Stonk
Stonking
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Post by Stonk on May 5, 2020 19:09:31 GMT
But this is not going to happen. Many companies will fail completely, and countless more companies
May I borrow your crystal balls?
No. My "crystal balls" -- or "eyes" as I prefer to call them -- are presently embedded in my head, from which location they enable me to see and read about things that have happened, are happening now, and show little sign of stopping happening.
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Post by shanghaiscouse on May 5, 2020 22:19:09 GMT
I think the point is that although in an administration there is no technical reason why lenders would suffer additional losses, in actual fact if it happened the behaviour of borrowers would be highly unpredictable. I recall they have around £15m cash on the balance sheet now but also over £20m of loans. They had to have £12-15m a year every year of capital injections which has been used mainly to reduce debt, but there is still a lot of debt compared to profit. The would only go into administration if enough people pull money out fast enough so that their revenue falls, people pull money out because they are worried about real economy, a lot of genuine bad debt, but once administration is possible there will be a huge increase in bad debts as dodgy borrowers look to take advantage of the situation. We'd better hope that the FCA would get involved first and make sure there is a structured administration where they identify someone in advance willing to take on the book of loans and with the capability to do so. Over at funding circle the problem I see is they were swamped with defaults and they don't have an internal team that can handle it, so they put the debt collection out to agencies, but as it is all unsecured then its difficult and unrewarding for agencies to handle. The main concern for me would be that whilst the loans are ring fenced there would be costs for the administrators to manage this and I'd be surprised if this does not cost the lenders a percentage on the £1 that many may not be happy with. Just a thought. That's coming anyway mate, they have the right to start digging into capital to support the reserve fund.
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Post by peertopier on May 5, 2020 23:32:31 GMT
My experience with Collateral and Lendy is that you will be treated very badly if it goes into administration. You will be classed as a risk taking investor who should have known that losing a significant proportion was possible. The administrators will take several years hoovering up fees, you'll receive lots of vague updates, you might occasionally receive a part payment. No one will take much interest in your plight.
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Post by diversifier on May 6, 2020 8:29:23 GMT
My experience with Collateral and Lendy is that you will be treated very badly if it goes into administration. You will be classed as a risk taking investor who should have known that losing a significant proportion was possible. The administrators will take several years hoovering up fees, you'll receive lots of vague updates, you might occasionally receive a part payment. No one will take much interest in your plight. Talking about platform administration at this point is irresponsible speculation. Sorry if this seems confrontational, but it’s important to challenge stuff like this. Administrators are called in when the *company* is insolvent. There is no indication of that, and no reason for it to happen - their income is likely down a few %, but so are their costs. The current event is an expected increase of investor loan default rate, which has nothing to do with the solvency of the platform. It’s like saying Charles Schwab might go broke due to the stock market crash. In the long term, lower trading volumes would reduce turnover but that’s not a reason to go broke. I *do* suspect that unfortunately medium-term we might see an orderly wind-down of the book, and then platform, either explicitly or implicitly. But that’s not the same thing at all. RS management decide what product they offer, my view is that the Access Ts and Cs aren’t attractive, => no new investor money, and that’s it. They can choose to launch a more attractive alternative product (or just return to what they launched with a decade ago), and investors will take a view on it. But, if the platform just closes to new loans and new investors and winds the book down over the lifetime of the loans, then absolutely so what. It’s a liquidity hassle, but nothing whatsoever to do with solvency. In December, as a condition of FCA, they emailed us the Ts and Cs of a wind-down plan. Not that they intend to do it, but it’s an orderly defined option, nobody should lose any money if it triggers. From the loan point-of-view, the current situation is Defcon 3, not Defcon 1. The loans are expected to be somewhat impaired, and the company has taken the *lowest of two* contractually allowed pre-planned options for recovery of the loan value, which does preserve capital. In fact, we’re *still* getting slightly more interest than available in a standard bank account, just the risk is no longer worth it. The Lendy was a different kettle of fish, because the default rate was *never* remotely acceptable, and the directors didn’t correctly implement ring fencing (whether malfeasance or not). The high fees for Lendy administration were mostly due to those things, and also because a couple of million fees looks horrific against only a few million recovered on a loan book of over £100m. The fundamental problem is that the loans were bad on the day they were written, the majority defaulted, and the recovery probability is laughable. Whereas RS have demonstrated a history of not only good loans, but also an accurate forward prediction of default rate within about 0.5%. *and finally*, Administration is just a different company management, nothing more. We are neither investors into RS, nor unsecured creditors, we are it’s customers, to whom they provide loan management services. Administrators aren’t empowered to do anything to us contractually that RS management can’t. They are still bound by FCA rules, and they can’t (for example) freeze repayment streams. The management can affect the quality of the loans being written, and the quality of recovery of the loans. While bad Administrators can fail to recover loans, that affected Lendy particularly because *all of their loans were in default*.
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Post by shanghaiscouse on May 6, 2020 8:34:32 GMT
It's a good post, thank you. However, I think you ignore the moral hazard angle. Once borrowers know the lender has gone into administration a significant proportion will try to take advantage. That's not guesswork, it is the normal pattern of behaviour.
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Post by lingield on May 6, 2020 9:04:13 GMT
My guess is that this will be okay - the key issue is clarity. Once there is clarity on the economic impact of the current pandemic on the loan book, Ratesetter's management will be able to develop a plan. I do not know but I suspect that Ratesetter should have more clarity in 2-3 months, but it might take a bit longer.
Even if there is a potential shortfall in the PF, if Ratesetter's equity investors are confident that a recovery is likely then they may choose to prop up the PF to protect their equity investment. From the news, it appears that Ratesetter was worth $300 million earlier this year - that is an investment that is worth protecting! Taking an unrealistic example for illustrative purposes, a $150 million top to the PF is a smart move, if the equity investors then subsequently exit at $300 million within a few months. Of course, the reverse is also possible. At the moment however, the general consensus appears to be that the economic environment will improve once the pandemic passes.
Clarity is therefore the key, Ratesetter does not have this clarity at the moment and sadly as we are one step removed we will never have access to the relevant information before a decision is made. We just have to wait.
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Stonk
Stonking
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Post by Stonk on May 6, 2020 9:09:08 GMT
Talking about platform administration at this point is irresponsible speculation. Sorry if this seems confrontational, but it’s important to challenge stuff like this. Administrators are called in when the *company* is insolvent. There is no indication of that, and no reason for it to happen - their income is likely down a few %, but so are their costs. The current event is an expected increase of investor loan default rate, which has nothing to do with the solvency of the platform. It’s like saying Charles Schwab might go broke due to the stock market crash. In the long term, lower trading volumes would reduce turnover but that’s not a reason to go broke. I *do* suspect that unfortunately medium-term we might see an orderly wind-down of the book, and then platform, either explicitly or implicitly. But that’s not the same thing at all. RS management decide what product they offer, my view is that the Access Ts and Cs aren’t attractive, => no new investor money, and that’s it. They can choose to launch a more attractive alternative product (or just return to what they launched with a decade ago), and investors will take a view on it. But, if the platform just closes to new loans and new investors and winds the book down over the lifetime of the loans, then absolutely so what. It’s a liquidity hassle, but nothing whatsoever to do with solvency. In December, as a condition of FCA, they emailed us the Ts and Cs of a wind-down plan. Not that they intend to do it, but it’s an orderly defined option, nobody should lose any money if it triggers. From the loan point-of-view, the current situation is Defcon 3, not Defcon 1. The loans are expected to be somewhat impaired, and the company has taken the *lowest of two* contractually allowed pre-planned options for recovery of the loan value, which does preserve capital. In fact, we’re *still* getting slightly more interest than available in a standard bank account, just the risk is no longer worth it. The Lendy was a different kettle of fish, because the default rate was *never* remotely acceptable, and the directors didn’t correctly implement ring fencing (whether malfeasance or not). The high fees for Lendy administration were mostly due to those things, and also because a couple of million fees looks horrific against only a few million recovered on a loan book of over £100m. The fundamental problem is that the loans were bad on the day they were written, the majority defaulted, and the recovery probability is laughable. Whereas RS have demonstrated a history of not only good loans, but also an accurate forward prediction of default rate within about 0.5%. *and finally*, Administration is just a different company management, nothing more. We are neither investors into RS, nor unsecured creditors, we are it’s customers, to whom they provide loan management services. Administrators aren’t empowered to do anything to us contractually that RS management can’t. They are still bound by FCA rules, and they can’t (for example) freeze repayment streams. The management can affect the quality of the loans being written, and the quality of recovery of the loans. While bad Administrators can fail to recover loans, that affected Lendy particularly because *all of their loans were in default*.
Very good stuff.
I disagree about it being irresponsible to discuss insolvency. It's always responsible for an investor to consider the worst-case scenario -- calmly and rationally, though. Scaremongering is never helpful.
From the present situation, it is conceivable that RS might become insolvent at some point, and naturally people are asking whether it is likely and what is the worst that could happen. RS are currently doing vastly reduced levels of business, but retain most of their fixed costs, and they've never made much of a profit historically. It's certainly worth thinking about, and considering what they can do to reduce those costs, and whether the lower costs as a result ot reduced business are enough to keep the engine ticking over.
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Post by danny101 on May 6, 2020 9:32:46 GMT
Hi, it is my understanding that although ratesetter has injected more money into the provision fund recently, it was due to the sale of part of its loan book. It has in the past injected some of its own money into it, to prop it up. However since it became regulated it is now not allowed to do this, which doesn't help lenders.
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Post by freefalljunkie on May 6, 2020 9:48:18 GMT
My guess is that in the short term Ratesetter might be doing fine from a solvency point of view. They will be making a nice chunk from all RYI release fees, and then they are creaming off the difference in interest from 1 & 5 yr RYI loans they are punting back into the Access market. Longer term it is hard to see how the business can survive though. The loan book is going to run down to zero and P2P is going to be a very hard sell to investors in future.
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ashtondav
Member of DD Central
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Post by ashtondav on May 6, 2020 10:21:11 GMT
There will be a very big loan market.
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savernake
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Post by savernake on May 6, 2020 10:22:56 GMT
My guess is that in the short term Ratesetter might be doing fine from a solvency point of view. They will be making a nice chunk from all RYI release fees, and then they are creaming off the difference in interest from 1 & 5 yr RYI loans they are punting back into the Access market. Longer term it is hard to see how the business can survive though. The loan book is going to run down to zero and P2P is going to be a very hard sell to investors in future. Are RS actually recycling RYI loans from 1 & 5 yr to the Access market? I was under the impression they were 3 distinct markets and loans could only be sold to another buyer within the same market. That's my understanding, but I'm happy to be corrected if I'm wrong.
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sd2
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Post by sd2 on May 6, 2020 10:25:51 GMT
May I borrow your crystal balls?
No. My "crystal balls" -- or "eyes" as I prefer to call them -- are presently embedded in my head, from which location they enable me to see and read about things that have happened, are happening now, and show little sign of stopping happening.
I bow to your absolute certainty in your superior knowledge of future events
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Post by freefalljunkie on May 6, 2020 10:36:02 GMT
My guess is that in the short term Ratesetter might be doing fine from a solvency point of view. They will be making a nice chunk from all RYI release fees, and then they are creaming off the difference in interest from 1 & 5 yr RYI loans they are punting back into the Access market. Longer term it is hard to see how the business can survive though. The loan book is going to run down to zero and P2P is going to be a very hard sell to investors in future. Are RS actually recycling RYI loans from 1 & 5 yr to the Access market? I was under the impression they were 3 distinct markets and loans could only be sold to another buyer within the same market. That's my understanding, but I'm happy to be corrected if I'm wrong. To be honest I am not sure, but looking at the new loans I have been lumbered with in my Access account many of them appear to have long duration and high rates of interest for the borrower in the underlying loan. To me it is also a little suspicious that RYIs for the old 1 and 5 year products are processing so much faster than Access/Plus/Max. Happy to be corrected if anyone knows different.
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Post by diversifier on May 6, 2020 10:40:27 GMT
It's a good post, thank you. However, I think you ignore the moral hazard angle. Once borrowers know the lender has gone into administration a significant proportion will try to take advantage. That's not guesswork, it is the normal pattern of behaviour. The practical impact of administration was rather an afterthought on the end, so you might be right about that. But the main point is why are people discussing administration at all? Nothing has happened over the past couple of months to raise the topic. The solvency of the platform company isn’t dependent on the solvency of the loan book, and vice versa. Companies can and do make profits while their customers lose money. I went back to one of your posts, that ”if people pull money out fast enough their revenue will fall”. That’s only half the balance sheet though. Their revenue is simply a % of assets, and at the current sellout rate of £4.5m/wk, it will take a year for this to drop by 30%. But with no new loans or investors, their costs will drop to the floor if it goes on longer than a couple of months, because they don’t have to spend anything on marketing (acquiring new investors or borrowers), nor on rating and processing new loans. Bluntly, they employ over 200 staff, and only need a quarter of that to just wind-down a static loan book. Last year, they had revenue £33m, and costs £37m. Divide costs by four, and it’s a healthy but linearly reducing cash cow for three or four years.
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Post by shanghaiscouse on May 6, 2020 10:55:56 GMT
I guess the fact that they are out trying to raise private capital is what originally set off the alarm bells, that's the news event in the last couple of months that changed things for me. They could go the same way like Funding Circle, basically closed to new lending from all retail investors, but you can't just divide costs by four, because you need to build up the whole recoveries side of the business too. Again, from FC experience, this is what has really killed off retail investor interest, the default experience and the terrible recoveries performance (I have had £53k of loans default with a grand total of £3k recovered in 2 years). In FCs case they simply decided to stop marketing to retail investors and focus on just originating loans to sell in securitisations to junk debt funds, I suppose RS could go the same way.
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