Q2 Loan Book Insights: Trends and Analysis 2024

Pallas Capital has now achieved a notable milestone at the end of June 2024, managing over $2 billion worth of total loans. It marked the achievement showcasing the constant expansion of the company with robust performance throughout Q2 2024. Pallas Capital has established its grounds as the major player across the lending market, from following the profitable refinancing initiatives to the considerable loan settlements. The company is constantly steering through the market with greater confidence with the strategic management of the loan book, maintaining a lower level of risks and aiming towards the demand of the borrower across the construction lending market.

Refinancing And Strategic Moves In New Zealand

One of the key highlights of Q2 2024 was the successful refinancing approach of Pallas Capital Group to its New Zealand banking facility. Pallas Capital has attained greater access across the massive lending mandate and less cost of funds with Westpac, which serves as the key funder in the region. The strategic move boosts the flexibility of the company, paving a new path for growth across the loan market in New Zealand. It is where the company has attained notable growth since its launch in late 2022.

The New Zealand market mainly supports Pallas Capital's success. In Q2 alone, the company settled around $97.6 million in new loans, bringing the total to $343 million in New Zealand following its launch. The constant growth focuses on Pallas Capital's growing influence and ability to capitalise on the scopes across the lending sector of New Zealand.

Loan Settlements And Originations

Like in the previous quarter, Q2 2024 also offered a great opportunity for loan originations amounting to $424. One million in new loans settled from the previous year. This shows the company is following up on that growth from Q1, where the first two quarters of the year saw the company settle for over $750 million worth of loans. The company under consideration made and assumed 60 new loans in the quarter under consideration, which are 44 first mortgage loans and 16-second mortgage loans.

Nevertheless, Pallas Capital’s loan assets are still well diversified, which reduces the issue of concentration. Of the total loan settlements, construction loans were found to be a big percentage at $181. Seven million construction loans were settled during Q2, which is 43% of total settlements. This ratio is consistent with the industry average and represents the firm’s explicit sector focus on construction lending, especially because borrower demand is still robust.

Loan Repayments And Market Dynamics

Another significant factor that impacted Pallas Capital's Q2 performance was a high level of loan repayments, which amounted to $187. Six million to customers during the quarter with 5. Such repayment activity is high and corresponds to approximately 11 percent of the total number of companies. Consequently, they have been able to place 6% of the total loan book. 

Likewise, the short-term nature of Pallas Capital’s loan portfolio has an average term-to-maturity of 8. From 17 months, it enables the company to mark them to market on a constant basis. This particular strategy helps Pallas in deciding which loans to offer or to offer exit depending on the market.

Navigating Market Challenges

The broader market environment remains uncertain, including low new site activity for developers and investors. Pallas Capital team continues to be cautious about pre-development and vacant land financing and approves only loans with good exit based on the prevailing feasibility studies. This has been facilitated by refinancing as a form of loan settlement in this quarter, given that many developers are inclined to postpone the commencement of their projects.

Despite the high demand for construction lending still prevailing, lenders have to be careful. Another type of risk worth mentioning is valuation risk, which can be defined as a situation when commercial real estate being used as collateral experiences value depreciation, resulting in losses on loan portfolios. To overcome this risk, the firm updates security valuations with more than 75% of assets within the past 18 months in its loan book.

Loan Book Performance And Defaults

At the end of Q2, Pallas Capital's loan book comprised 40 construction loans and 173 others, including 43 loans in New Zealand. The quality of the overall loan book remained relatively stable. However, three loans to this company were in default, accounting for 0. Anecdotal evidence suggests this represents as much as 83% of the total loan book by value. Of these defaults, two were rollovers from the previous quarter, while one was an addition in Q2.

New Zealand’s defaulted loan is secured against pre-development property in Auckland. Pallas Capital is currently managing these defaults. A receiver has been appointed for one of the loans, and discussions are ongoing regarding the sale of the security property in the other case. Pallas still firmly believes that both loans will be repaid in due course.

In particular, one of Pallas Capital’s borrowers, Stevens Constructions, entered administration in May 2024. The company collaborated with the borrower and was able to change the builder and rearrange the capitalisation. This position leverages the imperativeness of construction lending and the need to evaluate not only the builder’s competence but also the ability of the developer as the project financier to mitigate and handle the financial and operational losses that may emanate from such mishaps.

Conclusion

Pallas Capital’s Q2 2024 financials show good performance of most of the loan portfolios, driven by refinancing activities, construction financing, and proper risk management. With a loan portfolio in excess of $500 million that is set to mature in the next one and a half to three quarters, the company is well-placed to not only retain its market share but also grow in the ever-shifting market environment. LinkedIn: https://au.linkedin.com/company/pallascapital

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