# Loan Note Investments



## Daddy Ireland (20 Jan 2018)

Anyone any experience of investing in this type of vehicle as part of a balanced portfolio.   Typically pay about 9% per annum or thereabouts for durations of approx 3 years.  Usually monies are required for property development.   Typically senior debt first charge on the asset been financed and typically perhaps 70% of a project is financed by this type of senior secured debt.    In this case in the event of the company going belly up one should have a very good chance of getting their money back.  Not sure of tax implications but I guess the interest is only subject to CBT.   All thoughts appreciated.


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## Joe_90 (20 Jan 2018)

I think at 9% the chances of getting your money back if it goes belly up are very slim.

The interest would be subject to Income Tax, PRSI and USC.

The company should withhold 20% withholding tax and remit it to the Collector General and you can claim a credit for that.


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## Jim2007 (20 Jan 2018)

There is a reason why the rate is high... and on what planet does MBS form part of balanced portfolio??? We have been here before and it did not go so well.


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## Gordon Gekko (20 Jan 2018)

I’d run a mile.

If it goes well, you get 9%.

If it goes badly, you lose it all.

Development risk with capped upside...I would run two miles!


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## cremeegg (20 Jan 2018)

I agree with the previous posters, stay away.

The reason being that if things go wrong the first 70% of any assets go to the senior debt, the bank presumably.

This usually involves the bank putting in a receiver whose priorities are 

1. His own fees
2. The banks money

If there is anything left after that he looks again at his own fees to see how he can charge some more.

When I was about 21, I was sent to a certain business in receivership, my employer was the receiver. I clocked in in the morning, I clocked out in the evening and my employer charged 50 quid an hour. Sometimes we photocopied, mostly we played pong.


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## MrEarl (20 Jan 2018)

Hello,

I have come across some parties that are offering "loan notes" to help raise funds for property development projects, that are secured by first fixed mortgages over freehold properties, so we all need to be very clear as to what exactly the original poster is talking about here.

In the case of an unsecured loan note, 9% pa is far too low for the likely level of risk to be taken on.  The specific return required will differ from one individual to the next and also, from one deal to the next, but I would be looking for high teens and upwards for my annual return.

In the case of a secured loan note, then much depends on the quality of the security offered, the overall loan to value (of security), the time until maturity and return of the loan, the likelihood of the project succeeding, the risk of the project being significantly delayed, the risk of the security dropping in value etc.  9% pa may be an acceptable return here, but much depends on the specifics of the transaction.

Regardless of whether we are talking about a secured or unsecured arrangement, there is a serious risk with these deals because your funds are going to be used for one development project, or given to one borrower, and as such it's either high risk, or extremely high risk, depending on whether you are getting (real, tangible, enforceable) security or not.

Get an independent solicitor to read over the documentation and advise you on it's implications, and in particular if the documentation you are being asked to sign can be enforced in an Irish court, before you proceed with either of the above options.

Definitely not suitable for widows or orphans, or about 90% of the rest of the population !


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## Daddy Ireland (20 Jan 2018)

Thanks for the replies.  Mr Earl you make very good points.  Cremeegg , my loan would rank equally with the banks I am sure as secured first fixed mortgage.  A leading investment firm raised circa 25 million euro last year from loan note issuances.  I would imagine they would have vetted the companies extremely well before taking on the raising.  Nothing worse than a bad deal to sour the reputation.  A certain '.Money Doctor ' recommends these on page 367 of his current book to people with pension lump sums who have cleared their mortgages and have the kids sorted.  But I too take all of your points on board.


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## RedOnion (20 Jan 2018)

There is no way you would get 9% on a senior loan note where there is tangible security.


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## Jim2007 (20 Jan 2018)

Daddy Ireland said:


> A leading investment firm raised circa 25 million euro last year from loan note issuances.  I would imagine they would have vetted the companies extremely well before taking on the raising.



€25 million is peanuts, expect very little over site for such a small amount.  It this was such a good deal at 9% the firm would have had no problem laying it of to a client and you'd have never heard of it.  You appear to be way out of your depth on this and would be well advised to walk away.


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## Daddy Ireland (20 Jan 2018)

Thanks again.  All thoughts appreciated.  No commitment made.  Exploring all avenues to get an income from 250k in retirement.  So this is just another area I came across to look into.


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## Gordon Gekko (20 Jan 2018)

What portion of your overall pot does the €250k represent?


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## Daddy Ireland (20 Jan 2018)

100% .  Looking for ideas that would return 5%.


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## Gordon Gekko (20 Jan 2018)

Daddy Ireland said:


> 100% .  Looking for ideas that would return 5%.



That sort of investment would be crazy for your portfolio. If you had €5m, €250k into something like that would be punchy.

Is that 5% gross? 

What about a diversified European REIT portfolio? 

Or a Medium Risk fund or portfolio with 50-60% equity content?

Or, and some will shoot me for saying it, an investment property?


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## Daddy Ireland (20 Jan 2018)

Only would have contemplated 10% being 25k to the loan note idea. Still not ru,ing that out with proper research.

Well I reckon 5% net was on my mind for that part of my investment.

Thanks for other ideas.


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## Daddy Ireland (20 Jan 2018)

Investment property today.  Not a chance.


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## Gordon Gekko (20 Jan 2018)

Daddy Ireland said:


> Investment property today.  Not a chance.



How can you contemplate lending 10% of your investable wealth to a borrower who can’t get finance anywhere else so he/she can build houses, but baulk at buying a property?

For the record, I think there are more diversified solutions for you.


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## Daddy Ireland (20 Jan 2018)

Because at my age 60 to buy an investment property I would have to use pretty much all of my investible wealth or get involved in borrowings.  Being a landlord ain't of interest to me with all the associated rules and regulations. So as you say some people would shoot you for suggesting an investment property.  Seems though there's a lot of fools investing in loan notes for example if 25 million was invested through one investment firm. It might be tiny but that is one firms clients monies.  I am looking for ways to invest 250k to get some decent return and thought 10% to such a project would be an idea and hence I sought opinions.  Mr Earl made a lot of sense ans so I am unlikely to go down this path without sound fundamentals being in place.


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## Gordon Gekko (20 Jan 2018)

So maybe take a look at a diversified portfolio of European REITs?


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## MrEarl (21 Jan 2018)

Hello Daddy Ireland,

For what it's worth, I would be far quicker to invest in quoted equities (value stocks) across the Irish, European or possibly even US stock exchanges, if I were you. 

There are many very sound, long time established, multinational companies that should on average, give you 5%-7% pa (between dividends and capital growth).  

Granted, there is a risk that the value of the individual shares might fall, but there is also the very important attraction of liquidity - you can sell the shares anytime you want.  

Also, you don't have to invest in one sector (i.e. property), you could diversify across several industries, so as to reduce your risk significantly. 

You won't be able to sell a loan note very easily, if you want your funds back at any point before it repays


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## RedOnion (21 Jan 2018)

Interestingly, below is article along the lines of what OP might have read.

https://www.rte.ie/lifestyle/living/2017/0731/894203-are-you-ready-for-retirement/

While there are examples of where this has been possible, it's not risk free. Google Ballisk Homes for an example of one that has worked out - but even there there is a limit to the upside. An equity investment in the same period would have been far more profitable.

Just remember those who are involved in issuances of Loan notes receive their fee income upfront, whether the loan repays or not!


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## Daddy Ireland (21 Jan 2018)

Spot on Red Onion.  Ballisk Homes is the exact type of loan note I would be thinking about.  Dublin property investment, severe shortage of property and should work out ok over the next 3 years or so. That's closed now though.   Spot on 're the article too.  I would consider the author a shrewd man.  Mr Earl yes I am thinking strongly about some monies to companies you mention but USA would not be on my list. To Gordon, yes thanks I will look into European Reid's.


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## RedOnion (21 Jan 2018)

Daddy Ireland said:


> That's closed now though.


Not just closed. They've since repaid it, because they refinanced it cheaper elsewhere after 12 months.
Not a bad return, but I don't think you'll find a lot like this. Check out how the fee structure works on these also if you're looking into them.


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## Daddy Ireland (21 Jan 2018)

What is the simplest way to invest in European REIT's.  I don't find ETF's of much interest as the tax thing is a bit complicated.   What have been returns from such in last 5 years.


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## Daddy Ireland (21 Jan 2018)

Wow, I didn't know that it was repaid early. I must look into that to see if anything on top of 9% was paid for early redemption.   Fee to broker was 2% up front.


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## Daddy Ireland (21 Jan 2018)

Protection built into Ballisk Loan note meant investors received 13.87% after 13 months for early redemption.   Now I would have liked a bit of that.  Buyer beware and all that but there are some good loan notes floating around too.


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## Jim2007 (21 Jan 2018)

Daddy Ireland said:


> Spot on 're the article too.  I would consider the author a shrewd man.



And I would consider him anything but!  He is advocating exactly the kind of strategy that saw Irish investors loose more than most other Europeans!  The loan notes are basically concentrated subprime lending and the  property syndicates are so small that they normally would be referred to as penny stock type investments. And of course to say nothing of the fact that property is one of the most risky asset classes you can invest in!

Of the portfolios I worked on I say you can expect to earn a return of about 4% - 6% at a reasonable risk.  Beyond that one risks taking a serious hit on one’s retirement capital.


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## cremeegg (21 Jan 2018)

Although I posted previously that if the project fails you are likely to be wiped out, an investment in property in Ireland right now hardly seems doomed to failure.

You talk about equal security with the bank and a first charge. What does this mean, my understanding is that any charge on an asset has to rank either before or after any other charge. Why would the bank accept a situation where the loan notes ranked before, (or equal to if that is possible) the banks charge.


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## Daddy Ireland (21 Jan 2018)

All I know Cremeegg on  that point is that there is a first charge put on the property that is being funded.  So I assume if a bank is putting up 70% and say the balance is 30% funded by a loan note without delving further I cannot answer for sure but I reckon the bank and loan note providers have equal ranking.  It is a question though that I can check should I be interested in another venture that comes up.  I would only be interested in  loan note issuance that is Dublin property based.


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## RedOnion (21 Jan 2018)

If we take the example of Ballisk, there was no bank debt. The only other funds were equity in the company, so the senior note had first legal charge over the property assets.
This is a bit unusual. You usually see bank debt, and the junior loan notes being sold to investors, so they rank behind bank debt.

Note: there are times that banks (usually via SPVs) will invest in the junior notes (mezzanine finance) so you'd have equal ranking in that case as you've all bought the same note.


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## Daddy Ireland (21 Jan 2018)

So Red Onion would that have made Ballisk a sound investment in the current property environment and if so should a similar scheme be offered what would you think.


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## Gordon Gekko (21 Jan 2018)

The project goes well; I get 9%.

The project goes badly; guess what, we’re partners in a development project.

I think I’d prefer to just partner on the development as I’m not a big fan of limited upside/unlimited downside.


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## cremeegg (21 Jan 2018)

Of course Gordon, but unless you have a large sum to invest in a single project that’s not possible. 

To be able to participate in a project like this for €25k, with no recourse to you, is not necessarily a bad plan.


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## Gordon Gekko (21 Jan 2018)

cremeegg said:


> Of course Gordon, but unless you have a large sum to invest in a single project that’s not possible.
> 
> To be able to participate in a project like this for €25k, with no recourse to you, is not necessarily a bad plan.



I think Mr Earl’s advice is rock solid. This sort of stuff is not for widows and orphans, and I’d include someone whose retirement pot amounts to €250k in that bracket. Caveat emptor x 100.


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## Daddy Ireland (21 Jan 2018)

I would be committing up to 10% of cash pot only ie  a max 25k to such a venture.
In hindsight Ballisk clearly was a good deal but it looks like it was a reasonable risk if it was a presented loan issuance opportunity today.  As I said the investment house do not want to sell duds as too bad for business and effects any future loan issuabces they may offer.  If such a venture very similar to Ballisk is presented in the coming months I will look at it bearing in mind all the points raised.  It at least warrants an interest and if a lot of things are in place is worth an investment I believe.


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## Jim2007 (21 Jan 2018)

Daddy Ireland said:


> As I said the investment house do not want to sell duds as too bad for business and effects any future loan issuabces they may offer.



Except the evidence is exactly the opposite!  Read the Swiss government reports on the securitisation process at UBS note the order - keep the best, then next favoured investors and dump the rest on the public.  Or read up on the cases taken by Elliot Spicer when he was AG in NY.  Or simply google Canter Fitzgerald, Fines and Penalties, to see how much they care about the public.

The idea that they will not sell you duds because they are nice guys does not match the history of these investment houses.


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## Daddy Ireland (21 Jan 2018)

OK Jim I am naive about investment houses.


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## Brendan Burgess (21 Mar 2021)

Hi Daddy Ireland 

Did you invest? 

A salutary lesson here: 






						Dolphin Trust collapse - Wealth Options broker
					

I'm one of the 1,800 Irish suckers who took the German Property Group (formerly called Dolphin Trust) bait.       :confused:       Although initially hesitant about investing, I was convinced when my broker sent me the following assurance from Wealth Option Trustees (WOT):-  "We hold first...



					askaboutmoney.com


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