The significance of strong exit plans came up during a debate at the recent Finance Professional Show, where Gavin Diamond, commercial director of bridging at United Trust Bank, said that LTV was a little bit of a red herring, with the importance being on the exit.
He revealed that he still received emails from brokers asking how much UTB was prepared to lend, without explaining how the borrower was going to repay.
He added that with a strong exit strong exit strategy in place, lenders would be more willing to go to a higher LTV.
Are there still applications which don’t have a firm exit in place?
“We do see a surprisingly high number of people enquiring about bridging loans that don’t understand the importance of the exit,” said Lucy Barrett, managing director at Vantage Finance.
“We are very clear with people that entering into relatively expensive short-term finance without a plan to exit is not something we will assist with.”
Chris Whitney, head of specialist lending at Enness, said it did see clients whose exit strategies were either not viable or just poorly thought out.
“A common one is where the borrower intends to refinance out on to a term loan when the LTV or other aspects of the situation make this unlikely.
“I think both broker and lender would have a moral obligation to object to being in a transaction where there isn’t a viable exit.”
However, Jo Breeden, managing director at Crystal Specialist Finance, said he was seeing a reduction.
“Bridging finance has become more mainstream and after years of training events – delivered through both us and industry bodies – brokers are becoming more and more aware of its importance.”
Meanwhile, Vic Jannels, chairman at AToM, added: “Most know what they are expecting to do in order to repay the bridging loan.
“It is rare that borrowers have not thought this through, as they understand the expensive nature of the loan type.”
Why is an exit so important?
“No exit route, no loan,” said Steve Brennan, director of credit at ActivTrades.
“A strong exit route should always be available, so shouldn’t have a bearing on LTV.
“Deals need to be assessed by competent industry underwriters and overseen by even more competent industry experts.
“It’s very easy to lend money, it’s not so easy to get it back.”
Kit Thompson, director of short-term lending at Brightstar, felt the exit was “everything”.
“No firm exit = no bridging loan.
“The consequences of failing to exit on time are default interest (at much higher rates) and ultimately the client risks repossession of the property.”
Chris Gardner, COO at Amicus Finance, said it owed it to itself and its borrower to ensure a viable exit strategy was in place.
“Our experience in evaluating exits is a real value-add for our borrowers, which is particularly pertinent as at Amicus we offer some of the most generous LTVs in the market.
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“Exit strategy is one of the key pillars in our underwriting process and we encourage our brokers and borrowers to be thorough as a sound exit strategy makes it much easier to say ‘yes’ to a deal.”
Matthew Tooth, CCO at LendInvest, added that it recognised that nothing was completely secure, but as long as the proposed exit strategy was credible it would happily support a deal.
However, Jon Salisbury, managing director at Ortus Secured Finance, said: “Not every client knows precisely how they will repay – many have a few options and are taking time to decide.
“However, we need to feel comfortable that the client’s overall strategy is realistic and sensible.
“Lending is all about balancing the risks and a particularly strong repayment plan may well enable us to increase the LTV on a loan.”
The benefits of a strong exit strategy
Chris Oatway at LDNfinance felt a strong exit would ensure the client was in the best position to negotiate the best terms possible.
“This may include higher leverage, lower rates of interest or fees.
“The key thing is the comfort that it provides the bridging lender.”
Scott Marshall, managing director at Roma Finance, said: “We would always be prepared to and in fact have written loans at higher LTVs on closed bridging loans or where the exit has been secure.”
Jack Coombs, director at Aspen Bridging, said it determined LTV primarily by the property type and location, but the level of the loan must also be consistent with the customer’s exit strategy.
“The exit is fundamental to responsible lending and we only lend where there is a realistic exit within the term.”
Louis Alexander, managing director at the BridgeCrowd, added: “If an exit strategy is very clear – such as the sale of the security and it is listed on the market – then we will offer a higher LTV of up to 75%.
“If an exit strategy is less [defined] – such as the sale of the security, but it is not being marketed – then we will offer the loan on our valuation-only product.”
Colin Sanders, CEO at Tuscan Capital, said that regardless of the strength of the exit strategy in place, it would not agree to breach its advertised absolute maximum LTV.
“However, where there is a strong and realistic exit strategy in place, we have in the past agreed to increase the maximum LTV we would otherwise lend to.
“This applies particularly to property in geographic regions of low demand, where – in usual circumstances – we prefer to limit our LTV and, therefore, risk exposure.”
Paresh Raja, CEO at Market Financial Solutions, added: “…If the exit is based on the sale of the property and you can clearly see it’s attracting market interest, then it would make sense to provide a loan at a higher LTV.”
Zuhair Mirza, principal at Avamore Capital, said it generally worked on the basis that a strong exit strategy was in place and, as a result, it did not see much scope for pushing leverage further.
“However, there would be particular circumstances where we would consider providing a higher LTV with a strong exit strategy – most notably if a sale has been agreed in relation to the security and the purchaser has exchanged on the site.”
James Bloom, managing director of short-term lending at Masthaven, concluded: “A strong exit strategy is one of the factors we assess during our credit and underwriting process and has a large bearing on the LTV we would provide a loan on.
“On the flip side, however, we wouldn’t accept a weak exit strategy just because the LTV was low – a robust exit plan is the basis for a bridging loan and can’t be [compromised].”