London Capital and Finance

Malthusian

Supercalafragalistic wrote: »

Malthusian, this seems to be a different view to those given on here earlier and v interesting.I dont suppose you happen to be an ifa or something akin do you?

I haven't disclosed my background here because I prefer to be judged on facts rather than authority.

Trusting authority over facts is what got LCF investors into this mess in the first place.

Up until this post I have sensed that the view towards the investors has been slightly on the ‘greedy, !!!!less twits’ side of the fence, and have almost felt as if it were there own fault.

Only to the extent that it's their fault for being less clever than the people that took their money - in the same way as it's your fault if you get mugged for being less quick and strong than your attacker. The brain is just another muscle.

The word "guaranteed" was never used anywhere in LCF's literature in the sense that people are referring to. "Full asset backed security" was the kind of wording they preferred. Of course I can't speak for what investors were told over the phone.

Malthusian

Perhaps wrote: »

In this case there doesn't seem to have been much VC money, but I wouldn't be surprised if the loan contracts were for rates lower than breakeven, given the large payment to Surge. Maybe they were hoping to make it up in volume later on.

It wouldn't surprise me.

jimjames

Perhaps wrote: »

No, the administrators say this:
The 44% APR figure is the administrators' calculation of what breakeven for the loan would be. It is not the contractual rate of the loan. This is important because the investor is only will only get the contractual rate, not this 44%, even if the borrower doesn't default.

If you look at some of the borrowings then the rates are tiny in comparison to the required amounts to break even.

https://damn-lies-and-statistics.blogspot.com/2019/02/london-capital-finance-loan-costs.html

The largest borrower presumably is London Oil & Gas as they now have a director appointed by S&W on their board. According to their accounts the loan from LCF was at 1.75% above the rate LCF borrowed at so 8% plus 1.75%.

That is nowhere near the 44% required which means that the other loans have to return even more than 44% to be able to recover the required capital to repay. What sort of quality of business has to borrow at rates over 44%? It's likely to be in an incredibly precarious position so hardly a great security for a loan.

Edit: On the link posted below it suggests that the remainder of the £122m lent to LOG may have been invested in solar energy projects in emerging markets. The risks get higher and higher

jimjames

Also a new piece in the Standard today, their reporter doing a good job picking up the strands of this

https://www.standard.co.uk/business/jim-armitage-the-stench-grows-stronger-around-bust-lender-london-capital-finance-a4075856.html

ffacoffipawb

Another horrible trap for the unwary ...

https://www.improvemyisa.info

Supercalafragalistic

Malthusian wrote: »

I haven't disclosed my background here because I prefer to be judged on facts rather than authority.

Trusting authority over facts is what got LCF investors into this mess in the first place.

Only to the extent that it's their fault for being less clever than the people that took their money - in the same way as it's your fault if you get mugged for being less quick and strong than your attacker. The brain is just another muscle.

The word "guaranteed" was never used anywhere in LCF's literature in the sense that people are referring to. "Full asset backed security" was the kind of wording they preferred. Of course I can't speak for what investors were told over the phone.

Thanks Malthusian.....well whatever your role in life, i appreciate your clarity and empathy.

masonic

Perhaps wrote: »

No, the administrators say this:

"Accordingly, in order for LCF to be able to repay the Bondholders, the Borrowers would need to make very substantial returns on the monies loaned from LCF to them. For instance, in the case of a: 1 year bond, we estimate that the associated Borrowers would need to repay LCF c.144% of the amount loaned to them, and thus requiring them to make a c.44% return in one year on the monies loaned to them."


The 44% APR figure is the administrators' calculation of what breakeven for the loan would be. It is not the contractual rate of the loan. This is important because the investor is only will only get the contractual rate, not this 44%, even if the borrower doesn't default.

My assumption is that the APR of the one year loan consists of the ~25% up front fee and ~19% interest, of which Surge Financial gets ~25%, LCF gets ~11% and Bondholders get ~8% by way of their LCF bonds. This is consistent with what LCF wrote about the interest rate charged to borrowers on their website (12-20%). So the contractual interest rate of the loan is 19% EAR, which, when combined with the up front fee of 25% make an overall cost of borrowing of 44% APR.
(edit: and the worked example 2 posts down using the figures for the 3 year loan suggest that the relationship between APR and EAR holds)

It's important to clarify that the investor/bondholder is not entitled to any more than the capital + 8% owed to them by LCF. They are not entitled to all of the income received from borrowers if this is in excess of their contract with LCF. They have no contract with the borrower. They will get their capital + 8% if LCF has sufficient assets to pay it, otherwise they are entitled to dip into whatever income stream the borrowers generate after the administrator's fees, or if a borrower defaults on their debt, whatever can be recovered from the loan security after the borrower's administrator's fees and LCF's administrator's fees. But never more than their capital and 8% interest and probably a lot less.

You could be right that the loans made to borrowers do not oblige them to repay this much and actually their interest rate is lower than 19%, even as low as 0%. We don't know that borrowers are obliged to repay 100% of the face value of the loan, or just the 75% they received. Anything is possible I suppose. Nobody has seen a loan contract from the lending business.

But if LCF lent out Bondholders money for an insufficient interest rate to generate the returns they would need to meet their obligations to Bondholders, then the directors have left an open goal for a personal liability claim from the administrators. This would be a textbook illegal Ponzi scheme that should see people imprisoned. Somehow I think the directors are cleverer than that, but maybe I'm wrong.

jimjames

masonic wrote: »

But if LCF lent out Bondholders money for an insufficient interest rate to generate the returns they would need to meet their obligations to Bondholders, then the directors have left an open goal for a personal liability claim from the administrators. This would be a textbook illegal Ponzi scheme that should see people imprisoned. Somehow I think the directors are cleverer than that, but maybe I'm wrong.

From the previous link I posted the rates for the loans from LCF to London Oil & gas are 9.75%. If that's the case and £122m was lent at that rate, the rest will need much higher rates, nearer 60% to get the capital back.

masonic

jimjames wrote: »

If you look at some of the borrowings then the rates are tiny in comparison to the required amounts to break even.

https://damn-lies-and-statistics.blogspot.com/2019/02/london-capital-finance-loan-costs.html

The largest borrower presumably is London Oil & Gas as they now have a director appointed by S&W on their board. According to their accounts the loan from LCF was at 1.75% above the rate LCF borrowed at so 8% plus 1.75%.

That is nowhere near the 44% required which means that the other loans have to return even more than 44% to be able to recover the required capital to repay. What sort of quality of business has to borrow at rates over 44%? It's likely to be in an incredibly precarious position so hardly a great security for a loan.

This is a 36 month facility loan, expiring March 2019. So it is going to reach the end of its term and become repayable in the next 4 weeks. That's the scary bit!

In the case of a 3 year loan, the borrower would need to repay 174% of the amount loaned to them (presumably meaning what they received after the ~25% fee). The 25% fee means that they received only 75% of the loan principal that they have to pay at the end of the term. 174% x 0.75 = 130%, so after the up front fee is taken into account they need to repay 130% of the face value of the debt, so the interest is 30% over 3 years, which is 9.4% annualised. This is slightly below the 1.75% + 8%, but perhaps some of the money lent was in 2 year bonds at 6.5% interest - the facility would not have been drawn down all at once.

masonic

jimjames wrote: »

From the previous link I posted the rates for the loans from LCF to London Oil & gas are 9.75%. If that's the case and £122m was lent at that rate, the rest will need much higher

Actually based on the calculations above 9.75% would cover the bondholder interest, albeit leaving very little for LCF's cut - probably zero after their costs. The big problem is the bullet repayment of principal as I mentioned a while back. They need to repay the face value of the debt, which is 133% of the amount they received owing to the 25% up front fee.

My calculations are based on my assumption about the APR of the loans a few posts earlier, as applied to the figures for the 3 year loan term.

There is a discrepancy between the rate paid on this loan and the 12-20% suggested on the LCF website though.