james
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Post by james on Mar 28, 2016 12:10:55 GMT
Zopa experienced a 4.18% actual default rate in 2008 and RateSetter has specified 3.25 as the rate at which a resolution event will happen without outside funding (or some other special case to prevent it) and 5.5% as the rate at which interest effectively ceases. With that context it was interesting to read: There are many options and in reality RateSetter would do everything in its power to avoid a resolution, as it probably would be terminal to the brand. I'm pretty sure that RateSetter doesn't really plan to have the business fail if there's a rerun of 2008. I'm not sure that the FCA would grant authorisation if that was the plan offered to them. I assume that equity would be issued given that credit markets would again not be operating. I don't personally agree that a resolution event would be fatal for the brand but I do think that a wide range of tools can be used to avoid getting there. |
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Post by westonkevRS on Mar 28, 2016 16:17:18 GMT
Small note, it isn't actually the 3.25 bad rate that would cause a resolution event. This is a hypothetical rate based on the current status quo and RateSetter making no more loans or taking no other remedial action. If defaults rise then obviously future pricing of loans and contributions to the Provision Fund would change, in fact we are constantly segmenting and analysing the portfolio to ascertain optimal pricing. Future contributions could be higher or lower than previously based on performance.
It's a journey (3.25 is a destination with no choices or changes made), and many decisions and actions will be taken along the way. With £17.6m in the fund, we have time to make strategic decisions before we get anywhere near having to think about a resolution event.
Kevin.
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jimc99
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Post by jimc99 on Mar 28, 2016 19:19:47 GMT
Surely what you have at the moment is a fund of just around 4M pounds more than you expect to lose anyway. So an increase of defaults from your expected 2.3% to around 3.0% would entirely wipe out the fund.
Treading on thin ice is the saying I think!
And as the fund continues to drop in cover ratio more current and potential lenders will be worried. If money starts to be withdrawn and new money starts to dry up RS may not have the time or means to leisurely take strategic actions on your "journey".
Sorry Kev, but something needs doing now to increase cover of the fund.
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spiral
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Post by spiral on Mar 29, 2016 7:27:05 GMT
Surely what you have at the moment is a fund of just around 4M pounds more than you expect to lose anyway. I think the point is (or at least how I believe I've understood it) that this is correct for the full lifespan of the loans so it only ever truely comes into play is RS pack up business today. If they continue operating, you keep the ability to be reactive as you've got potentially 5 years to make good any shortfall.
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Post by propman on Mar 29, 2016 11:05:43 GMT
While I agree that the RS calculation understates the buffer of the PF (Of the £14m of defaulted loans, the recoveries over the next 3 years or so are unlikely to be trivial). The institutional money is (ISTR) 3% so will not affect the rates too much. As I have said elsewhere, secured loans are unlikely to be safer than unsecured as competitive pricing means that the same rate is offered for a loan with the same expected default (in the statistical sense, ie weighted average of default amounts and probabilities). The issue is that secured loans are likely to have no or low defaults in a rising market and so are likely to perform much worse in a downturn.
That said, the likelihood of increasing bad debts temporarily depleting the PF to a point where it would not be prudent to assume all future claims would be paid out is likely in any severe rapid downturn. hence my suggestion above that as this seems a possibility, the PF should continue to repay capital due rather than the full balance after 3 months with interest. this would then allow RS more time while still having had no investor lose money. If things improve and confidence remains high enough to continue writing a similar level of business, the back-interest and then full capital could subsequently be paid.
RS otherwise will need to put there hand in their pocket to top up the PF as they have done on at least 3 occasions so far to maintain confidence. The trouble is that this business model is critically dependent on shareholder confidence through a downturn. This has not yet been tested and is a real risk. In a downturn investing funds are likely to want to reduce exposure to finance and may be short of funds due to their investors reducing their investments.
Personally I don't think the PF should be increased (this would mean reduced lending and so lower rates, or a higher proportion of the receipt from the borrower going into the PF at investors expense. I am happy with the level of risk on the loans, but think the current approach of warning about tail risk but not mitigating platform risk worrying.
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toffeeboy
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Post by toffeeboy on Mar 29, 2016 13:50:09 GMT
Surely what you have at the moment is a fund of just around 4M pounds more than you expect to lose anyway. So an increase of defaults from your expected 2.3% to around 3.0% would entirely wipe out the fund. Treading on thin ice is the saying I think! And as the fund continues to drop in cover ratio more current and potential lenders will be worried. If money starts to be withdrawn and new money starts to dry up RS may not have the time or means to leisurely take strategic actions on your "journey". Sorry Kev, but something needs doing now to increase cover of the fund. If you want lower rates for safer money then maybe RS isn't the site for you to be lending at. I am happy with the risk/reward levels at RS and so lend through the site. If you aren't happy with them then the answer is not to lend, not say the fund needs increasing.
The bad debt estimates are set at a reasonable level, why would you set the rates at the worst known and offer lower returns to lenders?
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Post by jackpease on Mar 29, 2016 14:03:31 GMT
I too am happy with the moderate risk/moderate return model of Ratesetter and really hope constant (albeit well-intentioned) calls for transparency/safety/'improvements'/bells & whistles don't distract management nor turn Ratesetter into something that i no longer want to invest in. This happened at Assetz.
Jack P
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pip
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Post by pip on Mar 29, 2016 18:52:16 GMT
Surely what you have at the moment is a fund of just around 4M pounds more than you expect to lose anyway. So an increase of defaults from your expected 2.3% to around 3.0% would entirely wipe out the fund. Treading on thin ice is the saying I think! And as the fund continues to drop in cover ratio more current and potential lenders will be worried. If money starts to be withdrawn and new money starts to dry up RS may not have the time or means to leisurely take strategic actions on your "journey". Sorry Kev, but something needs doing now to increase cover of the fund. If you want lower rates for safer money then maybe RS isn't the site for you to be lending at. I am happy with the risk/reward levels at RS and so lend through the site. If you aren't happy with them then the answer is not to lend, not say the fund needs increasing.
The bad debt estimates are set at a reasonable level, why would you set the rates at the worst known and offer lower returns to lenders?
Toffee, the point is that the default rate is rising fast, and has been for over a year. I get what Kev says around some lending being secured and some corporate borrowers being not able to access the funds, however on the flip side: a) we know that the provision fund will not only have to finance defaults but also recoveries b) quite a lot of the provision fund is lent to it by ratesetter, we have no idea when/if ever these loans will be recalled or if future ones will be forthcoming. This may make the performance of the fund appear better than it is c) in an economic downturn or property price fall environment the default rate could rise even faster than it is now. It is fine for you to say you are comfortable with the risks and if others aren't they should not lend. Well FYI I am not comfortable with the risks and haven't lent now for almost a year. However I also am still drawing down my money from the platform and would prefer not to see a sticky mess before my money is totally withdrawn. I therefore echo Jim's point that the coverage ratio needs to rise! If it does so over a medium term I will gladly return. I know just by talking to other investors, I am not the only one who is worried and not the only one to have either stopped lending or investing less than they originally planned to.
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jimc99
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Post by jimc99 on Mar 29, 2016 20:58:29 GMT
Just to add that most of my money is in 3 year at an average of 5.7%. I have about 2 years before I can empty my account.
A year ago we had a PF that covered expected defaults 1.7 times. We also had interest rates significantly higher (at least in the 3 year market) than they are now.
Now we have both lower default cover and lower interest rates. If some members think this is acceptable that's fine. For me it's a far riskier platform today than when I started so its bye bye RS asap.
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Post by westonkevRS on Mar 30, 2016 6:33:45 GMT
Now we have both lower default cover and lower interest rates. If some members think this is acceptable that's fine. For me it's a far riskier platform today than when I started so its bye bye RS asap. I didn't know if to laugh or cry, sometimes that damn coverage ratio does more harm than good. As a generally prudent organization we are not optimistic with our default estimates (i.e. over estimate probable realities) and ignore future income. As a result have made a rod for our back - if that's the right expression. Anyways, when I started lending with RateSetter there was £0.5m in the Provision Fund, the platform was lowly capitalised and unprofitable. When I joined in 2013 there was £1.0m in the PF, platform unprofitable but better capitalised after a relatively small fund raising. Today there is £17.6m in the Provision Fund, we are well capitalised after raising money from the likes of Woodford, platform is profitable and we have investors such as the B2B and LSE:P2P that have done extensive due diligence. Personally I believe the platform has never been safer. I am starting to hate that coverage rate! Kevin.
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jimc99
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Post by jimc99 on Mar 30, 2016 7:24:19 GMT
Fair enough Kev. Like you explained, the PF coverage ratio is apparently inaccurate right now. I hope soon a better measure of lenders protection can be developed. Then I can stop withdrawing money each month and start reinvesting it as before.
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Post by propman on Mar 30, 2016 7:29:42 GMT
Now we have both lower default cover and lower interest rates. If some members think this is acceptable that's fine. For me it's a far riskier platform today than when I started so its bye bye RS asap. I didn't know if to laugh or cry, sometimes that damn coverage ratio does more harm than good. As a generally prudent organization we are not optimistic with our default estimates (i.e. over estimate probable realities) and ignore future income. As a result have made a rod for our back - if that's the right expression. Anyways, when I started lending with RateSetter there was £0.5m in the Provision Fund, the platform was lowly capitalised and unprofitable. When I joined in 2013 there was £1.0m in the PF, platform unprofitable but better capitalised after a relatively small fund raising. Today there is £17.6m in the Provision Fund, we are well capitalised after raising money from the likes of Woodford, platform is profitable and we have investors such as the B2B and LSE:P2P that have done extensive due diligence. Personally I believe the platform has never been safer. I am starting to hate that coverage rate! Kevin. Kev, I personally think that the PF is probably about right. But I do not think that RS will go through 20 years with the current credit charges without the Fund requiring additional funds to maintain investor confidence at some point. As this is at the discretion of RS, I worry that it might not be forthcoming in a crisis.
While you may believe that the current estimated defaults is overstated, from August 2013 to July 2015 the defaults have consistently exceeded the contributions to the PF as a proportion of the amounts repaid, often significantly. This suggests that the default estimates that are significantly less than the contributions to the fund, have not been particularly prudent, especially as this is a benign economic environment.
It may well be that defaults are front end loaded, but on my Zopa account I still get significant new lates 3-5 years into 5 year loans, so this does make me think that they are not skewed to anything like the extent necessary to come close to the estimated amounts. Indeed the default estimates have been exceeded for 2013 and 2014 and new defaults appear to be increasing not decreasing this.
I accept that you have some flexibility to increase fund contributions when defaults increase, but that will be necessary to provide against the loans that are paying those contributions anyway and so substantially increasing the contributions above this level would substantially impact RS's profits &/or lenders returns as the rates to borrowers could not rise too much without reducing the new loans and thereby further increasing the amount required per pound lent (ie it would be self defeating). Indeed we have seen some of this play out in the 3 year market where you suggested a change in underwriting and, as a result, loan volumes and rates have dropped significantly.
As for concentrating on the absolute amount in the fund, this seems naïve. A similar concentration on the amount of defaults would make the comparison more alarming. Clearly the Fund has to be in proportion to the loans outstanding. Although I would welcome your estimates of the likely recoveries on previously defaulted loans and the amount of future contributions due on loans that have been made and contributions made as a proportion. Indeed re the latter, it would be reassuring to know whether there is a part of the payments that is legally the property of the fund as, if this is in RS's discretion, in the event of platform failure I would expect a liquidator to only pay the minimum required.
Please let me know where I have gone wrong in this analysis as you clearly believe that our concerns are overstated.
- PM
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jlend
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Post by jlend on Mar 30, 2016 8:55:20 GMT
Now we have both lower default cover and lower interest rates. If some members think this is acceptable that's fine. For me it's a far riskier platform today than when I started so its bye bye RS asap. I didn't know if to laugh or cry, sometimes that damn coverage ratio does more harm than good. As a generally prudent organization we are not optimistic with our default estimates (i.e. over estimate probable realities) and ignore future income. As a result have made a rod for our back - if that's the right expression. Anyways, when I started lending with RateSetter there was £0.5m in the Provision Fund, the platform was lowly capitalised and unprofitable. When I joined in 2013 there was £1.0m in the PF, platform unprofitable but better capitalised after a relatively small fund raising. Today there is £17.6m in the Provision Fund, we are well capitalised after raising money from the likes of Woodford, platform is profitable and we have investors such as the B2B and LSE:P2P that have done extensive due diligence. Personally I believe the platform has never been safer. I am starting to hate that coverage rate! Kevin. I think it will help when the independent director is appointed for the provision fund sometime this year in terms of communicating the health of the fund. I wouldn't be so hard on yourself and RS in terms of the coverage ratio. It is one of the many metrics that epitomise the transparency of RS. It was one of the things that was critical to the success of ratesetter in the early years and still has a place amongst the various other data and metrics that RS now published.
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toffeeboy
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Post by toffeeboy on Mar 30, 2016 10:26:41 GMT
Toffee, the point is that the default rate is rising fast, and has been for over a year. I get what Kev says around some lending being secured and some corporate borrowers being not able to access the funds, however on the flip side: a) we know that the provision fund will not only have to finance defaults but also recoveries b) quite a lot of the provision fund is lent to it by ratesetter, we have no idea when/if ever these loans will be recalled or if future ones will be forthcoming. This may make the performance of the fund appear better than it is c) in an economic downturn or property price fall environment the default rate could rise even faster than it is now. It is fine for you to say you are comfortable with the risks and if others aren't they should not lend. Well FYI I am not comfortable with the risks and haven't lent now for almost a year. However I also am still drawing down my money from the platform and would prefer not to see a sticky mess before my money is totally withdrawn. I therefore echo Jim's point that the coverage ratio needs to rise! If it does so over a medium term I will gladly return. I know just by talking to other investors, I am not the only one who is worried and not the only one to have either stopped lending or investing less than they originally planned to. So if rates drop and coverage ratio rises then you would return because that is what would happen.
When you say quite a lot do you know how much? Is this all public knowledge that RS has been funding the PF, I know they started it but how much have they put in because quite a lot doesn't mean anything. What percentage of the fund is actually due to RS?
Yes and in an economic upturn the default rate will go down, what is your point? None of us can see the future so all RS can do is best calculate a default rate and apply that to the PF so those that trust them to calculate the default rate loan with them. As for the coverage rate, what does that actually mean. they have 1.3 times the expected defaults that will happen, I always assumed that their only pledge would be to keep the coverage rate above 1 so it covers the defaults that they expect, anything in excess to this is a bonus. I believe there was talk about the excess being paid out just before Christmas.
As you say you aren't happy with the coverage so you are pulling out and that is your prerogative and I have no problem with that. It was Jim coming on saying the PF needs increasing that got my back up, just because he isn't happy he thinks things should change and damn all of those that are happy with how things are run.
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pip
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Post by pip on Mar 30, 2016 10:51:41 GMT
Toffee, the point is that the default rate is rising fast, and has been for over a year. I get what Kev says around some lending being secured and some corporate borrowers being not able to access the funds, however on the flip side: a) we know that the provision fund will not only have to finance defaults but also recoveries b) quite a lot of the provision fund is lent to it by ratesetter, we have no idea when/if ever these loans will be recalled or if future ones will be forthcoming. This may make the performance of the fund appear better than it is c) in an economic downturn or property price fall environment the default rate could rise even faster than it is now. It is fine for you to say you are comfortable with the risks and if others aren't they should not lend. Well FYI I am not comfortable with the risks and haven't lent now for almost a year. However I also am still drawing down my money from the platform and would prefer not to see a sticky mess before my money is totally withdrawn. I therefore echo Jim's point that the coverage ratio needs to rise! If it does so over a medium term I will gladly return. I know just by talking to other investors, I am not the only one who is worried and not the only one to have either stopped lending or investing less than they originally planned to. So if rates drop and coverage ratio rises then you would return because that is what would happen.
When you say quite a lot do you know how much? Is this all public knowledge that RS has been funding the PF, I know they started it but how much have they put in because quite a lot doesn't mean anything. What percentage of the fund is actually due to RS?
Yes and in an economic upturn the default rate will go down, what is your point? None of us can see the future so all RS can do is best calculate a default rate and apply that to the PF so those that trust them to calculate the default rate loan with them. As for the coverage rate, what does that actually mean. they have 1.3 times the expected defaults that will happen, I always assumed that their only pledge would be to keep the coverage rate above 1 so it covers the defaults that they expect, anything in excess to this is a bonus. I believe there was talk about the excess being paid out just before Christmas.
As you say you aren't happy with the coverage so you are pulling out and that is your prerogative and I have no problem with that. It was Jim coming on saying the PF needs increasing that got my back up, just because he isn't happy he thinks things should change and damn all of those that are happy with how things are run.
Toffee,
No I don't know what % of the provision fund is lent to it by Ratesetter, all I know is from the quote 'when Ratesetter launched in 2010 we kick-started the provision fund with a loan of £150,000, and in 2015 we increased our commitment by adding an additional loan', see the provision fund page.
Now Ratesetter seem a pretty good bunch and I am sure they would not call in these loans if things got sticky, however what if Ratesetter went into administration, wouldn't these loans form part of Ratesetter's creditors and the administrators would be duty bound to try and recall the loans, resulting in greater losses for lenders? I have no idea.
I don't really have a lot to add on your other comments, I have made my position clear.
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There are many options and in reality RateSetter would do everything in its power to avoid a resolution, as it probably would be terminal to the brand.I'm pretty sure that RateSetter doesn't really plan to have the business fail if there's a rerun of 2008. I'm not sure that the FCA would grant authorisation if that was the plan offered to them. I assume that equity would be issued given that credit markets would again not be operating.
