Safeguarding your investments: Making good on borrower default

Prudent risk to reward thresholds, backing from tangible assets coupled with rigorous due diligence and legal documentation. This combination creates an exceptionally high level of investment protection for our clients.

If the worst does happen, in this case a default on a property-backed bridging loan, these safeguards also mean that we can recoup our losses and still deliver the target return.

How do our investment protections work in practice and what gives them strengthened security?

The value of asset diversification

Our asset-backed investment portfolio is spread across a range of qualifying business activities, from commercial forestry to hotels and golf courses. The breadth helps to ensure sustainable, non-correlated returns across the economic cycle, while avoiding the need to put all our eggs in one basket.

We partner with specialist providers to fund bridging loans. The loans provide short-term capital to individuals or SMEs, who mainly use the money to finance property acquisitions.

Our target internal rate of return (IRR) on bridging loan portfolios is 5%. This threshold enables us to focus on high quality but low risk investments.

The security of the physical collateral is in turn backed up by stringent loan-to-value (LTV) and other lending criteria:

  • A maximum LTV of 70% for first charge loans
  • A maximum LTV of 65% for second charge loans
  • Thorough due diligence to check the creditworthiness of each borrower
  • Personal guarantees always taken out against the individual when lending to an SME
  • No loan will exceed 20% of a partnership’s capital
  • Interest payable from the outset
  • Enhanced default interest rate should a loan redeem late
  • Our investors have a priority return in excess of the service’s target return

Unlike putting money into equities or other capital market investments, the money we lend is also secured by a first or second charge on a freehold property. Just as crucially, we ensure that the legal documentation is sufficiently watertight to ensure that any necessary enforcement of the charges can be speedily enacted.

Redeeming the one that got through

Our checks on creditworthiness are exacting. But no due diligence, however extensive, can be 100% effective.

In 2019, a borrower defaulted on their obligations and deserted the property without repaying the loan.

This rare, but ever-present possibility is why our collateral-backed enforcement and redemption procedures are so important. We can step in to have the property sold and redeem the charge.

However, there was a further challenge here as the borrower had left the property in a severe state of disrepair. Even so, there is normally enough headroom built into the LTV percentage to cover for this. But delays in sale caused by the pandemic and buyers pulling out meant that the condition of the property continued to deteriorate and we faced the prospect of losing money on the transaction.

Perseverance pays dividends

However, this remained a sizeable property in a desirable area. As we moved into 2021, the property market was also increasingly buoyant once again. We therefore decided to invest in basic repairs and bringing the property up to reasonable decorative order, though not full refurbishment as the kind of buyers we were targeting would want to put their own stamp on the home.

Our modest investment in uplifting the property paid rich dividends by enabling us to sell at a price well above the net value and return the full loan capital to investors with profit. As a result of our perseverance in turning a potential loss into a sizable return, the bridging loan partnership as a whole delivered an IRR some way above our 5% target.

We believe this demonstrates the care, tenacity and solid risk mitigation we bring to the effective protection of investors’ capital. We were not going to rest until the value was recovered and the interests of our investors fully upheld.

If you would like to discuss any of the issues raised in this case study or other ways in which we protect our investors, please get in touch with our team on 020 3195 3500 or contact


Written by David Stein and Jack Dobinson


Important Information

Stellar Asset Management Limited does not offer investment or tax advice or make recommendations regarding investments. Prospective investors should ensure that they read the brochure and fully understand the risk factors before making any investment decision. The value of investments and the income from them may fall as well as rise and is not guaranteed. No assurance or guarantee is given that any targeted returns will be achieved. Forecasts of potential future results are not a reliable indicator of actual future results.

Stellar Asset Management Limited of 20 Chapel Street, Liverpool, L3 9AG is authorised and regulated by the Financial Conduct Authority.