The COVID-19 outbreak will continue to cause significant adverse economic effects that will almost inevitably impair borrowers’ abilities to obtain and service mortgages. And unlike the mainstream banks – which can access new NZ Reserve Bank liquidity and funding support – non-bank lenders have a much more restrictive toolset to combat economic shocks.
Billion dollar initiatives to encourage lenders to provide cash flow support to small business have emerged, but they haven’t brought salvation for all sectors of the market. In particular, the Non Bank sector will be feeling pain as wholesale funders and investors reduce their risk appetites and, in some instances, pull funding altogether.
Fortunately, ASAP Finance is a family-owned business and private equity is supported by fixed-term funding lines from mainstream banks. This means we do not rely on wholesale funders or investors which provides us with cashflow certainty. However, there are other sector specific risks which all developers should consider when choosing their funding partner.
On an ongoing basis, development finance companies have an added layer of complexity when it comes to managing cashflow. Development funding requires lenders make progress payments to the developer/ or contractor generally on a monthly basis for completed works.
During the Global Financial Crisis (“GFC”), many developers were caught out when their financier failed to make those progress payments ultimately spelling disaster for their project. This is because development finance companies rely on recycled cashflow from mortgage repayments to fund progress payments.
Mortgage repayments can come from selling down completed stock once the project is complete, or by way of refinance once the construction risk has been eliminated. During times of crisis, low transaction volumes decrease the frequency of repayments, similarly the refinance market experiences a decline in liquidity as other lenders become less willing to take on new debt.
Simple strategies such as switching from loan origination to servicing existing clients can provide immediate cashflow relief during times of crises and could be considered best practice for even the most well capitalised development lenders. The catch-22 being that it decreases overall liquidity in the economy and can ultimately worsen the impact of a crises.
At ASAP Finance we endured the Global Financial Crises and are aware of the perils that can result from being unprepared for external shocks. We emerged strongly from the GFC and the lessoned learned continue to be implemented in the business today including always operating with sufficient margin of safety (we currently have $50 million in undrawn secure funds).
Over the past 2 weeks we have visited over 80 construction sites with more sites to be visited over the coming weeks. Our commitment to our clients during these time remains unchanged; our success is inextricably linked to the success our clients and we look forward to taking each and every project we are involved in, to completion.
Written by Ben Friedlander