A combination of the benefits give the best possible investor protection in the event of something going wrong

The Importance of Real Assets in Debt Lending

Our clients know that we focus heavily on bonds and loan notes that are backed by real assets. These assets are generally property related. Why?

  • They are the most straightforward assets to take security over
  • Values can be established relatively accurately
  • In the worst situation of loan failure, most of the value can usually be realised
  • Value tends not to be related to the status of the business – provided that the asset doesn’t have to be sold quickly, then the real market value can often be obtained

Combine these benefits, and you have, in our view, the best possible investor protection in the event of failure of the bond or loan to repay capital or interest.

What is interesting is that quoted corporate bonds frequently have no security over real assets and in some cases no security at all. What investors are relying on is the business to continue to be successful and to generate sufficient working capital to service its loans. So even though you are lending to a quoted business, maybe one of the largest companies around, you could still lose all your money.

Investors rely on the company being in a strong enough financial state upon maturity, to either repay the loan out of current resources or to refinance by borrowing again in the market.

It doesn’t take a genius to realise that with increasing uncertainty over economic performance in the marketplace, combined with the relentless march of new tech initiatives, relying on the company to still be in a strong financial position in (say) five years, is not always a good bet.

Here’s a hierarchy of ‘value’ within assets provided as security for loans, starting with the safest and most reliable. Note that this is my personal view and you may choose to rearrange this list. Provided it gets you thinking about levels of risk and where you feel comfortable that’s great!

  1. Fixed charge - Land and buildings
  2. Fixed charge - Infrastructure assets backed by contractual public sector contracts
  3. Fixed charge - Plant and equipment
  4. Floating charge - Stock – finished goods
  5. Floating charge - Stock – work in progress
  6. Corporate guarantees – property development companies
  7. Corporate guarantees – manufacturing
  8. Corporate guarantees – tech businesses
  9. Corporate guarantees – service companies

At Avantis Wealth, our focus is on strong lending propositions backed, as much as possible, by property assets. We aim to give clients the best of both worlds!

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