What is loss given default in IP lending?

Full Explanation

Loss given default (LGD) is the proportion of an IP-backed loan a lender expects not to recover if the borrower defaults, after realising whatever value the collateral fetches. It is the mirror image of recovery: if a lender expects to recover 40 per cent of the outstanding balance by disposing of the IP, LGD is around 60 per cent. Because intangible assets are harder to sell than property or receivables, LGD is central to how IP lenders set loan-to-value ratios, price the facility and provision for losses.

What drives recovery is the realisable value of the IP on default, not its going-concern worth. Lending valuations under IVS 210 (Intangible Assets) and the RICS Red Book (VPGA 6, Appendix A) therefore use a liquidation premise, an orderly-liquidation or forced-sale value, and report a range with sensitivity rather than a single flattering figure. Conservative inputs are the norm: a low-end royalty rate, a risk-premium discount rate, a finite economic life over perpetuity, and cautious or absent terminal value. This is why indicative advances typically sit up to around 50 per cent of appraised IP value, and lower for broader-market or unregistered rights.

The lender then narrows that realisable value through three tests: separability (can the IP be sold or licensed apart from the business), saleability (how readily it can be realised on default), and legal strength (clean, enforceable title). IP that scores well on all three, for example a registered patent with clean title and an existing royalty licence, offers a lower LGD and supports a higher advance. Weakness on any one, such as unregistered rights or a contested chain of title, raises expected loss and compresses the loan-to-value. Perfected security helps too: charges must be registered at Companies House within 21 days under section 859A, and fixed charges rank ahead of floating charges in insolvency.

Your practical next step: to lower your effective LGD and win better terms, register your rights, prove clean title, and evidence a saleable, separable asset with attributable revenue, ideally captured in a single collateral-and-evidence pack a lender can rely on.

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