May 24, 2019 was the point of no return for the UK peer-to-peer lending firm as it became subject to investigation by financial watchdogs. Following the court decision, Lendy has gone into administration and is now under tight scrutiny from the Financial Conduct Authority, as well as the representatives of RSM.
Now that the company’s operations are under investigation, it remains to be seen whether the investors will get their money back anytime soon and, more importantly, in what proportion. At this point, the firm’s assets are managed by the appointed administration team, while the official website serves as a source of updates on investigation for the investors and creditors.
How did all this happen?
The platform first came to the regulator’s attention earlier this year because of the investors’ concerns over the risk of borrower default. It was reported that the borrowers were behind with their repayments for hundreds of days, meaning that the company was inefficient at fulfilling its business commitments. Having analyzed Lendy’s multimillion-pound loan book, the researchers revealed that around 50% of the loans defaulted. If expressed in money terms, it stands for £90+ million. This was a huge warning sign of an imminent collapse.
The opinions as to what has caused the company’s insolvency differ. Some believe that this is because of a non-viable business model and inadequate financial control, while others suggest that the failure of Lendy is a result of insufficient liquidity, and thus, the lack of cash flow. Since the administration is still at its early stages, there’s little clarity on the case. So, we have also delved into this high-profile scandal and come to the following conclusions based on the research we have carried out.
What are our observations?
During our research first and foremost we learnt, the manner that Lendy communicated with investors was based on the overly sales tactic by showing no real understanding for risk or prudence. The loans on their platform were often overly sales driven and financial metrics were misleading. Key statistics such as LTV were actually loan value against GDV which means nothing in the event of default.
What does it mean?
As we know LTV is a loan-to-value index calculated by dividing the amount of the loan by the current value of the property.
Let’s say, a developer is borrowing £100,000 and the property is valued at £200,000. It means that LTV will be 50%, which could be considerably safe as in the case of the default the investor’s capital could be recovered by liquidating the property.
Whereas, the loan value against GDV, Gross Development Value, indicates what the expected sales price could be. Therefore, if a developer is borrowing £100,000 and predicts that he could sell the property for £300,000, then the loan value against GDV would be 33%. And if this is presented as LTV it can be considered as a no-brainer investment.
However, if their investment opportunities indicated that LTVs were 50-65%, but they were actually the loan value against GDVs, you could only imagine how unsafe these investments were and how low the collateral was actually valued.
Lastly, within the UK it is known by lenders, brokers and experienced investors that they were accepting everything with very poor due diligence. And another point, but this is what was most striking. They simply conveyed the impression that they had no understanding for risk and it all could only go up. This is a very dangerous position to have in financial markets. Typical boom and bust behaviour essentially. The level of defaults was so high that they lost a lot of investors, and they would not be able to fund their deals anymore. As a result, this would lead their operational expenses higher than their earnings.
What comes next?
This situation with Lendy must act as a cautionary tale for anyone jumping straight away into the investment world. It’s really unfortunate that so many investors didn’t diversify and invested most of their savings into the platform. In our previous articles, we have already explained why even LTV can be misleading and why investors should take a better look beyond financial metrics before making a decision to invest. At EVOEstate, we carry out extensive due diligence not only on the deals we source, but also on the platforms. We help anyone invest alongside us and thus, prevent cases like the one mentioned above. We really hope that regulators will enforce a stronger control on the collateral valuation and decrease the likelihood of such events happening in the future again.