From risk to resilience: the power of security in a CRED investment

One of the risks with any loan-based investment is the borrower defaulting on the loan.

However, this risk is mitigated by careful management from experienced lenders. As the Bond Adviser report explains: “[Australia’s] domestic insolvency landscape for corporate lending gives lenders significant flexibility in terms of recovery … [so] default does not automatically mean loss but rather, restructuring, and subsequently, potential recovery”¹.

The repayment waterfall in the figure below shows how creditors rank, according to their seniority within the loan agreement.

The secured nature of CRED investments is particularly relevant as the broader economy faces the risk of slow-down, triggered by domestic monetary policy and/or international recessionary conditions.

Nonetheless, defaults are actually quite uncommon in practice.

“A final layer of income and capital security for real estate credit investors is the low level of loan defaults in the domestic lending market. Australia ranks in the world’s top 10 for efficiency in enforcing contracts,” was the conclusion of a study by the World Bank on this topic².

In the event of a default, lenders such as Zagga have a range of options available to them to manage the situation. Amending loan terms and/or restructuring the debt are the most common approach, and in many cases, sufficient to resolve the default. Generally, taking possession of the mortgaged property is the last resort, but if this happens, the senior mortgager has the ability to sell the asset to recoup their loan.

While Australia is not immune from the challenges facing economies around the world, the significant protections provided to lenders flow through to investors in real estate debt, reducing the risk of significant capital loss.

These factors outlined further in Zagga’s Whitepaper suggest that the CRED asset class may be a potential safe harbour in the midst of a global inflation storm. Continue reading via the attachment to learn more.