Online lender Funding Circle (LSE:FCH) has apparently sold 300 individual loans to Azzurro Associates, a subsidiary of Elliott Management, a US-based fund manager with approximately $41 billion in assets. The sale of these loans may garner additional regulatory scrutiny as they include personal guarantees from small business owners, according to a report. Azzurro is based in the UK and is regulated by the Financial Conduct Authority. The firm is a debt specialist that manages debt portfolios in the UK as well as continental Europe.
In a report by the Times, Kevin Hollinrake MP, co-chairman of the all-party parliamentary group on fair business banking, called the sale “very worrying.” The concern appears to be that collection methods may be more aggressive – especially during the ongoing COVID-19 health crisis. Hollinrake said that borrowers may be surprised that the loans were sold.
A blog post by Funding Circle this past October commented on the collection process during COVID explaining they work with businesses that have fallen behind on their repayments, and try to get the loans back on track. Of course, loans may be funded by individual investors who may see their returns impacted by nonperforming loans. Like many other online lenders, Funding Circle may offer a loan forbearance or payment plans to small businesses. Of course, this may not work. To quote Funding Circle:
Although this is always a last resort for us, if a business is unresponsive, uncooperative, or has no prospect of being able to repay the loan, we will default loans if necessary. At this point the personal guarantee will come into effect, and we will seek to recover the outstanding balance from the business and loan guarantors. This could come as part of a payment plan agreed with the guarantors, an Individual Voluntary Arrangement (IVA). In some cases they may declare bankruptcy, or we may need to pursue the case through court action.
Interestingly, a recent blog post by Azzuro discusses the issue of stacking (US) or using “Personal Guarantees” (PGs) to take out multiple loans with little chance of these loans ever being paid back. The concept of stacking has long been challenging for some online lenders. Azzurro advocates the creation of a “PG register” to better provide a transparent picture of a borrower’s financial situation.
While some may find the loan sale worrying, it has long been standard practice for both banks and Fintech lenders to sell certain loans to other investors. By selling certain loans, or a portfolio of loans, a platform may better manage its risk and better serve their investors.
According to the Azzuro website, its commercial debt solution provides liquidity to lenders for non-performing loans and then they pursue repayment.