By Ryan Weeks on Friday 26 May 2017
Peer-to-peer lender Wellesley will pause its peer-to-peer operations until Q3.
Peer-to-peer lender Wellesley will pause its peer-to-peer operations until Q3.
Wellesley & Co., the peer-to-peer lender best-known for investing alongside its investors, has announced wide-ranging changes to the business. In addition to publishing financial results for 2016, the firm has also made a first stab at publishing its loan book online.
Chief financial officer Alasdair Lenman, who was appointed last summer, has resigned from the company. Lenman was hired to help the firm publish its late accounts up to December 2015 ahead of its abortive fundraise on equity crowdfunding platform Seedrs, which was pulled at the start of this year.
Further to these developments, Wellesley has temporarily paused its peer-to-peer lending operations, and is launching a new listed bond on the Irish Stock Exchange.
In an interview with AltFi, Wellesley co-founder Andrew Turnbull (pictured) said that the firm was making some changes to its peer-to-peer product, as other platforms have, in order to fit with the FCA’s demands for standardisation across the industry. Wellesley currently operates under interim permissions from the regulator, and continues to await a decision on full authorisation. Some of the UK’s largest platforms, such as Funding Circle and Zopa, have been authorised in the past few weeks.
Turnbull said that Wellesley is pausing its P2P product in order to allow time for technical changes to be made. He said that these changes are designed to satisfy both investor demand and regulatory requirement.
Once re-launched, Wellesley & Co. will no longer deliver monthly interest payments to its investors. The monthly interest payment model was at odds with the style of development loans that the firm originates, which are repaid at maturity. Henceforth, the firm’s P2P product will offer a target rate of return, with interest repaid at maturity.
Additionally, loans will no longer be covered by a provision fund, with losses instead passed through to customers. Turnbull said that this move reflected the desire of the regulator to see the exact dynamics of P2P loans passed through to investors. It is telling that Zopa – which was authorised a few weeks ago – has also just announced the dropping of its provision fund.
Finally, Wellesley will also be switching to a novation model, which means that the platform's P2P contracts will henceforth be held directly between its investors and its borrowers. Wellesley will continue to originate loans in the first instance, and will then novate these over to its investors. This model mimics the one operated by Octopus Choice, which was authorised as a peer-to-peer lender in January of this year.
Wellesley has just launched its third bond, offering investors an annual interest rate of 4.75 per cent over 3 years, or 4 per cent over 2 years, paid monthly. The bond can be held within an ISA wrapper.
The first Wellesley bond was a mini-bond which raised a little shy of £50m. The second was listed on the Irish Stock Exchange, as is this third issue. The second bond was launched in response to ISA demand, and could be invested in via a stocks and shares ISA.
This latest edition is a first-charge, senior-secured bond, the proceeds of which will be used exclusively for lending on residential property development – in other words, to fund the loans originated by Wellesley. Turnbull told us that there would be no differentiation between bond investors and P2P investors.
So why do it? Turnbull said that the firm had conducted an extensive piece of research on its customers, which was executed by a third-party firm, and which concluded that fixed terms, monthly interest payments, and the security of a bankruptcy remote vehicle were highly sought after. For now, he sees the bond as the best means of delivering on these demands.
Wellesley is famed for skin-in-the-game approach to P2P, which in practical terms means that it takes a stake of every loan in a first loss position. It has previously been suggested that the proceeds of its bond listings – which in some cases may explicitly be used as working capital by the firm – have been used to fund this first-loss piece, as well as to top up its provision fund.
But Turnbull said that the proceeds of its listed bonds cannot be used in this way. It is only its mini-bond investors that contribute to Wellesley’s working capital. These investors are unsecured creditors to Wellesley’s balance sheet.
As mentioned above, Alasdair Lenman was brought in as chief financial officer last summer to steady the ship ahead of Wellesley’s fundraise on Seedrs. More specifically, his role was to review processes and procedures at the company, and to implement a transition to IFRS accounting standards.
Turnbull said that Lenman and the firm remain on good terms, and that he brought a lot of effort and professionalism to the business. He said that Lenman had indicated from the outset that he was interested in non-executive director roles at banks, and that he is now pursuing that goal.
Wellesley is yet to appoint a successor for Lenman.
Wellesley has now published its audited results for the year ended 31 December 2016. Its loan book grew 10 per cent during the period, to £163.6m, versus £148.7m lent in 2015. The firm made a loss for the year of £210,288, down from a loss of £2.2m in the previous year. But it made a pre-tax profit of £1.3m in the second half of the year.
Other notable points include having supported the development of 822 “mid-priced” homes in the UK. The firm also made a number of new hires in 2016, including Stephen Bell as chief risk officer in February, and Peter Scott as non-executive director in March. The firm claims to have delivered an average interest rate across all products of 4.49 per cent to investors.
Wellesley’s full accounts will be available via its website next week.
In an effort to provide increased transparency to investors, Wellesley has now published its complete loan book online as a static snapshot. Many of the UK’s peer-to-peer lenders do the same, with transparency often pitched by P2P platforms as a method of aligning incentives between the originator of loans and investors.
Wellesley has lent a cumulative total of £476m, spread across 65 loans. Of those 65 loans, 36 (55 per cent) are in technical default, in that they have breached a covenant. 22 (34 per cent) of the entire loan book have breached the contractual payment terms and can be classed as non-performing. AltFi Data assisted with this analysis.
However, Wellesley is only forecasting a loss on 10 of its 65 loans, and for each of the loans in question it has funds set aside from its provision fund, equal to a total amount of a little under £2m.
All Wellesley loans are secured by a first-charge over property, meaning that recoveries on bad loans are contingent on the sale of the underlying security.
Wellesley’s full loan book is now live for its active investors to download.
Wellesley also confirmed in its latest update that it exited the bridging loan market in September of last year, refocusing instead on development loans. The firm says that this helped it to reduce costs. It has also focused more on larger loans to developers who have historically borrowed from the high-street banks. Wellesley believes that this will help it to reduce its borrower interest rates and to improve the risk-adjusted returns on offer to investors.
David Godfrey, who is chairman of the Wellesley Group, commented on the news:
“I am pleased to see the progress which the management team has made in the past year in an industry which is in a period of transition. We returned to profit in the second-half of the year, a trend we expect to continue through the first half of 2017, and management is developing a strong platform on which to build Wellesley’s future growth and long-term success.”
“Wellesley’s business model proved attractive to investors and enabled us to lend more than £100m to developers, supporting the creation of 822 mid-priced homes across the country, taking the total since the firm’s inception above 2,000. I am proud that the business is helping to address the UK’s housing shortages and this type of social value creation will remain at the core of our business.”
“The Board is grateful to Alasdair for the contribution he has made to the business over the past year. Alasdair leaves us following the successful restructuring of the business which now has a lower cost base, recapitalised balance sheet, improved financial discipline and a clear financial plan."