BTG Consulting plc (BTA.F) Earnings Call Transcript

Hello, everyone, and welcome to today's session. Thank you for joining us. My name is Navita Yadav. I am the Managing Director and Global Head of Capital Markets at Vistra. I will be moderating today's webinar. Vistra Capital Markets supports issuers, lenders and investors with a comprehensive customized range of fiduciary and administrative services in key financial centers globally across 45 jurisdictions and a dedicated team of 400 specialists, we administer more than $395 billion in assets under administration. Today's subject, U.K. SME credit facing the challenges in the current environment, could not have been more topical. Given the macros and developments in financial markets, U.K. SMEs stand impacted as we speak. Today, we will explore this theme in detail with our expert panel from the industry and regulation. But before we begin, here are some webinar housekeeping items. [Operator Instructions] If you experience technical difficulties, we suggest that you log out and then return to the webinar. It typically resolves most issues. On your screen, you'll find a copy of the slide deck and some links to access other content related to today's webinar topic. And last but not the least, we are recording this webinar and will send you a link to the recording within 24 hours. It is my pleasure to introduce today's presenters: Andrew Birkwood, Founder and CEO of Azzurro Associates; his colleague, Karen Savage, Chief Operating Officer at Azzurro Associates; Callum McPherson, partner at Ashurst; Ian Defty, partner at Begbies Traynor; and Ashwani Roy, partner at Fieldfisher Capital. So without further ado, let me hand over to Ashwani. It is a perfect storm indeed, Ashwani, and a heavy cocktail of macroenvironment and monetary and fiscal challenges. Yet the markets follow one truism, which is eat what you kill. So talk us through the macro background, what's happening on the inflation side, the outlook, the currency. And then ultimately, what does this all mean for SMEs? Ashwani?

Thanks a lot, Navita, and good morning, everyone. We'll cover the U.K. macroeconomic outlook, and we'll also talk a little bit about the economic forecasts, including the currencies, the rates, inflation and how does U.K. sit with some of the other large economies that we normally compare ourselves with. First slide, [ Aggie ]. So over here on the screen, you see where the 0 coupon inflation swaps have been traded. Instead of taking inflation forecasts and inflation projections of the respective central banks of different countries, what I've done is I've taken what has been traded in the market to show a bit more of how the market is looking at it. And as you can see, the way inflation swaps work is, if you're looking at, let's say, a 10-year inflation swap of a particular currency in a country, it's then -- the fixed rate is the rate that you get if you swap that floating inflation returns into a fixed rate. You would see here the orange line, which is U.K. The short-term inflation forecast and the market view is that the U.K. inflation is higher, much higher than Eurozone, France and U.S. They all seem to be clustered around a 3% inflation mark, which is in line with their projections, whereas U.K. is about 2% higher. Short-term inflation forecast, as you can see, is somewhere around 7%, 7.5%. The -- and the good news is, and there is some, is that the rate of decline in terms of the recovery is projected to be slightly higher. The Eurozone inflation seems to be quite flat, whereas the U.K. inflation seems to be recovering quite well in the 5-year and after a 5-year term. So the market is definitely expecting this to recover in the mid- to long term. But there is a short-term storm that is brewing up, and we will see that in the next slides. Next slide, [ Aggie ]. So -- and this is an interesting graph. These graphs are for U.K. treasury yields. These are U.K. government bonds, and I have sort of put in 4 different curves here. One of them is from 1 year back when the interest rates were close to 0 and the latest one where the interest rate on a treasury yield 3 months is approximately 3.5%. And as you can see in the last month or so, the yield on the U.K. treasury bonds have gone up about 2%, almost 200 basis point. And as for the latest news from Fitch as of last night, actually, the U.K. economy is forecasted to enter into a recession in the last quarter of this year. Fitch has already downgraded U.K. to negative from a stable outlook. And one of the biggest repercussions that we are seeing of this U.K. treasury yield going up is the message from BOE's Governor, Andrew Bailey, who has pointed out that the bond buying program will stop, and the pension funds who are sitting on a very large portfolio of this U.K. treasury bonds, they are having a significant shortfall because of the yields going up. Now these treasury yields, they are what we used to call them risk-free rates. They are a part of every refinancing, every kind of loans or DCM instruments. So essentially, what happens is a risk premium corresponding to whoever the borrower is, is added on the top of these interest rates. So if the risk-free rate benchmark itself goes up by 2%, 2.5%, that means that the cost of borrowing will minimum go up by 2%, 2.5% for most of the borrowers. Next slide, please, [ Aggie ]. This is an interesting one. So this is a collection of some of the important macroeconomic fundamental that we need to observe. I have highlighted the ones. The blue ones are where we are in terms of the quarter 3 2022. Quarter 4 is when we are sort of forecasting this recession to hit. There's about 65%, 70% chance of inflation hitting as per the latest macroeconomic forecast and the next 2 quarters of 2023. This is the time when we need to brace for the storm to come. As you can see, the CPI, which is the consumer price indexes, the inflation reflected in the consumer items has been at around 10% now, surprisingly higher compared to most of the other counterparts in Europe. It's going to go up as per the forecast to 10.5%. And in the quarter 1 and the quarter 2, it's supposed to come down. That's the economic forecast as of now. It obviously depends on the macroeconomic factors, Bank of England base rates, what does the treasury decides to do in terms of the bond buying program and the government's policy around the tax and the tax cuts. But until 2023 quarter 1, you would still see around 10% CPI and about 12.9% RPI. So hence, the inflation is going to continue to be there for the next 2 quarters. Central Bank rate, which is non-surprisingly, it's following the inflation forecast, would continue to grow. And it would, at the quarter 2 2023, would be about 1.5% higher than where it is. That means that if we are sitting right now and we are looking at a 3%, 3.5% Central Bank rate, on the top of that, there is a credit margin, as I said, to the borrowers, you might be looking at another 150 to 200 basis point of rates going up. And the impact on the 3-year rate and a 2-year -- 3-month rate and a 2-year rate is also forecasted below. Interestingly, the 2-year rate seems to be around that 3.5% benchmark. But the 10-year rate, which is looking out 10 year in advance, seems to be coming down. This is consistent with the inflation forecast that we saw in the previous slide, where the market is also projecting the U.K. inflation to come down in the 5- to 10-year tenor bucket. The same thing is reflected here in the forecast of the interest rates. Dollar continues to strengthen against the GBP. And the forecast is that GBP will continue to weaken. Obviously, the short-term volatility is not so much important, unless you were an FX trader. But in terms of the long-term forecast, as you can see, sterling seems to continue to get weaker and continues to be there at a weak level of GBP 1.17 to $1 by the end of quarter 1, 2024. So overall, we are looking at a few -- next few quarters of high inflation, high interest rate being priced in the market as well as weaker sterling. Next slide, please, [ Aggie ]. So what does it mean for the SME sector? This is an interesting time for SMEs where they may not need to look back at their risk management policies. Tighter profit margins, obviously, because of the higher inflation or higher cost. We import a lot from other countries, which means a weaker pound also means that the cost of import continues to go higher. And hence, the profit margin will continue to shrink. We also think that at a higher inflation and rates cycle, it also means that the SMEs might face distressed situations around their existing debts. And at the same time, because the profit margin is being squished, you will have a sort of a double whammy from both sides from your interest expenses as well as your revenues. We already talked a bit about the S&P and Fitch forecast. The Fitch forecast is as of last night, which is U.K. has been downgraded to a negative rating. This is worse than the prepandemic levels and similar to the 2008 financial crisis levels. The question that we are also asking is in terms of the treasury management of U.K. government, there has been a significant risk on the COVID loans, the bounce back loans, and the latest mini budget from the government, which has created another deficit of about GBP 63 billion. So overall, creating a GBP 100 billion shortfall in the treasury books. That has to be brought in and balanced somehow. And it's a tough task for treasury at the moment because there is not much they can do by -- in terms of managing the inflation and rates in the shorter term. So that's all for me in terms of the inflation rates, forecast and some of the key risks that SMEs face in U.K. market. And I would pass it on to Navita to take it forward.

Thanks, Ash. Some interesting numbers there, clearly. A lot to do both on the monetary and fiscal side. Moving now to the industry side of things, the SME credit and NPLs, Andrew Birkwood. Andrew, would you like to talk about how does a typical [ debt sale sector ] and how do you price these assets as well as if you can share some case studies?

Of course. Thanks, Navita. Thanks, Ash. Good morning all. Andrew Birkwood of Azzurro. We are a debt purchaser and servicer of SME and B2B receivables. And I'm going to kick off with a [ whistle stop store ] of the debt sale sector. And the market really started in the mid- to late '90s, and it was almost wholly dominated by the sale of reasonably large consumer debt portfolios from the retail banks. The market developed into the 2000s. And really by the mid-2000s, the market was a very active industry with a number of well-capitalized buyers. And a number of creditors willing to sell their consumer debt. By the mid-2000s, really every large consumer credit -- consumer debt creditor was selling their debt at some point in their credit cycle. Towards the end of the 2000s, you had a lot of demand as new buyers enter the market, leading to some inflationary price spirals. And really from the -- during the credit crisis years, there was a bit of a adjustments in the market. And kind of moving from 2010 onwards, the market really corrected in a number of ways. We had fewer buyers. The pricing became more sensible. We had much more regulation from the FCA, and it became very much a regulated market. And what the buyers could do and how they use their data became very much a standardized part of the industry. But today, as the market has grown and moved through its kind of adolescent period at the end of the 2000s is much more of a mature market today. You have a small number in the U.K., particularly of dominant consumer debt buyers that are -- has significant data of assets and have established scale. Servicing platform is capable of managing large volumes of multiyear transactions. In terms of SME debt sales within that kind of life cycle of the consumer debt sale market, they've been few and far between, certainly, in my experience. Very limited volumes have been sort of SME, NPLs to date. And the prime movers really that we've seen over the last 5 years in the SME debt sector have really been the nonbank lenders. So providing loans, revenue-based financing, asset-based lending, credit card lenders, merchant cash advance companies, those have been the primary movers in the SME sale industry to date. And we've seen the retail banks step into the market and do a few transactions, but really testing the waters as opposed to anything more material and more scalable. We are starting to see an increase in the size of transactions that are occurring. And we've seen for some time now a willingness on the part of the nonbank lenders to either sell in a forward flow basis where they sell a volume of debt each month or a more occasional spot transaction, which maybe just happens once a year. In terms of the type of debt those SME lenders are selling, it really ranges from very early delinquency through to debt in a legal process and finally to kind of an aged written off part of the [ credit cycle ]. It really does cover the whole credit cycle. The reason why SME debt sale hasn't really followed the consumer debt sale kind of surge or even kind of sat within the consumer debt sale industry model that we've seen there, I think there's a number of factors that work as to why we haven't seen the growth in that market. I think partly, the initial part of the consumer debt sale model or business or industry was really led by the retail banks. And the retail banks established that industry and many other creditors, the consumer, credit card monolines and the retail finance companies really kind of moved into the market on the back of the retail banks. We haven't seen that same movement often retail banks on the SME side. I think there's a number of reasons for that. I think there's much less homogeneity in the consumer debt world. The debt management processes tend to be more bespoke. There's a much lower volume than for consumer debts. I think all of these things challenge the typical consumer debt model. And then when you add the fact that credit data is different, regulation is different, the recovery processes are all different to the consumer debt world, materially so, means that the typical consumer debt buyer is unable to simply just turn their models towards the SME industry and just going to play in that sector. Could we move to the next slide? You have, on transaction life cycle. Okay. Great. So we're there already. In terms of the transaction life cycle, one of the elements that I've not included in that life cycle is really selection of the buyer. And one of the key things for a seller to go about is which buyer or buyers do they want to invite into their sales process. And generally, a buyer will have to complete various due diligence questionnaires, provide policies and procedures and really evidence the track record that they followed in terms of managing an SME portfolio and that their processes and procedures are really attuned to the SME environment, which is, as I previously mentioned, not at all standard and differs quite a bit to the consumer debt [indiscernible], something that my colleague, Karen, is going to pick up shortly. In terms of the transaction life cycle, the gestation period for a transaction can be quite varied depending on the kinds of data and the kinds of portfolio that's being sold. I mean we've worked on some transactions that have been multiyear, from start to finish, to get from the initial discussion through to the transaction closed. A lot of that is to do with the fact that the sellers really don't have confidence yet to really embark on a kind of really collaborative debt sales strategy and need to get to build that confidence in the process. And sometimes that takes some time. Certainly, understanding the data, cleansing the data and ensuring the data is helpful for the pricing process has become -- that's been a lot of the last 5 years for us, is working with the creditors to make sure that we do get the right data, we do understand the historic performance of the assets to help pricing. And I think as Karen is going to talk about it in a couple of minutes. Clearly, the contract elements can be quite time-consuming. But if everything goes fairly well, there's no reason why a transaction can't occur within a couple of months from start to finish. But it does need for things to move fairly smoothly for that process to occur. On to the next slide, please, [ Aggie ]. In terms of health of the current SME lending sector. So in the last few weeks, I've spoken to a handful of our lending clients, mostly in the nonbank sectors, and try to get from then and there sentiment of the current environment and how they're viewing lending in the current kind of mixed economic position we find ourselves in. I think an interesting message, which probably isn't surprising, is that it's a very benign environment from a lending standpoint. And we would echo that from a debt buying perspective. We're not seeing significant increases in failed payment plans, a slowdown of settlements. And it's the same on the lending side of things. They're not seeing significant defaults coming through to their business. What they are seeing is depleted cash reserves. Cash reserves is still probably within the SMEs above prepandemic levels, but they are certainly on the way down and being reduced month-on-month, which is clearly a risk factor that's being looked at. The key measure unsurprisingly been looked at by the -- by a number of the lenders is the confidence ratings and the confidence indexes. And it won't surprise anybody on this call to hear that the SME confidence levels are plummeting. And as we go from quarter to quarter, they really have fallen off a cliff in the last 6 months. Some lenders have reported that they have been tightening their lending criteria and have kind of reinforced their scorecards. And thus, they are tightening their belts and not expected to lend as much in the next 6 to 12 months. Interestingly, other lenders see this as an opportunity. There's a few nonbank lenders that have recently secured financing and see this as an opportunity to grow their book. And I see in the next 12 months as a time that they can maybe even double or even more than double the size of their current lending book. And part of that might be that they expect the retail banks to step away and tighten up their own credit score cards, which will create a bit of a void in the more prime SME-type customers, which may find themselves not being backed by the retail banks. And the nonbanks are moving to -- potentially moving to that sector. Lenders are seeing -- they're seeing a higher bias towards higher balances over the last year. And this is something that we've seen on the debt sales side as well in terms of the purchases that we've been making, that the balances are starting to creep up. Now partly that's to do with, say, the merchant cash advance companies supporting that's really post-COVID, nobody uses cash anymore, and everybody pays through their card, and partly to do with inflation as well. So it's very much a mixed message from the nonbank lenders that we're working with in the SME sector. One thing that was a fairly constant message across the lenders was that they are taking the time to check in with their customer base. So every month, they'll be making a number of random calls to their customers to find out how they're doing in terms of their business, how are they finding things, what's going to the outlook. And that, again, has kind of reinforced that benign type message. Albeit it does appear that some of the supply contracts, that some of these SMEs have in place imply some potential cliffs -- cliff risks next year, which clearly could derail the current business model and put some stress in terms of being able to pay the interest payments on the SME lending they have. And with that, I think I might pass on to my colleague, Karen Savage, to talk about SME debt recovery.

Thank you, Andrew. Good morning, everybody. My experience in this sector is really as an insolvency and litigation lawyer for the past 30 years, focusing exclusively on the SME and corporate sector. So I'm cautiously optimistic about the current environment and recoveries in the current landscape because I've seen a number of financial crises in my career over the last 30 years. That said, in Ashwani's presentation, he showed the pressure, the financial significant pressure that will be on small businesses in the current environment with energy prices and interest rates skyrocketing. But as I'm going to show you with a couple of case studies at the end of this talk is that it is possible to achieve good customer outcomes and positive recoveries as we have in our own business. We very much use bureau data and segmentation of customer activity in the way that we choose accounts that we push through the collection cycle. What we see is that many creditors invest significant sums of money in the bureau and credit analysis at the origination and underwriting part of the loan process. But often once the accounts leave into arrears or into a litigation situation, the investment isn't so much there in that creditor space. But once we have acquired a debt or a loan portfolio, we're using bureau analysis very much from the beginning of the process to decide what strategies we apply to each of the customers that we have. So using bureau data, we look not only at the company health, but in many cases, we're looking at the director health as well, the underlying credit position of the directors because, in many cases, there may be personal guarantees that support the loans that we've acquired and also personal activity in relation to a director can also indicate the likelihood of that business to fail or not fail. And because we have this information at our fingertips, and we also have a longer time horizon in terms of payment than perhaps the original creditor, we can use and deploy different types of support to customers. So where forbearance is needed if customers or businesses are struggling, we can give them that to make sure that they get the right outcome and a sustainable payment there. And I think that does mean that we often can give these customers a better outcome in a heavily compliant system that we have in a regulated space as well where many SMEs, of course, are not limited entities. So there is a difference between that small business and a corporate that may not be a large significant corporate, but nonetheless is a fairly significant business. So what we will do with this data and the information that we acquire from the bureaus is to assess the affordability of a customer to pay. Our main aim, of course, is always to get the customer to work with us to get the right collection outcome. And that often is to engage with them to agree plans, plans for repayment. But often, customers, particularly in the SME space, don't engage in the same way as consumers will do. So a consumer will very often happily enter into a low-yielding payment plan, but SMEs are often very busy with the day-to-day activity of running their business and have significant cash flow problems and actually engaging with a creditor or the likes of us is not at the front of their minds. And I think it's -- if I take you through a couple of case studies, we can show here how the use of bureau information, but also experience of recoveries in the commercial space gave us two positive outcomes that involve 2 different situations with 2 very different customers. So case study A, we'll call him customer B, Mr. B. This company owed GBP 250,000 for a commercial loan. At the time the loan was given the monthly repayment, the contractual monthly payments were GBP 10,000 a month. When we acquired the loan, the original creditor had given forbearance. This was through COVID to that customer, the business and the PG to agreed payment plans of GBP 2,000 a month, a significant reduction in the actual contractual amount. Once we acquired the account, the customer and ourselves, we're in contact with each other. Unhappily, the 2 directors of the company were going through divorce, and there were a number of different challenges to that business as well as to the directors that have given personal guarantees to that original lender. This particular case, the customer was engaging with us from the beginning. And whilst there was a significant asset position, the house that the couple owned, although they were going through divorce, was north of GBP 2 million. What we did, which was the right outcome for this customer and for the business, the business continued to trade, but there was financial pressures, I would say, in the business health and also to the directors, is that we agreed, without litigation, to increase payments significantly from GBP 2,000 to GBP 8,000 a month, but with the support of a legal charge, which gave those directors comfort that we had some security, but actually, they were now repaying the debt [indiscernible] original contracting now, but something that they could afford, both of them, to see this debt reduced, which, of course, being a significant sum it was, was important to both of them. I start contrast, we had another customer. This particular customer, again, a business, backed by a PG, and a director will call him Mr. T in this case, owed nearly GBP [ 0.5 million ] at the point that we acquired the loan. But with our bureau analysis, we confirmed that the business has indeed failed. There are no assets, and it's in an insolvent situation, which Ian will come on to tell us about in a minute. And interestingly, this guarantor also had no personal assets and no home ownership, no shares or any assets that we could see through bureau data, no good credit footprint and the information that we had to have. Important information perhaps in this case is that the said director was a solicitor, and the failed business was a law firm. And despite the debt being -- sorry, GBP 500,000, when we acquired the loan, the initial offer from Mr. T was to make a full and final settlement offer of GBP 50,000, which we rejected. We, of course, needed to go through a number of checks and balances. And we had income and expenditure information from him and from personal accountants representing him, all of which showed us that his financial position was not strong as in there were no assets. But he then became rather disengaged and was not responding to various bits of information that we've required to support us giving forbearance on this account. Because that wasn't forthcoming, over a period of months, the account actually then moved into litigation, and defense was filed. And the defense was basically that the assignment of the original creditor to ourselves was not valid, both in the case of the business and also his PG, the guarantor that he'd given. Now Callum will come on, on the next segment to tell us all about the contractual arrangements around the assignment and the sale of loans. But suffice it to say, in this case, actually, we succeeded in winning the case of that trial. So we defeated that defense. Two days before the trial, he made an offer to increase that, if you remember the GBP 50,000 offer to GBP 150,000. The balance still being significant, as we said, GBP 0.5 million, which we rejected. And we proceeded to the trial and succeeded in obtaining judgment for the full amount of the defaulted loan of GBP 0.5 million plus costs of just under GBP 100,000. Now you may say, well, why would you take those steps in this case when this customer appear to have no assets? He was still a solicitor and was working actively in another law firm. And whilst he personally didn't have assets, we believed that he was connected to partners that did have assets. And actually, there may have been assets abroad, which we also confirmed through -- the process of the trial did exist. So whilst the bureau data on this case may have said, look, this doesn't look as though this is a positive outcome through litigation, the bureau information, together with the information that we have from the customer and also the experience I have and our team have of SME business directors over the course of the year has led us to believe that actually, this would not be the right outcome to accept GBP 50,000. And actually, the account has now been paid in full. I think the moral, I guess, where I would conclude here is that recovery of SME, as Andrew alluded to, is very, very different to consumer debt. And there isn't any substitute for experience in this sector and understanding the fact that a customer presents to you and using that bureau information, the customer information, reading between the lines, seeing the gaps and business acumen and probably intuition as well to make sure that even the seasoned and most creative entrepreneur is held to account in the right circumstances. This brings my segment to an end, [ Aggie ].

Thanks, Karen. And that was a deep understanding in real-time situation coming in about the SMEs. Let me move on to Ashurst now, Callum, to talk through the role of legal firms in the space and, of course, the due diligence process that is part of the process. And also, again, what are you seeing in the market? Are there any cases that you can share for our audience here?

Thank you very much, and good morning, everyone. Good to see so many of you here. As mentioned, I'm Callum McPherson. I'm one of the partners of Ashurst that's acted for a range of market participants in the [indiscernible] market, both buyers and sellers, in a number of jurisdictions ranging from the weird and exotic, like recent [ Cyprus ] through the U.K. and Ireland. So it's been an eventful journey. And as Andrew sort of touched on, the U.K. market has been relatively benign of late, but we are certainly seeing more activity, and we anticipate that sort of increasing as we head into Q1 and Q2 next year. I thought just to bring this sort of legal perspective on it, I thought it was worth taking a step back and starting with the seller and purchaser aims when we go into these debt sales and what they hope to achieve with it. I think just looking at the sellers' priorities and the purchaser priorities, the first one is the fast divestment of assets for balance sheet management purposes, receipt of the purchase price for the purchaser. It's fast acquisition to ensure the lapse time doesn't hedge this value realization. There is also from a seller perspective, the opportunity to package low-quality assets with high-quality assets and refuse cherrypicking. And for the buyer, the opportunity to acquire the entire loan book efficiently as part of a single transaction. And from the seller, what it wants is a clean break from the assets and the borrowers as far as possible. And the purchaser wants to obtain a direct relationship with the borrowers at the earliest opportunity to facilitate direct control. I think what it's worth saying is the overriding aim of all the parties is the completion of the sale of all the assets by way of outright transfer as far as possible on a single completion date. Just touching -- before we get to the timetable, which is the slide that's currently out, I thought it was worth just touching on the diligence of the assets. And Andrew sort of referred to it in his presentation as well. I think the days of the sellers providing extensive diligence are long gone. We can thank company formerly known as Irish Bank Resolution Corporation and special administration for ending any sort of seller diligence or reliance being provided to buyers for diligence. The emphasis -- and given this is the legal part of the presentation, you'd be disappointed if there wasn't some laugh in it. So the emphasis is very much caveat emptor, buyer beware. So what generally happens is the sellers load the information and data, including underlying loans, the underlying collateral into a data room, and the buyer is expected to conduct their own due diligence and then come to the review as to pricing and as to the appropriate thing -- as to the appropriate method of valuing the assets. There will obviously be Q&A from the seller, and there will be some assistance, but it is very much limited. And the onus is very much on the buyer to get themselves comfortable with the asset. And that generally is where we land. And as Andrew sort of said, that's why these processes can take some months to conclude. So I just wanted to turn to the sort of typical timetable of an NPL deal. And I'm not going to go through every point on these 3 slides, but I thought it was helpful to show pictographically kind of the timetable for a typical deal. Sort of I'm glad to hear Andrew and I were in an agreement where we talk about up to 3 months, and the D, as referred to in those slides, is the disposal date. So generally, there is a pricing date for the portfolio where there is a provided information to the prospective buyers for the pricing of the portfolio. That's the loan balance, the interest rates on the loans and things like that. And prior to that pricing date, there is seller risk in relation to the portfolio. Following that pricing date, the buyer assumes the risk and reward. So effectively, if there's repayments of the loans, for example, the buyer gets the benefit of that. Could we move to the next slide, please? Thank you. So this is the execution phase. So this is post the portfolio, post the pricing date. And effectively, what you have is the pricing date is typically set 1 month prior to the exchange date. That is when the contract is signed and gives the buyer the opportunity to conduct the due diligence I referred to and goes through matters. We then have the exchange. And at that point, that is when the SPA is signed, and the warranties are given. Presettlement conduct rights are granted to the buyer. What we mean by presettlement conduct rights is, for example, the seller can't really sell the collateral associated with the loan, for example, and things like that. And exchange is potentially the earliest date, and it obviously depends on the accounting analysis. Exchange is the earliest date in which the seller can get derecognition of the assets, which obviously helps with its regulatory obligations or things like that. Post exchange, there are then any consultation obligations in the loan agreement. For example, the loan agreement says it can't be sold or transferred without the borrowers' consent. Those consultation obligations are sought to be satisfied in that period. And that typically is about 3 weeks before the actual disposal date when settlement is paid and the loan assets are transferred legally or synthetically. And what we mean by synthetic transfers is some participation arrangements or other economic arrangements, whereby the seller remains a lender of record, but the buyer has the economics of the assets. Could we move to the next slide, please? So post-contract phase is the assets, which are synthetically transferred. We then continue with them, and they are ultimately elevated to a full transfer. And that can be period of 6, 9 months and things like that. And the reason they can't be transferred outright is because, for example, the borrower has an underlying consent right and refuses to grant consent. So what you end up with is long-term sub participation arrangements. Obviously, from a seller perspective, those sub participation arrangements are not particularly attractive for a variety of reasons because it means they still got the asset, they still got the admin associated with managing the assets and such like, but they have -- they don't have any control and they don't have any economics in there. So I just wanted to turn briefly to the sale and purchase agreement and sort of talk about some of the key terms of the sale and purchase agreement. It -- the sale and purchase agreement really is devised for portfolio flow and assets. It's not like -- some of you may be familiar with the LMA, single main debt trading documentation that you sometimes use, that is devised for a single loan asset. The SPA is overwhelmingly designed for portfolios of loan assets. The LMA documentation typically is a fairly neutral position favoring neither the seller or the buyer. The SPA, given that it's drafted by the seller, typically favors the seller. But the SPA includes mechanics for excluded assets. So for example, seller can exclude assets. It doesn't want to include -- it can exclude liabilities. So for example, liabilities relating to litigation or hedge misselling and some of the more sophisticated portfolios. And it has potential for the buyback of assets by the seller to avoid warranty claims under the SPA. The warranties, as I'm sure Andrew and Karen will back me up on, are fairly limited that are given by the seller. There is a very limited suite of warranties that they propose to give, generally limited to authority, powering capacity and some reps and warranties regarding a very small subset of the financial information that we will provide during the diligence. There is disclosures. So there is typically a disclosure letter, and the seller disclaims any liability for documents that are missing. So for example, to the extent security documents are missing or the underlying loan agreement is missing, which is a feature of almost all portfolios we sell, the seller has no liability or a consequence of those documents being missing. There is extensive liability limitation. So limitation liabilities are extensive, and they are typically limited. Liability to the seller is typically limited to 1 to 2 years. In terms of further assurance or ongoing obligations for the seller, that is also limited. We typically see between 60 to 90 days further assurance whereby the sellers will help for a period post signing for 60 to 90 days, but it is very limited. The warranties, just to touch on, is generally, warranties are limited to powering capacity, as I see. And it is a very small subset of warranties. There is no recourse for. For ones that -- the ones that sellers typically treat with caution is they will get no warranty as the ranking of security. No warranty as to any security interest is -- are enforceable or that the finance documentation is legal, valid and nonbinding. So those warranties are very, very limited. And finally, I just wanted to touch on the sort of knowledge and disclosure point. And that is that the content of any data room are deemed fully disclosed. And crucially picking up a point, Karen sort of alluded to, the purchasers deemed to have any -- to have awareness of any matters disclosed by searches and public registries. So for U.K. portfolios, there is obviously a lot of information that can be accessed on public registries. For example, companies house in the case of corporates and the land registry and also in regards to, for example, insolvency searches and such like, that is all deemed to be known by the purchaser at the time of sale. So if, for example, an insolvency search would have shown that a particular debtor is insolvent, the purchasers need to have knowledge of that even if they didn't do the search themselves. So that was a very quick canter through of the legal perspective. And I'll now hand over to Ian to touch on the insolvency update.

Thanks, Callum. And indeed, Ian Defty from Begbies Traynor to talk about the current state of insolvency play in the market, definitely 42% rise in England and Wales on declared insolvencies last month. So over to you, Ian, and talk us through how an insolvency practitioner in the SME credit space would operate.

Yes. Many thanks, and good morning, everybody. As we set out in the introduction, the U.K. economy is experiencing high inflation, rising interest rates, slow growth on the cost of living crises. There's a lack of confidence in the economy. There's payment delays in many sectors, and companies are still struggling with the changes that were -- that came about through Brexit. And this morning's headline fury the bank chaos. All of these factors, together with the effects of COVID loan repayments, energy prices, mean that companies or individuals have to find funds to pay for goods and services that they just don't have. And this will result in a rise in insolvencies. And as the SME is the biggest market in the U.K., without shadow of doubt, it will be hit the hardest. I hate to use the term perfect storm in insolvency, but what I would say is there's a coming together of numerous factors that must result in more insolvencies. Just by way of the current situation in the U.K., the number of registered company insolvencies in the U.K. in August was just short of 2,000. As just been said, that's 43% higher than in the same month last year. But more importantly, it was 42% higher than the number registered in 2019, which was prepandemic. And of that, there was figures in August. We've got something like 1,700 what are called creditors voluntary liquidations, that is director or shareholder-driven liquidations. And that's 73% higher than August 2019, again, prepandemic. The numbers for other types of company insolvency such as compulsory or court-driven liquidations have remained lower than before the pandemic, although they were almost 4x as many liquidations in August 2022 as in August 2021, but a lot of that comes down to the issues that the court have and whether they've actually got capacity to hear numerous [indiscernible]. For individuals, last month, we've had 565 bankruptcies registered, which again is -- which was lower than August 2021, again, at the height of the pandemic, and 58% lower than August 2019. But again, I would stress that this is a court-driven remedy. And because of that, the courts are struggling with the resources and to get everybody in effectively to hear these bankruptcy petitions. However, on the other side, we've had an increase in individual voluntary arrangement. So if you like, a precursor to bankruptcy, and they're slightly higher than August 2021, and 8% higher than 2019. So we can see that things are moving and things are certainly changing as we go forward. Now from our -- it's our view, Begbies Traynor's view, from our research that nationally, there's almost 600,000 firms that are in significant financial distress. And I often get asked to pinpoint a specific sector. But at the moment, it currently just isn't possible to do so because that significant distress is stretched across all industry from hospitality to professional and support services. But I think it's important to understand that this increase in insolvencies, to some extent, is a leveling up. Prepandemic, we had the prospect of massive insolvencies, particularly in the high street due to high rents and rates. So the current increase in 2022 is, to some extent, driven by that historic issue and the issues following the ending and [indiscernible] repayments of government loans and the end of furlough. We also now have a situation where landlords, and now we're able to use whatever remedies they have to recover their debts. Bounce back loans and corona business interruption loans are now all repayable, albeit the [indiscernible] Business Bank is offering some support. On nonpayment of coronavirus loans, HMRC, the national crime agency and the insolvency service are all actively looking at these nonpayment cases. Now the figures that are being bandied about, say that there's likely to be a 31% to 48% of loans will not be repaid. That's possibly up to GBP 17 billion. But the fact is we're just not going to know about that for some years, until actually all the ability to repay has passed, and we're able to look at it at some point in the future. I think it's also important to understand that HMRC are becoming much more aggressive than they were during the pandemic, seeking to recover tax, PAYE and NIC, through insolvency. So whilst you may be supportive of your creditors, you have to bear in mind that you may have revenue and customs taking a much more stronger view. What I would say is that the insolvency industry, be that insolvency practitioners, accountants, solicitors, barristers, are all set up at the moment to cope with a huge increase in insolvencies, although there may be a slowdown if and when matters hit the court. Now my role is not just looking at companies going into insolvent, but the reason behind those insolvencies. And if directors have found wanting, then any office holder will be considering action against the directors of that company or any culpable parties. I'm going to leave it there, something to ponder over. And I think I'm now going to pass back to Ash. Thank you.