Lenders are reviewing security after possible defaults due to economic headwinds

By Puja Sharma

Experts say it’s time for lenders to review security given the potential rise in defaults caused by economic headwinds

A likely surge in defaults due to the economic headwinds impacting the UK economy should result in lenders reviewing their loan books and the underlying security.

The security review is often an essential element in a lender’s strategy to recover the of its money from a borrower. It allows a lender to identify issues relating to its lending documents that have either existed since their creation or arisen during the loan. The identification of such issues early on is likely to impact the lender’s dealings with the borrower, guarantors, and other secured creditors. Its findings may dictate the tone of the approaches made to these persons and other stakeholders.

The UK economy is facing many headwinds. Whether from a Hard Brexit, Covid-19, or the structural changes facing the high street economy. Most lenders will now be reviewing their books to identify borrowers in exposed industries ahead of the usual warning triggers of breached covenants and missed payments. This article is intended as a timely reminder of the purpose of the security review when it is needed, and some common issues encountered.

Partners Ann Ebberson, Alex Edwards, and Kate Rigby spoke at Rosling King’s seminar, with Alex Edwards, commenting that given the multitude of factors driving the current economic crisis, including the slump in the value of the pound, rising construction costs and supply chain issues, there is a real possibility that borrowers will default on their loans.

Lenders should be reviewing their books to identify those borrowers who may be more exposed or who may already be showing signs of heading toward breached covenants or missed payments.

Security reviews are an essential element in a lender’s enforcement strategy, confirming the validity of its security over a borrower’s assets; they enable lenders to identify any issues in their lending or security documents.

A borrower can default on their lending in many different ways and defaults are, of course, specific to each lender under the terms of their loan conditions.

A security review is likely to focus on:

• Material risks that security might not be valid/open to challenge
• Identify any assets which are not subject to valid and effective security
• Steps the lender could take to rectify any defects
• Enforcement options available to the lender and any restrictions on those options

Alex Edwards, the partner in Rosling King’s banking and finance group, said: “We are facing difficult economic times and lenders should be looking for signs that their borrowers may be facing problems, early interaction is imperative to try and prevent defaults on lending and to maximise recovery options if borrowers do default.”

Key Highlights

• Exercising your power of sale under the provisions of the Law of Property Act 1925 and selling the security property
• Seeking repossession of and selling the security property
• The lender can appoint a Law of Property Act Receiver/Fixed Charge Receiver
• Enforcing a Guarantee
• Look at enforcing any collateral warranties that you have been assigned to you