The Orca research team recently completed the second edition of our comprehensive ‘ArchOver Investment Report’ (downloadable PDF) to use for due diligence. This article is a highly-condensed version of the report. The full report can be downloaded by clicking the button further below.
ArchOver is a peer-to-peer (P2P) lending platform which connects UK businesses requiring finance with investors seeking a secure and favourable return. Launched in 2014, ArchOver offers five investment models: ‘Secured & Insured’ (S&I), ‘Secured & Assigned’ (S&A), ‘Secured’ (S), ‘Bespoke’ (B) and ‘Research & Development Advance’ (RDA). Secured & Insured loans historically comprise 78% of the ArchOver loan book. In 2017, Secured & Insured loans comprised 63% of the loan book for the year, reflective of the addition of new investment models. Investors can expect returns ranging from 6% to 10% per annum (p.a.), however, rates depend on the individual loans selected and vary dependent on the level of security.
ArchOver is part of the Hampden Group (Hampden), and 91% owned by Hampden Holdings Ltd, which is the ultimate parent company. Hampden is a leading provider of specialist business support services to the insurance and financial services markets, with a 300-year history and some £2.4 billion under management in the Lloyd’s insurance market. Despite ArchOver operating at a loss for 2017, Hampden has provided sufficient capital to meet the day-to-day operations and regulatory requirements of the platform for the foreseeable future. Hampden has also invested on exactly the same terms as other investors £12,448,000 across the platform to-date.
Table 1: ArchOver Investment Models, source: Orca
Default & Recovery
ArchOver does not incorporate a default assumption into the interest rate calculation. To-date, ArchOver has experienced two defaults and no losses. ArchOver defines a default as: a missed capital payment; a missed interest payment; failure to report monthly as required and failure to rectify the issue within 14 days. When a borrower is classified as being ‘in default’, ArchOver will act to recover the investors’ capital. A loss is when the security has been insufficient to repay investors’ money and capital losses have occurred.
The two Borrowers which are classified as ‘in default’ are currently in the recovery process. At the time of publication, an Administrator has been appointed and security is being reclaimed.
If the borrower misses a payment (interest or capital), fails to report monthly and fails to rectify the issue within 14 days, ArchOver classifies this as a ‘borrower in Default’. Similarly, if ArchOver believes a business is failing and there is a breach on the loan agreement, the borrower will be classified as ‘in default’. In both situations, an Administrator will be appointed. The Administrator will review options for the future of the company, which include ceasing to trade and closing down, restructuring, refinancing, or full or part sale of the business. ArchOver will work with the Administrator to maximise recoveries for investors and limit losses.
With regards to Secured & Insured loans, for any amounts not recoverable, ArchOver will enforce the insurance policy.
A Recovery Manager is appointed to represent the interest of the investors. Investors will receive regular updates and written monthly reports throughout the entire recovery process.
Table 2: ArchOver Default Loan History, source: Orca
Table 3: ArchOver Liquidity, source: Orca (Correct as at 23rd March 2018)
ArchOver has facilitated in excess of £60 million worth of loans cumulatively over time, and £31.5 million in 2017 alone – this is almost four times the total lending for 2015, which was £8.69 million. The platform’s lending total grew 106% between 2016 and end 2017. While this rate of growth may be difficult to replicate in an increasingly competitive marketplace, ArchOver maintains a rich pipeline of high value loans helping to support its continued growth objectives.
Chart 1: ArchOver Liquidity, source: Orca
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The borrowing businesses are typically seeking debt-finance for working capital or to replace invoice financing, factoring or bank overdrafts. With ArchOver, borrowers can seek loans from £250,000 up to £15 million. Loan terms average 18 months for 2017 and range from three to 36 months. Businesses can borrow through ArchOver multiple times. ArchOver’s Credit Team performs detailed credit analysis on every loan before approving and listing on the platform. ArchOver’s Loan Management team monitors the business and its assets throughout the loan period on a month-by month basis, giving them advanced warning if a default or change to repayment should be expected.
The pie chart below illustrates the diverse range of sectors ArchOver investors have gained exposure to over time. ArchOver does not deliberately align its credit writing with specific sectors, but rather evaluates businesses on a case-by-case basis. As it happens, this has led to a significant portion of borrowers falling within the following sectors: financial services (brown), construction (green), healthcare (blue), software (light grey) and engineering (dark pink).
Chart 2: ArchOver Borrower Breakdown
Like ArchOver’s agnostic position on which sectors to lend to, the platform does not prioritise or preclude lending in certain regions of the UK. Again, each business is taken on a case-by-case basis.
ArchOver has facilitated lending to businesses across 27 different areas in the UK. Even so, there is an element of geographical concentration, which is perhaps best signified by the fact that 22.2% of the loan book is attributed to Birmingham based borrowers, and 11% is attributed to London-based borrowers. Bear in mind, ArchOver operates out of London and has pre-meetings and follow-up meetings with all borrowers at borrowers’ premises.
Chart 3: ArchOver Geographic Breakdown
Zero Default Policy
The platform does not forecast likely defaults as the platform has very limited data to base its calculations, having only had two recent defaults since it started. By way of comparison, however, many major P2P platforms do model future defaults and bad debt rates which can provide comfort for investors in the eventuality of a default.
Insurance Dispute (S&I Investment Model only)
If there is a dispute by the borrower’s customer for services delivered or if the borrower fails to inform the insurer regarding a default within the prescribed period, a dispute over insurance payout could occur. ArchOver’s strict monitoring process ensures that they are kept abreast of any potential customer defaults. Also, ArchOver aligns its Secured & Insured lending with markets which are performing well and are highly insurable.
Investors manually select the loans they wish to fund. There are only ever a few borrowers listed on ArchOver at a given time, so diversification can be hard to achieve. Borrowers may also refinance their current borrowing with a new loan. ArchOver clearly identifies each company to avoid borrower concentration. Investors should, however, remain aware of the loans they have made across the platform, to avoid being exposed to a single borrower, albeit two different loans.
There is no secondary market on ArchOver enabling investors to sell or buy loans. Investors should therefore be prepared to commit to the duration of the loan term. ArchOver intends to provide a facility during the next year.
ArchOver has progressed significantly in recent months, adding new investment models to its platform offering. This will undoubtedly promote the platform to a wider demographic of investors, delivering opportunities which cater to different risk profiles and investor types. The next year will be telling as the platform continues to grow and one thing investors will keep their eye on is the platform’s loan recovery process which, to-date, has been largely untested.