Defaults are an inevitable part of doing business, but they are not all the same. Ultimately, the outcome for the lender/s depends on several key factors; the exposure they have taken on, the processes they have in place for resolving defaults, and the nature of the security in place.
When a default occurs, it doesn’t necessarily mean that the risk assessment process neglected to account for particular details. What it does mean is that certain risks (market risk, borrower risk, operational risk or something else) have become a reality.
Estateguru has a strong risk and debt management teams in the different countries in which we operate and we have also established strong cooperation with our liquidation partners in all of our operating countries. Moreover, Estateguru also has a security agent in each country in which we operate.
What exactly is a security agent, and what is their role with Estateguru?
The security agent is a legal entity, which was established and, until March 2023, also controlled by an independent law firm. Due to changing regulatory requirements, a security agent has subsequently been acquired and is now supervised by Estateguru with the management of everyday activities still overseen by the independent law firm to mitigate potential conflict of interest risks. The security agent is tasked with representing Estateuru’s investors in all notary dealings. The security agent is the link between the bailiff and the investors, and they represent our investors in all court and bankruptcy proceedings. The bailiff’s task is to ensure the legal nature of the liquidation proceedings, seize the properties that are to be liquidated, ensure that the collateral property is available and there are no tenants occupying it etc, and arrange the auction process. The bailiff is also responsible for ensuring that all required notifications and documentation has been provided to the borrower in accordance with the law, especially in cases where the borrower is unwilling to participate, or is actively avoiding the bailiff.
Enforcement Procedures
In all the markets in which Estateguru currently operates, the enforcement procedures are relatively similar in nature – Estateguru terminates the contract with the borrower, and then the case is handed over to the security agent who prepares all the documentation and forwards it to the bailiff or the court.
When the court or bailiff has processed the legal documents, which may take up to a few months, the bailiff can start the auction of the property. The property will be auctioned and if there are no buyers, the price will be reduced and the new auction will be announced and the process will continue until the property has been sold and funds paid to Estateguru.
The period from starting the process until receiving the funds from the sale of the property differs in length from country to country, and the current market conditions also have a role to play in determining the duration of these processes. The borrowers in these cases can also cause further delays through argument and counter steps. In some cases, it is quicker to take control of the collateral and sell it ourselves.
Let’s take a look at the different markets in which we operate, and the approximate timelines to recovery in each one.
Resolving Defaults in Different Countries:
Germany
After the termination of a loan contract, there is a 6 months waiting period for voluntary fulfilment of the debt. After this, the enforcement process can start. We have to apply to the court to start the enforcement process, which extends the process by several months. After the court has approved the enforcement we can approach the bailiff to arrange the auction and forced sale of the property. This process can take several months. Another option is to sell the claims.
Finland
After termination of a loan contract we must apply for an enforcement decision from the court. There are no deadlines for this process and the timeline depends on the judge who handles the case and also on the debtor – if the debtor disputes the process or, for example, avoids receiving court notices. Based on our experience the process of receiving enforcement decisions from the court takes 3-6 months. After the court has made a decision on the forced sale of the property, a bailiff will be appointed to start the sale and auction process. It usually takes 1-3 months before the sales process can proceed.
Estonia
In Estonia, after termination of the contract, there is no court decision needed. We can apply to the bailiff to immediately start the enforcement process, but must provide 30 days notice for the debtor to voluntarily fulfil the debt. After this period the bailiff can initiate the sales process of the property in the auction.
Lithuania
In Lithuania we have to provide 30 days for the debtor to voluntarily fulfil the debt. After termination of the contract we have to turn to the notary to apply for the enforcement notice. This process will usually take up to one month. After receiving the notice we can approach the bailiff for the forced sale of the property. Before starting the sale and auction of the property, the bailiff must also give the debtor 30 days to voluntarily fulfil the debt. After this period we can start the sale process of the property.
Latvia
After termination of the contract we must apply for an enforcement decision from the court. This is usually received in 30 days. After this we can hand over the case to the bailiff. It usually takes up to 30 days for the bailiff to start the sale process of the property via an auction.
Refinancing and bankruptcy procedures
In many cases borrowers still want to save their project and their own equity in the project. This means that for many defaulted projects the borrower is still able to sell the property or refinance the loan before we sell the property. If this happens, we are usually able to recover the money in less than 6 months. In rare cases, we might also face the bankruptcy procedure or legal protection process, which are also initiated in order to sell the property, but which may take more time than the bailiff procedure.
Estateguru’s Open Portfolio:
Why monthly updates do not always provide new information
As we are dealing with various governmental procedures, and because there are sometimes courts involved in granting the sale of a property or resolving the borrower’s dispute, the recovery process in certain cases might take more time than 12 months.
Once we have submitted our applications to the court or to the bailiff and have done everything from our side legally, there is not much more we can do than wait. So unfortunately as each of these process phases take several months, we can’t provide substantive loan updates every month.
We can assure investors that for every defaulted case our debt management, risk and legal teams are working diligently to ensure the fastest and highest recovery for the defaulted loans. We are representing your interests and our own, and we are as impatient as you are for results.
We have adopted a more aggressive debt collection strategy since November of 2022. We are more rapidly defaulting and moving to enforcement in certain cases, when our traditional, cooperative approach to workouts does not lead to recoveries. As previously mentioned, we have made the business decision to pause German operations, default the borrowers who do not keep promises and move on with enforcement.
It is difficult to state a specific timeframe for the recovery of the defaulted loans, because every case is different. We have almost a decade of experience in recovering defaulted loans. The statistics of the recovered loans are given also on our statistics page: https://app.estateguru.co/statistics/ (but you can read a short summary below).
Recovery Statistics:
