Dear clients, friends and colleagues
When we sent our last newsletter on the 31st March, all our jurisdictional teams were in the early stages of lockdown and working from home.
The UK was bracing itself for the impending increase in diagnosed cases and expected deaths from COVID-19. A lot has happened since then……
The US has the highest casualty rate of the coronavirus and the UK has just passed Italy with the largest in Europe as per the official data. Johns Hopkins has also created a very useful (albeit depressing) tracker of COVID-19.
The COVID-19 pandemic has created huge disruption to the global economy and I suspect we will not know the full extent of the devastation until the current stimulus packages are removed and Companies are no longer being financially supported through the initial phase of this crisis.
Unemployment statistics are frightening and there are some very scary predictions of how high these figures will reach eg. some analysts are predicting US unemployment will reach 20% of the population. Sadly the human impact that follows will have a generational impact on society too. The world has changed and will never be the same again. Having said that, mankind has a proven ability to adapt and we will simply find new ways to push forward. In every situation there are winners and losers and new sectors will emerge that will create employment, etc.
The global economy is also facing a further black swan event in the oil sector. In the last month we have seen crude oil prices plummet (Shell slashed their quarterly dividend by two thirds off the back of this, the first time since WW2). For the first time ever, the price of U.S. crude oil went negative as the coronavirus pandemic obliterated demand for energy. Traders and producers paid as much as $40 for the privilege of parting with a barrel of oil! West Texas Intermediate (WTI) crude sold for more than $60 a barrel just a few months ago. Following the outbreak of the coronavirus, a global collapse in economic activity, coupled with a price war between Saudi Arabia and Russia, the price of crude reached its lowest level since the 1997 Asian financial crisis.
The banking sector is also under severe pressure with Lloyds Banking Group reporting a 95% fall in first quarter profits, all against a backdrop of global economic turmoil.
There are too many examples of economic, social and political implications of the impact of the virus to talk in detail about here but suffice to say we are emerging now into a different world to that we inhabited just a few months ago.
What happens next?
Although, at the time of this Newsletter the UK and our other operating jurisdictions remain in various stages of lockdown, Governments are now at the next stage of planning and instigating their respective exit strategies. Our teams have been working closely with their contacts in their respective markets, finding new opportunities and ensuring we make the right decisions for our Co-Funders whilst also supporting our Borrowers and contributing in rebuilding the economy.
Many of our competitors have stopped lending during the lockdown period but we have still been able to complete loans (and thankfully have some loans repaid) whilst ensuring we abide by government guidelines, adjusting our risk appetite accordingly which has put us in a strong position in the market.
Sancus is well placed over the coming months to service the anticipated demand from Borrowers for our Asset Backed lending solutions. We are in constant contact with key relationships and our core brokers and intermediaries and remain highly proactive in the market whilst also closely watching all the variables that may affect lending risk and exposure.
The Stock Market
After initial bear market plunges (losses in excess of 20%) in world stock markets, we have seen strong rallies in the FTSE100 and Dow Jones off the back of potential advances in the viable treatment of COVID-19 and economies easing out of lockdown.
These have been erratic and, in my mind, unreliable indicators of what lies ahead, effectively “dead cat bounces”. We will not truly know where stock markets will bottom out until we have a clearer picture of the damage done to the global economy by COVID-19.
Although large sites were for the most part shut down over the last month, they are now starting to operate again as they have adapted working practices in line with government guidelines.
Our UK sales team, based in London are starting to see increased activity throughout the Capital, with some construction companies already fully operational on all of their sites. Building materials appear to be accessible, although some builders’ merchants have reduced the number of stores they have open at this time and there is some evidence of price rises for some goods as supply chains have been affected.
The Royal Institute of Chartered Surveyors (RICS) advice remains in line with the UK government, advising that those working on-site in England can continue to do so, and that employers who have people in their offices or onsite should ensure that employees are able to follow Public Health England guidelines. This is important for us to manage our existing loan book as our Monitoring Surveyors will need access to the building sites.
All valuations now come with a ‘Material Uncertainty Clause’ which means any valuation report we work to, is caveated for the effects of the virus on the valuation.
VAS Audit (the UK’s valuation auditing and assurance service business) has recently advised us that if there is a site opportunity for development or conversion and the building is vacant, and no one is around, it is possible to arrange for a Valuer to inspect the property, many Valuers are already doing this.
Desktop valuations are being recommended in some lending proposals. Sancus will accept valuations with such COVID-19 caveats as long as a formal full valuation is prepared as soon as practicable. In order to protect our position, we have also built into our offer letter that the Borrower must add more equity to the loan if the valuation comes in materially lower than the agreed Loan To Value (LTV) for the loan.
UK property transaction statistics, published by HM Revenue and Customs show the number of property transactions for March 2020, referenced back to 2019. Surprisingly, the numbers are approximately the same as they were last year but caution must be taken as there is a level of estimation in this figure and this will not have taken into account the full impact of COVID-19, we expect the impact on transactions won’t feed through until May’s statistics.
Mortgage approval data is only available for February so it does not yet give true data that can inform us of the current crisis but it is a statistic that we are also watching.
Default interest being waived on loans that require short-term extensions
We continue to support our Borrowers during this crisis and shall consider waiving default interest on short term extensions that have been caused by the current pandemic.
This allows the Borrower time, without undue additional pressure, to either refinance their loans with traditional lenders or sell properties depending on their agreed exit strategies. We will liaise directly with Co-Funders who may be affected.
How Sancus stress tests their loan portfolio
We continue to focus on a Borrower’s LTV, which we test in two ways:
- Taking a discount on the valuation of the security;
- Projecting forward any delay and the impact this has on the accrued interest on roll-up loans.
I feel that we are all already adjusting to a “new norm” and I am cautiously optimistic that I can see the “light at the end of the tunnel” albeit with some nasty bumps along the way.
It is clear that levels of physical distancing shall have to remain in place at least until a vaccine is found, which could be a year from now, and this will have an impact on us as individuals and as an economy.
However, I believe that as a business we have always been nimble and fast to adapt and take advantage of new opportunities and gaps in the market.
Sancus staff are still currently working from home but we are currently reviewing how we can start to return to work considering respective government guidelines and physical distancing measures.
The Sancus Team are always available and if you would like to talk to us or have a query, please email your relationship manager in the first instance, here are our staff contact details.
Please keep safe.
CEO, The Sancus Group
T 01534 708900