Low risk WDL 1st Mortgage Fund

‍1st Mortgages

Of course, a 1st mortgage on the loans issued creates a substantial reduction in risk. After all, if the borrower stops paying his interest and principal, you can eventually sell the property on which the mortgage rests. So at a Loan to Value of 70%, the property must first drop in value by 30% before you have to take a write-down as a fund. We also express this in terms of the LGD% (Loss Given Default) More freely translated: the write-off rate on your loan if you have to cash out. An average LGD of 1% on the entire portfolio is the expectation in the fund. Compared to loans to SMEs without collateral where you would therefore have an LGD of 100%, establishing a 1st mortgage is a substantial reduction in risk.

‍Spreading

Suppose there is a total of 30 million in the fund from which 40 loans averaging 750k are made. Now we know from risk data that about 2% of borrowers in the SME segment run into trouble each year. We also express this in PD% (Probability of Default). By the way, that means you expect to have to write off 0.02% of the principal on the entire portfolio per year (with a PD% of 2% times the LGD% of 1%).

‍Margin in fund

The interest margin we reserve in the fund is 0.5% per year. From this 0.5% we expect to have to write off 0.02%. So how bad does it have to be to burn that 0.5% a year in write-offs? So that’s a PD x LGD of 0.5%. Then, for example, PD should be at 10% and LGD should be at 5%. That’s both very high! In that case, of the 40 borrowers in the portfolio, 4 would go bankrupt each year. That would really be sky high!

‍Subordinated capital

And to show that we have complete confidence in this, as a fund manager we deposit 2% subordinated capital. So if that 0.5% per year margin in the fund would not be enough then the investor gets the principal as well as the interest paid in full before we see anything back at all from our 2% subordinated capital.

‍Right selection

This is not easy to explain because there are many factors that affect it. But through skill and lots of experience, we select and structure financing cases better than someone who does not have that skill. We focus on the right combination of good collateral (i.e. low LGD) and a healthy cash flow of the borrower (i.e. low PD).

‍What does that leave in terms of risk?

The risk that remains is that we as fund managers use the money for other purposes. That we as WDL Credit Funds improperly use our mandate to make loans from books. There are unfortunate examples of this in the marketplace. And yes of course: we are also registered with regulators. And yes, last but not least: European and National governments give us full confidence in, for example, our WDL SME Fund. That both says a lot of course but still “trust” that we operate in accordance with agreements is very important. We also understand that this trust is very important for investors before you can make appointments. What is our response to that? We like to build long-term relationships. No fuss. Fully transparent. Neat and tight. Feel free to come in and meet us. Coffee is ready!