What is an Asset Backed Loan Note?

For many investors, asset-backed loan notes are the only acceptable loan notes available for purchase. Though non-asset-backed loan notes are available, they do not represent a particularly attractive prospect for most established investors. As the name suggests, an asset-backed loan note is a loan note that is secured against one or more assets of value as an insurance policy for the investor. If the issuer fails to repay the investment capital (or deviates from the initial agreement in any way), the investor has the legal entitlement to repossess and sell the assets named in the contract.

Viable property (residential or commercial) and/or land are the most common assets used to back loan notes, though various other assets of value may be accepted by the investor.

What Information is Included in an Asset Backed Loan Note?

Every loan note is unique, as the agreement is tailored in accordance with the requirements, preferences, and objectives of both parties.

Most asset-backed loan notes will include:

• The full names, addresses and contact details of those signing the agreement.
• Signatures from all parties of interest named in the contract.
• The principal sum (amount of capital) to be loaned by the investor.
• Details of the assets that will be used to secure the loan.
• Terms and conditions regarding ownership of the assets in the case of non-repayment.
• How much the issuer must pay in interest and when.
• Any supplementary information on penalties for missed or late payments.
• The maturity date of the loan – i.e., when the capital must be repaid in full.
• Details regarding early exit clauses and/or early repayment options.
• Information on trustees if applicable.

As an asset-backed loan note is a legally binding financial agreement, it is essential to ensure all parties involved are completely satisfied with its content before signing.

The Most Common Asset Backed Loan Note is the note used by construction companies and developers to generate funds for property development projects.

The property (or properties) being worked on will usually serve as the security for the loan and/or the land where the project is taking place.

The Basic Principles of Asset Backed Loan Notes

Appropriately arranged and overseen, an asset-backed loan note can be a surprisingly simple funding solution and investment opportunity. At its core, the principles of an asset-backed loan note are like those of taking out a mortgage.

The individual or company selling the loan notes reaches out to private investors for funding, with the incentive of fixed-rate interest payments over an agreed period. As an insurance policy, the borrower offers collateral (security) in the form of assets of value to cover the costs of the loan.

This means that even if the project fails and/or the company declares insolvency, the investor can recoup most or all their capital losses by selling the assets they subsequently take ownership of, however, the risk of such an eventuality can be effectively mitigated by conducting due diligence and investing exclusively in credible companies with an established track record and credit rating.

What Are the Advantages of Asset Backed Loan Notes?

From the perspective of the issuer, the immediate advantage of an asset-backed loan note is the flexibility and accessibility of this type of borrowing.

Investors are often willing to offer loans to cover a much greater proportion of the total costs of the project than a typical bank or lender.

A traditional lender may agree to cover 50% of the project’s total costs, a higher amount can be covered with a high-value asset backed loan note.

For the investor, the potential to generate an attractive fixed-rate income through regular interest payments is the main point of appeal. Another advantage with asset backed loan notes is the relatively low-risk nature of the investment, as the capital provided is secured against appropriate assets.

Independent Expert Advice…

If you are considering an investment in asset-backed loan notes, independent broker support can help you gain access to the best loan notes available from credible and established issuers.

At UK Finance Group, we can provide you with the information needed to help you make an informed decision and assess the potential value of the loan note investment opportunities available.

Call or email anytime to arrange an obligation-free consultation with a member of the team at UK Finance Group.