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Borrower collapses force Hadrian’s Wall to pool risk

30 October 2019

High-yielding small business lender Hadrian’s Wall Secured Investments increases exposure to pooled loans after collapse of two borrowers and a toughening economic environment.

Small business lender Hadrian’s Wall Secured Investments (HSWL) has reduced the number of individual loans in favour of pooled lending after the collapse of two of its borrowers.

The £101 million Guernsey-based income fund, which yields 8.5%, has shifted the balance of its portfolio away from individual, bespoke corporate loans and into pools of loans from specialist companies following a ‘challenging’ year.

In the year to 30 June, the investment company delivered a net asset value (NAV) total return of just 2.3%, down from 6.6% the previous year, after it was forced into more ‘work-outs and remediation’ with its borrowers. The shares currently trade at 26% below NAV, the widest discount among London-listed direct lending funds, after selling by some of its large shareholders.

Chairman David Warr said pooled loans have ‘lower single event risk and less severity of loss given default’ so the board had asked fund managers Marc Bajer and Mike Schozer to rebalance the portfolio towards them to ‘offer a better risk/return profile in the current economic environment’.

The failure of two borrowers has hurt the company. It has accounted for an ‘expected loss reserve’ of over £3 million in relation to the administration of Arensis Energy in October 2018. 

Warr said the fund was working with the company to ‘improve and operate the manufacturing parts of the businesses’.

It also had £2.7 million of exposure to Dawnus Construction, which entered administration in March. The loan was secured by construction equipment which Warr said was being auctioned in the expectation of a full recovery.

In May, the fund suffered a further setback after one engineering borrower ‘experienced significant cashflow shortfalls, as all of its projects were experiencing concurrent delays’.

The managers downgraded the investment, and increased its loss reserve by £1.1 million to £1.3 million in respect of the £13 million loan.

‘This renewable energy engineering company has had over 20 years of profitable operations, owns exclusive patents, and has received numerous awards,’ said Warr.

‘In 2019, it experienced its first operating loss. The company has embarked on an equity raising program.’

The uncertainty around Brexit had made the lending environment tougher and recent downward trends in manufacturing, construction and business activity have only exacerbated the issue.

Warr said the data suggested the UK ‘is more likely to experience a recession’ and a no-deal Brexit is a ‘distinct possibility’ and noted the fund’s investments are ‘exposed to a general economic downturn’, which was causing the managers worry.

‘There is a range of possible impacts on individual investments from the different Brexit scenarios and the pace of any related economic change,’ he said.

‘On balance, most of the company’s investments are more likely to suffer from a general economic slowdown than through a direct link to Brexit, although weaker sterling would cushion the macroeconomic impact to some degree.’

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