Losses at Funding Circle more than tripled in the first half of the year, as the sudden onset of the coronavirus pandemic forced the peer-to-peer lender to write down the value of loans it had hoped to sell on to other investors.
Funding Circle originates small business loans on behalf of retail investors and other financial institutions, and generally only holds a small number of loans on its own balance sheet. However, it was forced to take £96m of fair value writedowns during the six-month period, linked to investment vehicles that had not yet been sold.
The adjustments, along with a writedown of all the goodwill linked to its US business, drove it to a pre-tax loss of £115m for the six months to June, compared with a £31m loss in the same period last year.
Samir Desai, chief executive, said “because of the speed and severity of Covid — just how quickly it hit — we were unable to sell those loans as quickly as we would have liked”.
The company also cautioned that investors in some of its loans were on track for their first-ever losses. Annualised returns on the £619m of US loans it originated last year are now expected to be about minus 0.9 per cent, compared with expectations at the start of the year that the loans would generate positive returns of up to 7.8 per cent a year.
Mr Desai stressed that performance in the rest of the company’s portfolio had been resilient, despite an increase in expected default rates.
“If you look at the UK numbers, we’re pleased that every cohort is expected to generate a positive return despite going through what is pretty much the worst possible recession for small business borrowers,” he said.
Shares in the company fell 7.5 per cent to 57p in morning trading.
Since April, Funding Circle has focused on lending through government-backed business support schemes, extending £815m through the Coronavirus Business Interruption Loan Scheme (CBILS) in the UK and about $500m through the Paycheck Protection Program in the US.
It warned in April that it was unsure what the financial impact of the schemes would be. On Thursday, however, it said the CBILS loans had “similar economics” to its traditional lending, and renewed its earlier target of breaking even on an adjusted earnings before interest, tax, depreciation and amortisation basis by the end of the year.
Mr Desai was also optimistic about the long-term impact of the pandemic in encouraging more businesses to use online lenders, and proving that the 10 year-old company would be able to survive a downturn.
“We wouldn’t have wished for a recession, but I think it’s a chance for us to prove that the loans we do are good and the model is very resilient,” he said.
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