Does Asset Backed Security Mean London Capital Finance is safe?
Note: Original post made on 13 Jan 2019, republished on 9 Feb with new information.
London Capital & Finance made a big thing about their bonds having Asset Backed Security. This has been picked up by investors in the bonds. "We're ok, all the bonds are asset backed". Well, yes. And no! The assets need to be worth something and they would need to be sold to pay the lender and that may not achieve their loan value. You also need to have the assets in the first place.
It is also the case that LCF have Companies House charges on companies they have lent money to that were applied AFTER another fixed charge already existed on the accounts. It may be academic as the assets are only £10,000 at the time but it means LCF cannot enforce that security.
As a bondholder of LCF you are essentially loaning money to London Capital Finance and are an unsecured creditor of the company. You are reliant on them making sure that assets are worth what they say and carrying out their lending prudently. That doesn't appear to be the case.
Asset backing is only of use if the assets have any value. As can be seen on 2 companies owing money to London Capital Finance the assets may be worthless and the company is insolvent.
Two such companies are these:
However Leisure & Tourism Developments PLC owes £4.2 million more than its assets are worth. Negative shareholders' equity is a strong indicator of impending bankruptcy, and so is considered a major warning flag for a loan officer or credit analyst. LCF cannot assume it has any assets available in the company to support its loan.
Using the figures from the Evening Standard suggesting that LCF were paying Surge Financial up to 25% commission for bonds that they introduced that could mean that up to £50 million of the £200 million money that investors thought was being loaned out never was. It also means that for an investor in a 1 year bond the guaranteed return that LCF would need to obtain would be 41% (33% to get capital back plus 8% interest) in order to be able to return the investor's capital at the end of the year.
Even worse the money from investors wasn't received in one hit, different people paid in over a period of time so money could not be lent immediately. LCF claimed that one bond sold in 7 months. Even if you assume an optimistic 3 months to collect enough money to be able to lend it out to companies that means the 41% return has to be made in only 9 months. If it actually took 6 months to collect enough money to loan out then they'd need a 82% return to be generated to pay back the investors.
How can your money be safe when up to 25% of your cash has been handed out to a company in commission before it even gets to London Capital & Finance to loan out?
The numbers just don't add up to be able to make this work in reality. It's no wonder FCA froze the accounts of LCF.
London Capital & Finance made a big thing about their bonds having Asset Backed Security. This has been picked up by investors in the bonds. "We're ok, all the bonds are asset backed". Well, yes. And no! The assets need to be worth something and they would need to be sold to pay the lender and that may not achieve their loan value. You also need to have the assets in the first place.
It is also the case that LCF have Companies House charges on companies they have lent money to that were applied AFTER another fixed charge already existed on the accounts. It may be academic as the assets are only £10,000 at the time but it means LCF cannot enforce that security.
As a bondholder of LCF you are essentially loaning money to London Capital Finance and are an unsecured creditor of the company. You are reliant on them making sure that assets are worth what they say and carrying out their lending prudently. That doesn't appear to be the case.
Asset backing is only of use if the assets have any value. As can be seen on 2 companies owing money to London Capital Finance the assets may be worthless and the company is insolvent.
Two such companies are these:
- Leisure & Tourism Developments PLC (Shareholders' funds £-4.2 million)
- CV Resorts Ltd (Shareholders' funds £23 million BUT impairment/revaluation)
However Leisure & Tourism Developments PLC owes £4.2 million more than its assets are worth. Negative shareholders' equity is a strong indicator of impending bankruptcy, and so is considered a major warning flag for a loan officer or credit analyst. LCF cannot assume it has any assets available in the company to support its loan.
Another company that borrowed from LCF was called Colina Property Holdings Ltd which was setup in April 2017. Shortly afterwards on 29th April 2017 a charge was applied to it in favour of a sister company called Colina Support Ltd over ALL of its assets as a fixed & floating charge. However on 12th May 2017 another charge was setup by London Capital & Finance over ALL of the assets as a fixed & floating charge. Both companies cannot have the same assets as their security and LCF is second in line!
Even worse the money from investors wasn't received in one hit, different people paid in over a period of time so money could not be lent immediately. LCF claimed that one bond sold in 7 months. Even if you assume an optimistic 3 months to collect enough money to be able to lend it out to companies that means the 41% return has to be made in only 9 months. If it actually took 6 months to collect enough money to loan out then they'd need a 82% return to be generated to pay back the investors.
How can your money be safe when up to 25% of your cash has been handed out to a company in commission before it even gets to London Capital & Finance to loan out?
The numbers just don't add up to be able to make this work in reality. It's no wonder FCA froze the accounts of LCF.
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