OakNorth, a SoftBank-backed lender, has registered nearly £ 100million in default

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OakNorth, the UK SoftBank-backed lender that once boasted of its perfect loan record, has incurred nearly £ 100million in defaults largely due to downgraded loans to property developers, according to a Financial Times analysis.

The defaults, from only 10 borrowers, will serve as a test of the owner’s credit underwriting Platform which made OakNorth one of the most much appreciated start-up.

Many defaults have followed the coronavirus pandemic, although OakNorth’s biggest default to date has been £ 41million on loan to a luxury property developer who went bankrupt in 2019.

Rishi khosla, the bank’s co-founder and managing director, admitted that at times its default rates were higher than some other UK specialist lenders, but said OakNorth had fully recovered debts on four of its 10 loans in default and expected recoveries of more than 90 percent on the other six.

He told the Financial Times that 10 defaults over more than five years and around £ 5bn in loans “aren’t going badly”, adding: “I would say you probably couldn’t find a reference anywhere in the loans. of financial services that actually compares against that.

OakNorth was launched in September 2015 by Khosla and co-founder Joel Perlman after selling their previous company, which outsourced investment banking research in India, to rating giant Moody’s.

The bank provides loans of up to £ 50million to businesses and property developers in the UK, while licensing its lending software to lenders in other countries. It has a large back office in India which includes credit analysts.

The pair initially said the bank would avoid traditional forms of collateral, but today the vast majority of its loans are secured by fixed assets, including real estate, with construction making up the largest segment of its loans. OakNorth said it continues to lend against “various guarantees” and to companies without significant tangible assets. The bank ended 2020 with an outstanding loan portfolio of £ 3.5 billion.

In January 2019, Khosla said OakNorth had not experienced any defaults or even defaulted on payments, signaling “zero” out of hand to the public at a FinTech conference when asked about it. on the bank’s bad debt rate.

Next month, SoftBank led $ 440 million in funding round that valued OakNorth at $ 2.8 billion. In 2020, one of the first key funders, Indian lender IndiaBulls, sold part of its stake in a secondary sale at reduced price this gave OakNorth an implied valuation of around $ 2 billion. OakNorth said the rebate reflected IndiaBulls’ position as a seller, rather than OakNorth’s outlook.

The Financial Times analyzed documents filed with Companies House to build a picture of OakNorth defaults, identifying seven entities which owed the lender a total of £ 97million at the time of their insolvency and three others whose liabilities were not not clear.

All but two were linked to property development, with the largest default of over £ 41million linked to a luxury home construction project near the village of Wadhurst in East Sussex. Directors of the developer, Newcourt Residential, said last month that they did not expect OakNorth to be reimbursed in full.

OakNorth also had nearly £ 28million in exposure at a London development, 254 Kilburn, which came into administration at the end of 2020. The directors of that entity also said last month that they did not plan to give OakNorth a full refund.

In addition to the 10 defaults recognized by the bank, Leon Restaurants, who in 2016 borrowed £ 19million from OakNorth, last year entered into a voluntary corporate agreement with his creditors.

Khosla declined to discuss Leon specifically, but said OakNorth considers borrowers who have continued to repay and have “chosen to do something on a consensus basis as not being in default. The underlying loan does not. has not stopped working “.

Over the past 16 months, OakNorth has established an in-house recovery team. A job posting sought candidates for a position managing the bank’s “distressed loan portfolio”.

OakNorth is expected to release its results for 2020 in the coming weeks. Its 2019 deposits recorded a provision for losses of £ 1.9m against just over £ 40m in defaults and a drawn loan portfolio of around £ 2bn.

Khosla said the bank made a general allowance for possible losses in June 2020, just as other lenders have done in light of the pandemic, but he said he expected the most of the provision is ultimately not necessary.

“If you look at the fundamental credit risk that we take, the credit risk is actually pretty measured,” he said.

Total loan portfolio growth fell to 12% in 2020, which the company said was due to the slowdown in lending activity in the first half of the year caused by the pandemic. The bank said its current growth is more than double its 2020 rate.

In 2019, he reported pre-tax profits for its £ 66million UK bank, but OakNorth declined to provide figures for the entire group, which is owned by a Jersey holding company that Khosla chairs.

A Singaporean entity owned by the holding company in 2019 recorded a pre-tax loss of £ 23million, according to local company records.

“We have always been transparent that at a Group level we are profitable and still invest in our software business,” said OakNorth.