London Capital and Finance

Jelli

I saved the website in 2016 and don't think it mentioned how many borrowers/loans were done then. Also saved 3 years worth of memorandums but not well enough to read any of them.

I don't remember the loan number being mentioned anywhere ever, but maybe didn't look hard enough.

Post 638, page 32.

masonic

AKRev01 wrote: »

Thank you for this - sounds like you have a good understanding of the process. What would constitute loans being determined improper?

The term "improper" was made regarding the administrators taking legal action against any parties who cause bondholders a loss through "improper actions"

This likely alludes to Section 172(3) of the Companies Act 2006, which obligates company directors to act in the best interests of creditors of the company.

Company directors are not normally held personally liable when a company becomes insolvent and creditors lose money. However, if it can be established in court that the directors did not act in the best interests of creditors while running the company, they can be held personally liable and their personal assets can be used to satisfy creditor claims.

Examples where this would likely happen are if the directors falsified accounts, used company money for personal purposes or borrowed excessively and unaffordably.

The LCF directors may face such actions and such actions may be successful. It would be surprising if the directors have not anticipated this and have been disposing of their personal assets.

bail-in

masonic wrote: »

The administrators have stated that Surge Financial acted as an underwriter for the loans. In other words, Surge Financial funded the loan to the borrower using its own capital, giving 75% of the capital to the companies and charging 25% in fees. So the company takes out a loan for say £1m, Surge gives it £750k after fees, but it owes Surge £1m plus interest.

Then LCF sells bonds to investors worth £1m. It uses the money to buy the £1m debt from Surge piece by piece until all of the debt is owned by LCF, and LCF owes an equal amount to bondholders.

So Surge has not siphoned off investors' money. If a bondholder lends LCF £5,000, then LCF has used that money to buy £5,000 of debt from Surge and that £5,000 of debt corresponds to £5,000 of debt of an underlying borrower. These would not constitute the necessary improper actions alluded to in the quoted passage above.

It's worth remembering that bondholders have no regulatory protection, but borrowers do have regulatory protection. If the loans are found to be improper then this could be bad for bondholders. In the worst case, it could be determined that the loans are invalid and borrowers would only have to repay the 75% capital they actually received (including any repayments they have already made), with the other 25% plus interest being waived. I'm not saying this is likely, but it is possible. It's good that borrowers are currently cooperating with the administrators and appear not to be challenging their loan contracts.

I cannot find this your definiton, meaning of a loan underwriter which in Google appears to be a regular job with an annual salary analysing a borrower's ability to repay, checkling asets etc. This is how I used the term in the LCF Review and this is how the former head of the FSA, Lord thingy, defines it in relation to p2p borrowers. Of course banks underwrite mortgages, paying say 80% and the buyer paying 20%, but I do not understand how this Surge underwriting model of funding a commercial loan works. Can you point me to an online explanation of this process of paying the commercial loan by a loan underwriter.

masonic

bail-in wrote: »

I cannot find this your definiton, meaning of a loan underwriter which in Google appears to be a regular job with an annual salary analysing a borrower's ability to repay, checkling asets etc. This is how I used the term in the LCF Review and this is how the former head of the FSA, Lord thingy, defines it in relation to p2p borrowers. Of course banks underwrite mortgages, paying say 80% and the buyer paying 20%, but I do not understand how this Surge underwriting model of funding a commercial loan works. Can you point me to an online explanation of this process of paying the commercial loan by a loan underwriter.

https://www.investopedia.com/terms/u/underwriter.asp
"Debt Security Underwriters
Underwriters purchase debt securities, such as government bonds, corporate bonds, municipal bonds or preferred stock, from the issuing body (usually a company or government agency) in order to resell them for a profit. This profit is known as the "underwriting spread." An underwriter may resell debt securities either directly to the marketplace or to dealers, who will sell them to other buyers. When the issuance of a debt security requires more than one underwriter, the resulting group of underwriters is known as an underwriter syndicate."

Edit: I should add that this is the only form of "underwriting" that isn't necessarily a regulated activity, and Surge Financial is not an authorised firm, so there can be no confusion as to what the term refers when used in connection with Surge.

Perhaps

masonic wrote: »

Indeed it is, so a very quick summary follows...

• 1 year loans were 44% APR, 2 year loans were 29% APR ... 5 year loans were 19% APR

For the record it doesn't say that, it says that 44% etc would have been the necessary APR to deliver on their promises. We don't know what the actual contractual APRs are.

We also don't know what the contract with Surge was, and whether they were expecting a time when they would have paid less in fees - in other words whether the proposition was always going to be egregiously awful, or whether the numbers might have added up at some future point. (given the risks of lending, I'm doubtful it would have ever added up).

One minor thing, the voiding of the ISA wrapper could be a tiny upside - losses people make on LCF would perhaps then be able to offset on investors' taxable gains made on other investments. However, given the demographic of LCF borrowers, it sounds like this will help roughly no-one.

bail-in

Still confused on this Surge underwriting of the loan thingy and LCF paying Surge re underwriting. LCF as issuer would have control of bondholder monies. LCF is the commercial lender not Surge. The loan contracts are with LCF not Surge. Interest would be paid to LCF as the commercial lender by borrowers not to Surge. Charges on borrower assets are registered by LCF's solicitors not by Surge. Why would LCF need underwriting of the corporate loans by Surge when they already have the capital from the bondholders to lend out and LCF is supposedly an active commercial wholesale lender? LCF account records would show details of each borrower, not Surge account records. I understood LCF was contracting Surge as a call centre agent to administer the bond. LCF Annual Accounts showed such outgong amounts being paid, to Surge supposedly, and supposedly from LCF profits from loan interest not from bondholder capital which is only to be used for the SME commercial loans.

masonic

Perhaps wrote: »

For the record it doesn't say that, it says that 44% etc would have been the necessary APR to deliver on their promises. We don't know what the actual contractual APRs are.

https://www.investopedia.com/articles/investing/121713/interest-rates-apr-apy-and-ear.asp
"What Is APR?
Annual percentage rate (APR) is a measure that attempts to calculate what percentage of the principal you’ll pay per period (in this case a year), taking every charge from monthly payments over the course of the loan, upfront fees, etc. into account."

The APR is what the administrators have stated - viz the amount the borrowers would have to repay, taking into account all of the charges over the course of the loan.

bail-in wrote: »

Still confused on this Surge underwriting of the loan thingy and LCF paying Surge re underwriting. LCF as issuer would have control of bondholder monies. LCF is the commercial lender not Surge. The loan contracts are with LCF not Surge. Interest would be paid to LCF as the commercial lender by borrowers not to Surge. Charges on borrower assets are registered by LCF's solicitors not by Surge. Why would LCF need underwriting of the corporate loans by Surge when they already have the capital from the bondholders to lend out and LCF is supposedly an active commercial wholesale lender? LCF account records would show details of each borrower, not Surge account records. I understood LCF was contracting Surge as a call centre agent to administer the bond. LCF Annual Accounts showed such outgong amounts being paid, to Surge supposedly, and supposedly from LCF profits from loan interest not from bondholder capital which is only to be used for the SME commercial loans.

It is the administrators (who have seen the company accounts) who have stated that Surge was not just involved in marketing the bonds, but also acted as an underwriter.

LCF issued the loans as the agent, as it has FCA authorisation to do. Surge acted as the debt security underwriter, putting up the initial capital to allow the loan to be drawn down before any punters were involved, in exchange for a significant fee. Surge was providing underwriting in the sense it was assuming LCF's risk for a fee - otherwise LCF would have to put up its own capital to initially fund the B2B loans, or go through the laborious task of raising all of the money required in advance of writing the loans, which could have taken several months. One way to achieve this would be to make Surge initially a party to the loan contract with the borrower, with LCF as agent. Alternatively, LCF could issue unregulated mini bonds to Surge for the full value of the loan.

Surge and LCF then marketed bonds from LCF to investors. If Surge was initially a party to the B2B loan, then this would have been done by novation, and LCF would have become a party to the loan contract, replacing Surge, using the money received from bondholders to buy out Surge. Otherwise, the same process was happening to the mini bonds, with bondholders replacing Surge.

The three activities (issuing the commercial loans, the underwriting, and funding bonds) are separate. In the first LCF was carrying out a regulated activity, in the second Surge was putting up the initial capital. In the third, LCF and Surge were working together to market the unregulated bonds to investors.

Supercalafragalistic

So,as a newly formed company, where did Surge get this capital from to “underwrite” in the first place? Its books show slim balances to begin with, and the income it made came from lcf , blackmore etc.?

masonic

Supercalafragalistic wrote: »

So,as a newly formed company, where did Surge get this capital from to “underwrite” in the first place? Its books show slim balances to begin with, and the income it made came from lcf , blackmore etc.?

The last accounts from 2017, which are only a snapshot, showed £4.2m cash at the bank and £1.4m lent (perhaps in active use to underwrite LCF loans). With a cash facility of over £5m, it was a lot more cash rich than LCF and could certainly provide LCF with useful liquidity.

It looks as though Surge started off quite small, but with fees of 25%+ and a holding period likely to be in weeks after which it could reinvest for another 25% bite of the cherry, it could have earned enough money to grow in line with LCF's lending business which itself grew 100-fold over 2 years. It wouldn't surprise me if Surge has an order of magnitude more cash now than it did at the time of its last published accounts, although a substantial amount has clearly been creamed off by the directors to fund their lavish lifestyles.

Edit: In fact, looking through its accounts, Surge Financial grew its cash reserves from £400k in 2016, to £2m at the start of 2017, to £5.6m in September 2017. Nice work if you can get it.

Supercalafragalistic

This is the bit i dont understand. They started off small , but had fees of 25 per cent. So if they were lending all these millions to lc and f, where did surge get the money from? If they started with 400k , are we saying they lent 300 to lc and f, kept 100 back, then l c and f loaned oit the 300k... then surge started flogging the bonds .....then kept lending the money from the bonds? So were the public actually giving money to surge who then lent to l c and f? Confused,com !