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Post by peertopier on May 5, 2020 23:21:05 GMT
From www.ratesetter.com/invest/investing-with-us/provision-fundAre these two ratios calculated independently? If the interest coverage is only 74% then could all of the fund be used to cover that leaving nothing for capital? Or does the calculation involve splitting the fund into two parts using some decision making process, in which case lowering the interest coverage has given more capital coverage?
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Post by Ace on May 6, 2020 6:57:32 GMT
An ICR of 74% means that, according to RS's forecast of future income and losses, they will be able to repay all capital plus 74% of promised interest. Hence, they have reduced interest payments to below 74% of that promised in an attempt to build the PF to be able to return to paying all of the promised interest at some point in the future.
Note that this is totally reliant on their forecast of future defaults. If they've underestimated they will have to make further cuts, possibly including cuts to capital. If they've overestimated they will be able to return to paying promised interest earlier than they forecast.
There is no intention to ever make up for the under payment of interest to lenders.
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Post by danny101 on May 6, 2020 8:09:29 GMT
Hi, I was wondering yesterday about there wording regarding the "capital coverage ratio". It concerns me that they state " if it is higher than 100% you will get back as much as you have paid in". "Paid in" to me doesn't really mean "paid in plus interest accrued to date". Am I just bring paranoid?.🤔
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Post by Ace on May 6, 2020 8:14:32 GMT
Hi, I was wondering yesterday about there wording regarding the "capital coverage ratio". It concerns me that they state " if it is higher than 100% you will get back as much as you have paid in". "Paid in" to me doesn't really mean "paid in plus interest accrued to date". Am I just bring paranoid?.🤔 No you're not paranoid. If the CCR is 100% they forecast to be able to pay all capital but no interest.
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Post by danny101 on May 6, 2020 10:41:40 GMT
This confuses me. Do you mean that if the capital coverage ratio is 100% exactly it will only cover the amount you have originally invested and that it will not cover all the interest I have received since investing with Ratesetter i.e. 5 years worth could be taken off my balance.
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Post by danny101 on May 6, 2020 10:46:48 GMT
I, m saying this as I understand that at the moment the interest ratio is below 100 so the provision fund can't cover future in interest due. It would be a big jump to say "as the capital ratio is less than 100 we can, t cover all capital and interest you have already been paid.
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Post by Ace on May 6, 2020 11:02:51 GMT
This confuses me. Do you mean that if the capital coverage ratio is 100% exactly it will only cover the amount you have originally invested and that it will not cover all the interest I have received since investing with Ratesetter i.e. 5 years worth could be taken off my balance. No. The ratios don't affect anything you've already been paid. They purely relate to the ability to pay from now on. If the CCR is exactly 100% they are forecasting that they will be able to repay all of your capital but no more interest. Of course, their forecast could be wrong in either direction.
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Post by peertopier on May 7, 2020 11:39:50 GMT
An ICR of 74% means that, according to RS's forecast of future income and losses, they will be able to repay all capital plus 74% of promised interest. Hence, they have reduced interest payments to below 74% of that promised in an attempt to build the PF to be able to return to paying all of the promised interest at some point in the future. Note that this is totally reliant on their forecast of future defaults. If they've underestimated they will have to make further cuts, possibly including cuts to capital. If they've overestimated they will be able to return to paying promised interest earlier than they forecast. There is no intention to ever make up for the under payment of interest to lenders. Aha. I see. It's obvious now. CR = PF/CL IR = (PF-CL) / IL Where CR is capital ratio, PF is provision fund size, CL is capital losses, IR is interest ratio and IL is interest losses. At the moment the excess 66% on the capital ratio is enough to cover 74% of the interest.
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Post by shanghaiscouse on May 7, 2020 19:28:10 GMT
Beware, as what happened with funding circle (which doesn't have a fund) is that interest was being paid out fine for 5 years (i.e. the interest and capital coverage % was >100 in both cases, had they had a fund) but as soon as the defaults started (due to lots of bad loans being written to juice the IPO) then both collapse very quickly, and before you know it all the interest you received in prior years is consumed by capital losses (oh no, I already spent all that money!). The Interest cover collapses quickly as that is a low absolute number, the capital gets destroyed more slowly as it is a larger absolute number, but once capital is being eaten into there is no way back for the interest. Or the capital as the recoveries are so pathetic.
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Post by peertopier on May 14, 2020 11:28:29 GMT
This information from Ratesetter is at odds with some of the earlier points made in this thread. www.ratesetter.com/invest/statisticsThere's currently £5.8 million in the provision fund. They're expecting £23 million to come in from "Borrower contributions to the Provision Fund due over the lifetime of active loans, discounted to reflect early payments and losses." That gives £28.9 million out of £39.2 million expected future interest losses.
Ignoring any payouts for interest, that £28.9 million is added to £36 million of "expected future investor interest "Interest payments from borrowers to investors expected to be received over the lifetime of active loans, discounted for early payments and losses." That gives £65 million out of £39.2 million expected future capital losses.
My original question was valid. The two numbers are calculated independently of each other, ignoring the other loss. The capital coverage ratio of 166% is sort of meaningless because if all the interest losses were paid then there would be nothing left to cover capital
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Post by peertopier on May 14, 2020 11:30:37 GMT
An ICR of 74% means that, according to RS's forecast of future income and losses, they will be able to repay all capital plus 74% of promised interest. Hence, they have reduced interest payments to below 74% of that promised in an attempt to build the PF to be able to return to paying all of the promised interest at some point in the future. Note that this is totally reliant on their forecast of future defaults. If they've underestimated they will have to make further cuts, possibly including cuts to capital. If they've overestimated they will be able to return to paying promised interest earlier than they forecast. There is no intention to ever make up for the under payment of interest to lenders. Their definition is the other way round i.e.: interest is paid first and whatever is left is used for capital. I've asked them to confirm that definition.
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r00lish67
Member of DD Central
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Post by r00lish67 on May 14, 2020 11:55:19 GMT
My original question was valid. The two numbers are calculated independently of each other, ignoring the other loss. The capital coverage ratio of 166% is sort of meaningless because if all the interest losses were paid then there would be nothing left to cover capital I think this hits on exactly what I've been trying (and failing) to formulate into coherent words, for about the last hour now! Let me try and put it in ways I understand, and see if we're talking about the same thing. The vast majority of the £65m fund is a projection. The projection part (£59m) is made up of two very interrelated things - future investor interest (£36m) and PF inflows (£23m). These items are counted separately as if they're two stores of value, but are of course in reality just (part of) the profit that comes back from borrower repayments. So the £59m is illusory to some extent. It's not double counting exactly, but is far more sensitive to unexpected losses than it might appear. edit: It would also presumably be dramatically susceptible to borrowers defaulting earlier (on average) than forecast. As if that happens, you end up with: 1) future investor interest going down 2) PF inflows going down 3) Expected losses going up In this way, each unexpected or unexpectedly early loss has a sort of triple whammy effect to the ratios.
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Post by peertopier on May 14, 2020 12:07:35 GMT
Yes, whatever the details are, there's currently just under £6m of real money in the fund and then a load of projections for what might come in and what might be lost.
Slightly worrying is that the capital fund boost comes from "Expected Future Investor Interest
Interest payments from borrowers to investors expected to be received over the lifetime of active loans, discounted for early payments and losses." It's not clear if that's the proportion of the interest allocated for the fund, or an estimation based on all interest coming in. If it's the latter then I suppose that's OK, you don't make any interest but it covered all of your capital lossses.
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beagle
Investor in ratesetter, funding circle, lendy (lesson learnt) and AC
Posts: 670
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Post by beagle on May 14, 2020 14:34:05 GMT
I would argue there is near 10 million plus given these figures show march and the debt sale was April. factoring losses per roolish (1 - 1.5 per month) perhaps 9 million. I think we need to wait and see or call them.
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Post by peertopier on May 16, 2020 18:05:38 GMT
I've had this explanation of the provision fund. It's a weird old thing, it's simple in some ways but complicated in others. I suppose it doesn't matter if you believe you're having interest or capital repaid if at the end of it you receive at least your capital back.
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