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Home Case Studies

Case Studies in Recovery: Pärnu

In the second of our case studies looking at specific instances of our recovery process in action, we outline the steps taken in recovering a defaulted project in Pärnu, Estonia.

02-03-2023
in Case Studies, Investing
Reading Time: 4 mins read
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Parnu, SEB

In the second of our case studies looking at specific instances of our recovery process in action, we outline the steps taken in recovering a defaulted project in Pärnu, Estonia.

One of the things we pride ourselves on is the efficacy of our recovery process, which is borne out by the figures. From more than €20M of recovered defaulted loans, the average return of fully recovered loans stands at 9.16% and the average term from default to fully recovered status has been 10.6 months. (N.B. These numbers are dynamic and subject to change as we recover more loans. They are accurate at the time of publication. For completely up-to-date numbers, please check the statistics page).

As we get many questions about defaulted loans, we’d like to share some information about the nature and extent of the work we do in this regard. Hopefully, this will give you some peace of mind, should you have other defaults in your portfolio currently or in the future, and help you to trust that we have the team, the plan, and the strategy in place to protect all your investments.

Today we’ll be discussing the following, recovered loans:

#6454 Bridge loan (Estonia) – Funded – 11.07.2019 

#7138 Bridge loan- 2.stage (Estonia) – Funded – 22.04.2020

Following recovery of these loans, and stages 1 and 2 of #4534, which were recovered last week, Estonia’s overall portfolio default rate (current loans) has decreased from 5.23% to 2.68%, (as of 28.02.2023), which is the lowest default rate in all markets.

As we get many questions about defaulted loans, we’d like to share some information about the nature and extent of the work we do in this regard. Hopefully, this will give you some peace of mind, should you have other defaults in your portfolio currently or in the future, and help you to trust that we have the team, the plan, and the strategy in place to protect all your investments.

The journey from funded to defaulted to recovered

Funding date: Final stage on 22.04.2020

Default date: The loans were defaulted between 26.07.2021 and 02.08.2021.

The challenges faced

The total amount of the initially funded loans was €1 272 000 to purchase and develop a commercial building in the city centre of Pärnu, Estonia. 

In the time between 2020 – 2021, parts of the purchased building were sold off. In total, nine sale transactions took place, and €775 656 of principal, plus scheduled interest, bonuses, penalties and indemnity, were paid back to the investors.

The borrower had planned to sell the rest of the property, but the transaction was blocked by other creditors, and consequently they were unable to return the loan in accordance with the agreed deadline.

As the borrower was not able to repay the loan, our debt management team initiated the enforcement procedure. When the property was at auction for the fifth time, we were informed that the other creditors had applied for bankruptcy of the property owner. This would have meant a delay of approximately one year, and a likely smaller recovered amount, due to the high costs of bankruptcy procedure. 

Keeping our investors best interest in mind, and to ensure the fastest and largest recovery of the loan, Estateguru decided to enforce our right, as the first rank mortgage holder, to acquire the property with the investors’ claim at the auction in August 2022. This means that the mortgage holder becomes the owner of the property, our investors’ claims on the property remain in place, and all the other claims held by other creditors on the property are terminated. 

This meant that we could ensure the quick sale of the property, with the highest possible price. It also meant that Estateguru had to cover the costs related to the auction and acquisition, as required by the law. These costs amounted in total to €30 434, and as with all other similar cases, they were considered operating costs, and covered by Estateguru. 

In addition to the acquisition cost, Estateguru covered the management and servicing costs of the property in the amount of more than €8000 between August 2022 and February 2023.

As the contract held by the property’s tenant was about to expire, we took the opportunity to negotiate an increase in the rental price and extend the term. We managed to finalise the negotiations and sign the new contract with the tenant in December 2022. This meant that the property would be more attractive for potential buyers.

From December 2022 to February 2023, we held negotiations with several potential buyers, before reaching a successful deal with one of them. 

Going above and beyond for our investors

By acquiring the property rights, and covering the associated legal and property management costs, our team has extended themselves beyond what would be considered normal market practice in cases such as this one. We held months of negotiations with the tenant to ensure more favourable terms for our investors.

Our risk team held negotiations with potential buyers to sell the property and our risk and legal teams prepared the sale transaction to ensure the fastest and highest recovery for the investors. Ultimately, our actions resulted in no capital losses on recovery and achieved the highest possible sales prices in a very unfavourable economic environment.

Our work will continue

The Estateguru team works extremely hard to actively manage all of the defaults and recoveries in our loan portfolio through to a resolution that satisfies our investors. Our aim is to avoid capital losses at all costs, even when this requires the kind of extensive involvement that many other lenders would shy away from. Rather than write off losses, which would be the easy and simple way out, we remain committed to doing everything it takes to recover, at a minimum, the full principal for our investors. 

We are confident that more recoveries are coming in the near future, and we approach every default with the same dedication, no matter the size of the loan or the obstacles faced during the process. We hope this blog has proved useful in providing an insight into the work we do at Estateguru.

Related Posts

Estateguru’s Annual Review for 2022 and outlook for 2023

What is refinancing and why does Estateguru refinance loans?

Watch: Baltic Real Estate Market Overview

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