nick
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Post by nick on Feb 4, 2016 11:46:45 GMT
I have been reading about Twino on this forum with a view of investing some money on the platform. However, I'm finding it difficult to get comfortable over the risks, and in particular, platform risk which is particularly important given the reliance on the guaranteed buyback. My understanding of their business model is that, although they are structured as a P2P platform for pay day/short term unsecured personal credit, in substance they are effectively borrowing from investors at a fixed rate 12.8% and lending at a much higher rate with the interest rate margin earned covering the defaults which they guarantee under buy back.
I assume that without the buyback guarantee, the investor interest rate of 12.8%+ would not be profitable. Looking at Finabay’s financials as an indicator, their gross margin looks like around 110%pa with bad debt expense of the order of 30-50% of gross income implying a default rate of circa 30-50%pa. This ties back to their publicly stated expectation that they expect to buyback 15-20% of Polish loan volume which translates to roughly 30-40%pa assuming a 6 month loan period. So the buyback guarantee should be expected to represent a significant amount of any return.
I not sure that being principal to the loan provides any significant benefit in terms of insulation from Twino’s credit risk (parking aside the buyback guarantee) as events at Trustbuddy have shown that the cost of a step in administrator are significant (25% of book in that case) in addition to the underlying bad debt expense (20%+ of book?).
Reflecting on the above, I keep coming to the conclusion that the risks taken on from lending on the platform are not very different to investing in a bond issued by Twino and that the return should be viewed in that context (similar to Saving Stream before they changed their structure). Have I missed anything or is my thinking flawed in anyway?
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JamesFrance
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Port Grimaud 1974
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Post by JamesFrance on Feb 4, 2016 14:39:01 GMT
Every loan part is accompanied by a 12 page assignment agreement, so although the loans are all made initially by Finabay it seems the contract is between lender and borrower so not like the early SS model. The borrower is not named but I believe this is usual practice for personal loans where the details are held by the platform. According to the website Finabay seems to be operating a highly profitable business and has more years of lending experience than most P2P platforms, but I have not found independent verification of their accounts. Personally I am more concerned about businesses making considerable losses where expansion seems to be slowing, rather than this one which appears to be attracting a considerable level of investment currently although only launching just over 6 months ago.
I have not been able to find a reason not to invest here compared to any other platform, but obviously the recent P2P disasters make any investment of this type seem more risky than more traditional bank deposits etc. so do any of us really know what the risks are?
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Post by soereng on Feb 6, 2016 11:39:38 GMT
Hi nick,
your assumptions are right, although some extra details should be noted.
A loan has a counterparty risk aginst the original borrower. I.e. the borrower's ability to return principal and pay interest totally depends on the borrowers credit rating. BUT as loans are guaranteed by Twino (not Finabay!) the counterparty risk moves completely to Twino. With fixed interest rates (since I invest, I've never seen other rates then the 12.9%) this reflects in fact a bond against Twino at 12.9% with 1 month time to maturity.
The baseline is: If one invests at 12.9% at Twino he/she should decide if this reflects the actual counterparty risk for an unsecured bond. Looking at current bond market, 12.9% reflects a high risk investment - one should be aware of this.
There is however an additional operational risk, what it means could be seen when looking at the Trustbuddy case: Even if the guarantee would in fact guarantee a 100% capital payback, a bancruptcy case could put an impediment on actually returning the "safe and guaranteed" money. If the company goes bancrupt operation is stopped until someone takes over, no payments are made at all. This cost for this specific risk is part of the 12.9%, so the counterparty risk alone is less then 12.9%.
The P2P market evolves currently towards the "payback guarantee" model - e.g. you can see this at Mintos where quite a number of providers there offer this type of loans now. But only time will show, if this business model will work as providers thought of. As you have mentioned, if the actual default rate of loans for a certain provider is higher then he initially calculated - which is always a tricky part for any new business without proper historical data to calibrate a default model against - he might move into bancruptcy after a while. So even the "guarantee" model bears some risks that - interestingly enough - a non-secured lending platform like Bondora does not have.
Regards,
Soeren
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Post by jevgenijs on Feb 8, 2016 11:27:46 GMT
Hello, Everyone!
Thanks for expressing openly your concerns and let me try to address those. As I understand we the concerns are related to two areas:
1. Is TWINO capable of respecting the BuyBack Guarantee?
2. What happens with collecting the payments in case TWINO files for bankruptcy?
Let's start with the first one: at the moment TWINO is a wholly owned subsidiary of Finabay, and is the guarantor for the BuyBack (as per the agreements with the investors). We realize that this structure is not ideal for the investors; and thus, we have initiated the merger of Finabay and TWINO. After the merger is complete (might take 3-4 months more), TWINO will become the sole owner of all local lenders, and its balance sheet will represent the consolidated assets of the whole group.
As you can see from our website, the financial position of Finabay is pretty strong, and will are planning to repay a number of liabilities to further improve the financial health of the group (read TWINO after the completion of the merger).
Regarding the bankruptcy: in case TWINO files for bankruptcy, TWINO loses the rights for the interest rate spread on the loans sold to investors, meaning investors become entitled to all proceeds arising from the underlying loan agreements (principal, interest rate, late fees, etc.). The bankruptcy does not eliminate the obligation of the borrowers to repay their loans and the administrator will be required to funnel the collected proceeds to the respective investors.
Liquidation of the loan portfolio is a standard procedure for administrators of financial institutions (i.e. banks), and they usually hire and external partner to run down the portfolio. In addition, we are in talks with several such partners, to ensure that there is no delay with the process in case of administration (meaning the partner would be able to take over the run down the next day after the administration).
Hope I answered your questions, but let me know if I missed something.
Sincerely,
Jevgenijs
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Post by soereng on Feb 8, 2016 19:30:39 GMT
A very comprehensive answer, thanks jevgenijs.
After reading my email again, I need to add one thing: The difference of course to a bond is, that the "bond" is virtually secured by loans. So in bancrupty case the guarantee is lost - but the loans aren't as jevgenijs pointed out. So it makes the loans somehow better then the bond.
However, as beeing involved with Trustbuddy for myself at the moment there is some huge operational risk involved with the administrator taking over the business. Depending on the reason for the bankcrupty the administrator (usually a lawyer) needs first to secure the bankcrup organisation - it takes some time until he understands that the major asset's of the clients are not the company itself, but the loan portfolio it manages ,-)
However, this applies to really EVERY lending platform, so nothing very special for Twino then for any other platform.
Cheers,
Soeren
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