Investors should be aware that there are risks associated with investing in Secured Notes. The key risk factors include those risks that arise from the underlying mortgage lending activities of the Company.
Financial returns are achieved by the Company through the recognition, assessment, monitoring and control of risk factors. It is through the management of this risk that an interest spread can be achieved to provide an acceptable return for the risk profile of the funding raising and lending activities established.
Assessment of credit risk is based on a range of factors broadly categorised as follows:
- ‘Character’ of the borrower demonstrated through investigation of their history of meeting past commitments and reference checking, stability of income, stability of residency, management experience and demonstrated ability to adjust to changes across economic and industry sector business cycles.
- ‘Cashflow’ of the borrower and analysis of historical financial statements, relevant budget forecasts and cash flow projections indicating the capacity to meet all obligations; these include the proposed borrowing and any existing borrowing commitments, the margin for adverse movements in income or expenses, the relative volatility in their revenue streams and demand, supply and competitive market forces in their chosen segments.
- ‘Collateral’ of the borrower in respect to the quality and quantity of the specific real property mortgaged in support of the loan facility. This also includes the quality and quantity of other assets and insurances that could be realised or financed if required to meet commitments as an alternate source of repayment for the lender.
Loan defaults occur when a borrower does not meet a fundamental obligation under the loan arrangement. This occurs through failure to meet an interest payment obligation or by failing to discharge the loan on or before its due date. Credit losses ultimately can be incurred when the proceeds available from the sale of the property mortgaged to the Company as security for a loan, are less than the amount owed under the mortgage.
The nature of our target borrowers, together with the shorter loan terms may result in loan default rates higher than those of traditional lenders. It is important that Investors appreciate that loan defaults are an ordinary part of the Company’s business.
While loan default rates may be higher than those of traditional lenders, the Company has developed policies and procedures focused on driving early action to address arrears and any material and adverse change in a borrower’s credit profile. This has been done with a view to avoiding and, if necessary, minimising credit losses. However no guarantee can be given that this will always be the case.
Where a loan is for construction funding for a development, risk may be greater due to factors outside the control of the Company. The major risks associated with development loans are the potential for delays in completion of the development, cost over-runs and the uncertainty of property market conditions prevailing at the time of completion of the development.
In addition to the loan default risk and credit loss risk, the Company may suffer a loss if, among other things:
- the Company is unable to invest in suitable mortgages within a reasonable time after the issue of Secured Notes;
- mortgage interest rates fall after Secured Notes have been issued reducing potential interest earnings spread;
- the valuations relied on when making lending decisions do not accurately reflect the value of the property at the time it is sold; or
- other factors beyond the control of the Company occur, such as adverse economic conditions or force majeure events.
During the term of a loan facility the total debt outstanding may accumulate and exceed the loan-to-valuation ratio limits prescribed for the loan or the value of the mortgaged property due to a combination of factors; including a decline in the value of the mortgaged property, accrual of unpaid interest and other incurred costs.