appropriately.
As An Investor, Should I Expect To Receive My Money Back?
Many factors will dictate the recovery results and at this stage, that’s an impossible question to answer because only the administrators know the financial health of Lendy.
The administration process will include consolidation of Lendy’s financial accounts, communication with loan borrowers, legal action to recover defaulted loans, collection of current loan payments and more.
I personally expect to take a capital loss but to what extent, I’m unsure.
So Does This Mean All Property Development Lending Is Bad?
Property developers need financing for projects and peer to peer lending solves this need. As lenders’, we have to find the reputable p2p companies who care about their investors and borrowers. We need companies that will source sensible loans and have a network of loan brokers who bring deals. We need companies who have underwriting experience and who know how to separate the good loans from the bad in order to protect investors’ interests. We need companies who charge sensible fees and operate in transparency.
If you want high returns as an investor, you will need to take risk. This risk will invariably come with defaults so if you invest in property development loans, you must be comfortable with the risk.
Lendy used to be an extremely popular higher risk investment for anyone looking to lend money within the property bridging sector. As Lendy’s loan book matured, it was apparent that many of the underwritten loans were troublesome. Property development financing is a competitive field and I believe Lendy underwrite loans they should have passed on in order to generate high fees.
Lendy was under pressure to keep their loan pipeline full. Investor demand was high and the more loans Lendy filled, the more fees they generated.
12%+ interest paying bridging and development loans are prone to defaults so don’t be surprised by this, especially during unstable economic times.
Lendy’s failure is another wake-up call for all investors to properly diversify and not to exclusively chase high returns.
Despite Lendy’s failure, I plan to continue investing through peer to peer and expect some companies to thrive and others to fail.
A reader asked me if I were a new investor, would I continue to invest in property bridging and development loans? My answer was to limit property development lending through reputable companies who lend to experienced borrowers, tread carefully and diversify across many loans at varying risk levels.
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** This unbiased Lendy review is for information purposes only and should not be considered investment advice. Opinions expressed in this Lendy review are based upon my investing experiences. All information was deemed to be correct at the time of writing. Peer to peer lending contains risks so never invest more than you can afford to lose. **