Loan Book Commentary: Q1 2024

Loan Origination

As anticipated, we are pleased to report a continued increase in the volume of new loan settlements in Q1 2024, with Pallas Capital settling $330 million of new loans in the quarter.

In contrast to new loan settlements in 2023, these settlements were dominated by new construction lending, which made up $288 million of new loan limits. This is anticipated to be a continuing theme of our loan origination over the year, as we see a modest level of improvement in development conditions with a particular focus on residential and industrial projects.

Pleasingly, over the quarter acquisition funding also increased and the general sentiment from borrowers is that economic conditions are gradually improving. With the market expecting that we are at or near the high point for the official cash rate, and with inflation in construction costs and labour normalising, we expect to see a modest increase in site demand for the rest of 2024.

Q1 also saw $35 million of loan repayments, the majority of which were legacy construction projects that reached completion during a difficult period.

Market Outlook

The past twelve months has seen pressure on borrowers, many of which have been required to post additional capital to meet loan terms (for example, to reduce LVRs, prepay interest etc.). Broadly, borrowers across the market have been able to meet these requirements (all borrowers under Pallas Capital loans have met all such requirements).

The availability of additional equity from borrowers is important for two reasons. Firstly, it is a key feature of our credit analysis, and we monitor a borrowers’ holistic liquidity capacity and obligations very closely when assessing our loans. Secondly, the availability of such ‘credit enhancement’ supports lending by non-bank lenders (such as Pallas Capital) who may offer greater leverage than a traditional bank (our first mortgage LVR typically sits at 65%, where the banks are currently around a 55-60% LVR). Lenders with a strong credit focus will avoid the trap of lending to borrowers who may be unable to inject additional equity if and when required.

A factor that we highlighted in our last commentary, and which continues to be a significant risk to borrowers, is a failure by some lenders to honour funding mandates by advancing monies as agreed. Pallas Capital settled several loans in December for clients that had been left at the altar by another lender. Although we have been a beneficiary of these missteps, limited liquidity for the smaller non-bank lenders remains a strong risk for SME borrowers.

As previously, at the end of the quarter Pallas Capital had substantial cash and approved but undrawn funding for new loan opportunities.

Status of the Loan Book

At the end of the quarter, Pallas Capital had 40 construction loans and 156 other loans on foot. The loan book performance remained strong throughout the period.

We saw a decrease in loans in default during the quarter. Pleasingly, since the last update Pallas has successfully managed repayment of our defaulted loans in Queensland (four loans to one sponsor group) with all assets sold, settled and all debt, interest and fees repaid in full.

There are now two defaulted loans in the portfolio. One is for a retail property, which continues to be managed with the position of the Pallas Capital loan augmented with additional security pledged and a meaningful reduction to the loan balance by the sponsor. The other loan is secured against a pre-development property in Auckland, New Zealand which has a receiver appointed and the property will be sold to repay the debt. These loans represent 0.48% of the total loan book (by value).

We are confident that we will continue to maintain our perfect record of full recovery of debt, interest and fees across the loan book.

If you are looking to deploy capital into any of our current Open for Investment debt opportunities, please contact your Pallas representative or contact