Loan Book Commentary: Q2 2023

Loan Origination

During the June quarter, Pallas Capital had 22 loans repaid (approx. $136 million) and settled 38 new loans (approx. $219 million). However, there was a slowdown towards the end of that period, reflecting more subdued demand from borrowers, together with a more conservative reset of our credit parameters on new construction loan applications. Consequently, in June and July, loan repayments exceeded new loan settlements by approx. $73 million.

Demand from borrowers weakened towards the end of the quarter, as many developers and other property owners focussed their energies and capital on supporting existing projects, rather than launching new projects or acquiring new sites.

Also, we had expected a number of borrowers to move from the banking to the non-banking sector as a result of ICR covenants becoming tighter (i.e., reflecting higher interest costs). In fact, the major banks have proved more flexible than we anticipated, moving from an ICR of about 2.0x generally to about 1.5x and in some instances lower (we are aware of one major bank in New Zealand setting its ICR requirements at 1.1x for the next 12 months). This has enabled several bank borrowers to remain with their existing lenders, notwithstanding rising interest costs.

Having said that, it appears that borrowers are starting to regain confidence and new loan applications are currently being received at a higher rate.

Status of the Loan Book

The Loan Management team has been closely monitoring our existing loan book, and to date we have not witnessed any material change in default rates. These stood at about 1.0% of our loan book (by value) in early 2022 and are running at about 0.7% currently. Part of the reason for this is that our borrowers have contributed additional equity when required so as to maintain agreed LVR levels.

Currently, we have 33 active construction loans and 114 non-construction loans on the books. Our Watch List now contains three loans (two construction loans and one pre-development loan). A fourth loan on the Watch List was repaid in full (including penalties and fees) a few days ago.

One of the Watch List loans is now due to be repaid in full this month (following the appointment of a receiver) and one next month (following project completion). The third loan is a construction loan; there is no default on this loan but we have appointed a project manager as a precautionary measure to monitor construction progress as this has been slower than expected.

We are confident that all monies owing on these loans are well secured and will be recovered in full.

We are still finding that the refinance market is open and liquid for loans where we do not wish to remain as lender, although this process has slowed down. Two active construction loans by Pallas Capital (approx. $15 million in value) were refinanced by other non-bank lenders in the quarter.

Lending Parameters

During the period we did reset our lending parameters on construction loans so as to be more conservative. Whereas previously we would generally accept pre-sales sufficient to cover about 15% of our loan position at first drawdown (typically 50% by the end of the construction programme), for larger loans we now generally require pre-sales to cover about 30% of our loan commitment at first drawdown, with a correspondingly higher coverage level expected at the end of construction.

We also now examine each builder more rigorously, especially on loans of over $10 million where we will generally require the builder to arrange bank guarantees in our favour equal to 5% of the construction contract sum.

To date we have not reset our lending parameters for non-construction loans, although we now devote extra due diligence where our loan exit is by the borrower taking out a new construction loan.


At the end of the quarter, we had approx. $485 million of undrawn funding lines and we expect existing loans with a total value of about $180 million to repay in the current quarter.

We have made several hires in our Loan Origination team and, together with easing market conditions, we are confident that this will lead to accelerated lending rates in the current quarter, with a substantial volume of new loan applications being processed at present.

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