Insurers as lenders: what borrowers need to know
Insurers are the new show in town
The make-up of providers of debt secured against UK real estate has changed dramatically.
In its 'Money into Property UK 2013' report, DTZ confirmed that "aggregate non-bank lending grew by 35% in 2012, building on 17% growth in 2011". De Montfort University's May 2013 lending report found that such lending amounted to 15% of all new lending in 2013 and, in June 2013, Savills' head of valuation, William Newsom, identified that nearly a quarter of the 47 organisations currently claiming to be able and willing to lend and hold £100m or more of senior debt are insurance groups.
Insurers are now clearly a significant provider of UK real estate debt (De Montfort's figures represent £3.8bn of new lending by insurance groups in 2012) and all the indicators point to their market share increasing further and further in the years to come.
In their efforts to lend new money, traditional debt providers continue to be hamstrung both by the increasing regulatory burden and by the continued caution of credit committees with the damage of huge writedowns still fresh in their minds. Borrowers will increasingly find that they need to turn to insurers for debt finance.
By their nature, insurance groups are very different organisations to banks and borrowers will need to be prepared for quite different conditions of borrowing.
What borrowers need to know
The main differences with the insurers compared to the banks arise as a result of the fact that the monies provided by the lending entity within the insurance group will come from its parent's annuity business i.e. from insurance premiums and pension contributions. These premiums and contributions have to be invested and mortgage investments must show a premium over bonds.
Whereas the banks would routinely lend over a 3 or 5 year term, the insurers will lend over 10, 15 or 20 years.
The banks would also typically lend at a margin over LIBOR and not necessarily require hedging to be put in place. The insurers, on the other hand, require fixed margins over gilts.
Insurers will also typically require a large proportion (as much as 50%) of the loan to amortise in quarterly instalments.
Whilst the paying down of a large chunk of the loan is desired, insurers are also focused on certainty around the term of the loan in order to have certainty as to the return on the investment for the benefit of the underlying insurance or pension business that is funding the loans. A bank may well incorporate a prepayment fee into its conditions but such fees will not be a bank's particular focus and they will usually be fairly nominal (a typical 5 year loan would have a fee of 2% of the amount prepaid in the first 12 months, 1% in the 2nd year, 0.5% in the 3rd year and no fee in the final 2 years). By contrast, early repayment (in addition to the agreed/required amortisation profile) of a loan provided by an insurer is likely to have to be in a minimum amount of 5% of the facility, the borrower is likely to have to give the lender 3 months' notice of its intention to prepay and the prepayment must be accompanied by a fee in an amount (to quote one example):
"sufficient fully to indemnify the Lender against any reduction in the rate of return that the Lender determines it shall receive on its investment in the Loan as a direct or indirect result of the Early Repayment. The amount of the indemnity will be ascertained in accordance with the Lender's usual method of calculation provided that the calculation will be on the assumption, whether or not the fact, that reinvestment of such sums is only available in gilts;".
If borrowers can adjust their minds to appreciating the particular nuances of a business quite different from that of banks then they will be able to tap into a key new source of debt finance.