Debt Management is the process by which late payments and defaults are recovered by a lender and is a key component in realising expected returns for investors.
Once a repayment date is missed, lenders take appropriate and timely action to get the loan back on track or initiate repossession of the property, in order to maximise the amount they can recover. Specialist collections agencies are sometimes used in order to do this most effectively.
Debt management – the details
Actions can range from late payment reminders to court proceedings, however, the goal is always the same – to recover the full principle, interest and fees from the borrower. Generally, the best way to achieve this is through working with the borrower to get the loan back on track.
By working with the borrower, the lender is able to understand the reasons for late payment and help them work through solutions that will repay the loan. This avoids lengthy, expensive legal proceedings and the risks of capital losses from selling the property below market value at auction.
Sometimes borrowers are unwilling to work with the lender, and in these circumstances, more aggressive tactics are required, and the lender aims to take control over the property via court order at the earliest opportunity.
Debt management at Estateguru:
Unlike banks that find it easier to accept defaults on individual loans, provided the ratio stays low because they are primarily concerned with the overall portfolio performance, Estateguru is driven to avoid any capital losses whatsoever.
We do this because our investors are everyday people who cannot afford to accept losses that could have been avoided with more time and effort. Our strategy is therefore aimed at recovering the principal, interest and fees on every loan – and we never give up!
This often means not defaulting our borrowers when there is a chance this will result in capital losses for our investors (for example by recovering a property mid-construction and selling it below market value at auction). Instead, we aim to help them finish the project and repay the loan in full.
We have a team of dedicated staff members, who are in contact with overdue borrowers on a daily basis, and a risk team that works on the trickiest cases.
We work with partners on the ground in our locations, who have local expertise and networks that help support our collections strategies.
All of this adds up to a company that is serious about its debt management, and that’s what has resulted in industry-leading capital loss figures for our portfolio that we are very proud of.
Case Study:
Finland recovery – Going above and beyond
Loan: The default covered several stages of one project:
#0063 Bridge loan 1 stage (Finland) – Funded – 12.08.2019
#8708 Bridge loan – 2.stage (Finland) – Funded – 14.08.2019
#2496 Development loan – 3.stage (Finland) – Funded – 21.08.2019
#8006 Development loan – 4.stage (Finland) – Funded – 27.08.2019
#5930 Development loan – 5.stage (Finland) – Funded – 04.10.2019
#8082 Development loan – 6.stage (Finland) – Funded – 08.11.2019
#5930 Development loan – 7.stage (Finland) – Funded – 21.11.2019
#5930 Development loan – 8.stage (Finland) – Funded – 01.06.2020
Funding date: Final stage on 01.06.20
Default date: 12.02.21 but contracts were only officially terminated on 05.04.21 as negotiations were ongoing with one of the creditors on the project to buy the others out and complete the construction. Unfortunately, this plan fell through. This meant that the loan was in ‘late’ status for a total of 89 days.
The challenges faced
- The borrower took on too many projects at the same time and ran out of cash and equity.
- Although 90% finished, without sign-off from the local municipality the units could not be sold to end customers, as per Finnish law.
- EG negotiated with one creditor to buy out the project and finish construction, but this solution was rejected by the other creditors. EG then proceeded with enforcement.
- Finnish court could not serve notice, as the borrower was based in Sweden, and Finnish law requires it to be served and acknowledged in person.
EG attended court hearings and meetings with the responsible judge and instigated bailiffs in Sweden to pursue the customer, to maintain pressure on the court and the borrower. - By December 2021, EG had managed to persuade the borrower to send a representative to attend court and receive the notice, after over 8 months of pressure and negotiation.
- Once notice is served, Finnish law then requires a waiting period where the borrower can challenge the decision before the bailiff can be instructed.
Once the bailiff is instructed, all creditors then have a period in which they can challenge the enforcement action, and then there is a 2-week marketing period before the auction. - This meant it took 5 months from the notice being served to get to the auction, but EG was extremely active in this period.
- Whilst waiting for the auction EG team took steps to protect the collateral value by restoring the electricity connection in the buildings by paying 7300 euros for the new electricity contract, hiring security service for the property, reactivating heating systems in the property, and ordering inspection to assure that no cold or other weather damages had not accrued.
- EG also actively sought out a buyer to make sure the auction would be successful, and EG’s buyer paid 2.25m EUR at the auction in May 2022.
- One final obstacle was to gain agreement from all creditors for the sale, which EG managed to achieve in September 2022, with the loan now repaid in October
Going above and beyond for our investors
Our team exceeded the efforts seen as a normal market practice by attending court hearings to maintain pressure on the entire process, pursuing the borrower in a different locality in Sweden, finding willing buyers to take part in the auction, and taking steps to protect the collateral during the delays.
EG’s actions resulted in no capital losses on recovery and achieved a sales price higher than the market average down-value on mid-construction developments being sold at auction in Finland, where often they are sold at huge discounts.
Our work will continue
The Estateguru team works every single day to actively manage all defaults and recoveries in our loan portfolio through to a resolution that brings satisfactory results to 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 not be willing to undertake. 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 principle for our investors.
