How Merx approaches the lending decision
For experienced investors, the importance of disciplined lending decisions will be familiar. What matters is how that discipline is applied in practice.
At Merx, each opportunity is initially screened before key terms are negotiated, including interest, repayment arrangements, security and any special conditions.
The assessment considers the borrower’s financial position, credit history and management capability, the security being offered and whether there is a viable strategy for repaying the loan. Each opportunity is considered on its own merits.
Before a loan is issued, it must also be approved by Merx’s Investment Committee, with decisions requiring unanimous agreement.
The objective is to understand the risks of an opportunity before committing investor capital.
The role of security
Experienced investors will also recognise that security is an important protection, rather than a substitute for sound lending decisions. At Merx, it forms part of the broader assessment of each opportunity.
The Fund lends to business and property professionals, with loans secured by mortgages over New Zealand property and/or security over business assets.
Merx may take first or second mortgage security and/or security over business assets, with appropriate loan-to-value ratios. What is required will vary depending on the loan, the underlying assets and market conditions.
As the Fund’s Information Memorandum notes, security and third-party guarantees may not fully protect against a borrower default. The quality of the borrower, the repayment strategy and the way the loan is structured therefore matter alongside the security itself.
Ongoing credit management
The same discipline applied when assessing a lending opportunity continues once a loan becomes part of the portfolio.
Repayments and compliance are monitored regularly, and any issues that arise are assessed and addressed throughout the life of the loan. Merx also seeks to ensure appropriate security is in place when a loan is made and that sufficient security cover is maintained over its term.
If a borrower fails to meet their obligations, Merx can commence a recovery process. The Fund also maintains a loss provisioning policy for potential future losses.
Looking beyond the headline return
For investors, the headline return only tells part of the story. It doesn’t show how the underlying loans have been assessed, the security supporting them or the processes in place to manage credit risk.
For us, being transparent about those risks is important. Private credit involves the possibility of losing investor capital and understanding how credit risk is assessed and managed provides important context for the returns generated by the Fund.
Investors should carefully review the Information Memorandum and seek professional advice where appropriate before making any investment decision. Investments in private credit involve risk, including the potential loss of capital, and returns are not guaranteed. Understanding both the risks and the governance frameworks supporting the Fund can assist investors in making informed decisions about whether the investment is suitable for their objectives and circumstances. Investors must qualify as “wholesale investors” as defined in Schedule 1 of the Financial Markets Conduct Act 2013. The Fund is not suitable for retail investors.