Are those investing cheaply and without collateral are right?
Martynas Stankevicius, CEO of crowdfunding platform Röntgen
The Western capital structure is usually dominated by several types of financing: equity, secured and unsecured private debt (also known as senior debt and junior debt). This diversity is slowly becoming evident in Lithuania, reflecting the growing maturity of the market. However, it may be that unsecured investors today are not pricing their risks correctly.
In recent weeks, several bond issues have been publicised in Lithuania, where well-known real estate or manufacturing companies are borrowing at 8-10% interest with secondary mortgages or no collateral at all.
This means that in today's economic conditions, 8% yield bonds without any collateral seem attractive to investors, even though there are many quality investment opportunities in the market offering 9-11% interest with the primary mortgage of completed, liquid housing.
Thus, we observe an interesting trend in the market today – private debt with a primary mortgage offers a higher return to investors than debt (e.g., bonds) with fewer guarantees. Here, we are "deviating from the textbook", where, according to financial theory, unsecured loans should offer higher returns (and risk) than loans secured by assets.
In numerical terms, today, top-quality bank-financed projects with primary collateral are borrowing at 8-9% (i.e. 3-5% + Euribor), while medium or less experienced developers with primary collateral can borrow at 9-11% from banks or crowdfunding platforms.
Economic logic would further dictate that a bank-level developer with a secondary mortgage or no collateral at all could borrow at an additional 2-3% higher rate (i.e., in the 11-14% range). As for the risk premiums for businesses that do not meet bank criteria and do not offer primary mortgages, I wouldn’t even dare to speculate.
Therefore, the risk premium should be paid by those businesses borrowing without collateral. This is because pledged solid assets help avoid losses or at least significantly reduce them in the event of negative economic scenarios in the market.
Perhaps investors who choose unsecured bonds consider that the larger companies offering unsecured investments are too big to fail? Indeed, large businesses have a certain "right" to borrow more cheaply because their experience and scale of operations theoretically reduce the risk of failure and increase their credibility. However, large economic shocks would affect large and smaller businesses alike, and the experience of investors in the event of a shock could be radically different: those who invested with collateral would be able to recover all or at least part of their investment, as opposed to those who invested without collateral. In the latter cases, the main creditor (the bank or platform holding the original mortgage) will often take all the assets.
The question that remains unanswered today is whether some investors are lending too cheaply for higher risk, or whether others are earning too much by investing with lower risk.
Are those investing cheaply and without collateral are right?
Martynas Stankevicius, CEO of crowdfunding platform Röntgen
The Western capital structure is usually dominated by several types of financing: equity, secured and unsecured private debt (also known as senior debt and junior debt). This diversity is slowly becoming evident in Lithuania, reflecting the growing maturity of the market. However, it may be that unsecured investors today are not pricing their risks correctly.
In recent weeks, several bond issues have been publicised in Lithuania, where well-known real estate or manufacturing companies are borrowing at 8-10% interest with secondary mortgages or no collateral at all.
This means that in today's economic conditions, 8% yield bonds without any collateral seem attractive to investors, even though there are many quality investment opportunities in the market offering 9-11% interest with the primary mortgage of completed, liquid housing.
Thus, we observe an interesting trend in the market today – private debt with a primary mortgage offers a higher return to investors than debt (e.g., bonds) with fewer guarantees. Here, we are "deviating from the textbook", where, according to financial theory, unsecured loans should offer higher returns (and risk) than loans secured by assets.
In numerical terms, today, top-quality bank-financed projects with primary collateral are borrowing at 8-9% (i.e. 3-5% + Euribor), while medium or less experienced developers with primary collateral can borrow at 9-11% from banks or crowdfunding platforms.
Economic logic would further dictate that a bank-level developer with a secondary mortgage or no collateral at all could borrow at an additional 2-3% higher rate (i.e., in the 11-14% range). As for the risk premiums for businesses that do not meet bank criteria and do not offer primary mortgages, I wouldn’t even dare to speculate.
Therefore, the risk premium should be paid by those businesses borrowing without collateral. This is because pledged solid assets help avoid losses or at least significantly reduce them in the event of negative economic scenarios in the market.
Perhaps investors who choose unsecured bonds consider that the larger companies offering unsecured investments are too big to fail? Indeed, large businesses have a certain "right" to borrow more cheaply because their experience and scale of operations theoretically reduce the risk of failure and increase their credibility. However, large economic shocks would affect large and smaller businesses alike, and the experience of investors in the event of a shock could be radically different: those who invested with collateral would be able to recover all or at least part of their investment, as opposed to those who invested without collateral. In the latter cases, the main creditor (the bank or platform holding the original mortgage) will often take all the assets.
The question that remains unanswered today is whether some investors are lending too cheaply for higher risk, or whether others are earning too much by investing with lower risk.
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