In general terms, Loan Notes have been around for a very long time. A Loan Note is an extended form of a generic I Owe You (IOU) document from one party to another. It enables a payee (borrower) to receive payments from a lender, possibly with an interest rate attached, over a set period of time, and ending on the date at which the entire loan is to be repaid. Loan Notes are usually provided in lieu of cash at the payee's request.

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A loan note denotes a type of contract that typically outlines the legal obligations of the lender and the borrower. A proper loan note will include a set of contractual penalties, including the right to sue or seek arbitration if either party to the contract fails to meet or otherwise defaults on financial obligations. 

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Its a useful way for businesses to raise capital, and a means for investors to get involved in large scale projects, while balancing their portfolios.

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Loan notes come in different forms. Some are:

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• Transferable

• Able to be traded on the stock market

• Either secured or unsecured

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What are Property Investment Loan Notes?

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In the case of Property Loan Notes, the capital advanced is used for property development.

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Traditionally, property developers and construction companies funded property developments with loans from banks. However, after the 2008 recession, banks changed the way they lend money. Heightened caution among lenders caused them to deem virtually all development financing to ‘short-term’ which has meant that developers have had to seek alternative methods for raising funds.

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Developers use property loan note investments to raise funds for their projects, while investors benefit from one of the highest interest rates currently available in the UK alternative investment market.

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The gap in the development financing market has been fulfilled in part by developers issuing Loan Notes, which allow them to raise the necessary funding required. These investments are considered higher risk, which is why investment providers offer a high fixed rate of interest. It is also an alternative to investing on the stock market, or in more conventional property investments such as buy-to-let.

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Loan Note Structure

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All of the Loan Note opportunities introduced by Alfred William Consultancy are structured as follows:

 

1. Interest is paid as 'income' periodically, or is compounded over the term of the loan and repaid on the maturity date as 'growth'.

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2. Throughout the term of the loan, the Loan Notes are secured by a charge over the assets of the company, which is governed by a Security Trustee. Please note that this DOES NOT mean that your investment is safe and DOES NOT guarantee repayment of your capital. There is always a chance that you might not be able to recover part or all of your capital should something go wrong. Please read the ‘Key Risks’ section of our website.

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What is a Security Trustee?

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A Security Trustee is normally appointed by a Loan Note issuer for the benefit of Loan Note holders to safeguard the interests of Loan Note holders. A Security Trustee is independent of the issuer and normally has the ability, if required, to take control of the issuer’s underlying assets on behalf of the Loan Note holders, if the issuer was to be in default on payments due and payable under the Loan Note Instrument. This structure avoids granting security separately to all creditors which would be costly and impractical.

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A Security Trustee is reliant on the issuer to provide it with the relevant information or on Loan Note holders to notify it of default. If a Security Trustee is not aware of a default event, then they will not be in a position to enforce the provisions in a Security Trustee Agreement. If a Security Trustee is required to exercise its powers under a debenture or a charge, it will appoint a receiver who will then liquidate issuer’s underlying assets to repay creditors. Fees are likely to be applied if this course of action is taken. Loan Note holders are classed as secured creditors, but certain creditors may take priority over secured creditors e.g. HMRC, Security Trustee, Receiver Fees or VAT liabilities.

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Please, note that an existence of a Security Trustee does not guarantee the success of the issuer, getting your interest paid or recovering the initial amount invested. A Security Trustee merely holds charge over the issuer’s assets in trust for Loan Note holders, and can appoint a Receiver, Administrator or Liquidator in the event of default, to recover part of all the monies invested.

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AWC's Loan Note Checklist

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If you are considering a Property Loan Note investment, make sure the offering has the following 'must haves':

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         Is there a Security Trustee in place?

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         Is there Corporate Guarantees in place (following assessment of Guarantors assets and liabilities).

 

         Is there any Charge in place to secure your investment?

 

         A company assets fixed and floating debenture (Charge) should be in place.

 

         Is there a Special Purpose Vehicle (SPV) in place?      

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