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Post by mopcku on Jan 25, 2017 11:42:22 GMT
Hello
I am active in the p2p lending for couple of months now and want to share some thoughts.
I think I understand the original idea of p2p lending which is based on the idea that via diversification as result of the very small loan part sizes (5 or10 €) also the small investors like us can reduce their risk of extreme losses.
At the moment in continental Europe I see very small number of relevant platforms which are using this original model. Here I see only Bondora Fellow Finance FinBee (which belongs to this category only partially because of the their compensation fund)
There are increasingly bigger and bigger numbers of Platforms (and offered loans) which offer the so called buyback guarantees. The biggest of these platforms are Mintos Twino Viventor Swaper
The majority of you like these platforms but my problem is that with these platforms I see completely change of the original of p2p lending idea of diversifying between different borrowers. Buying a loan part from some platform with buyback is like borrowing to the originator company. If I get my money back always independently if the original borrower defaults or not it makes for me no difference how good I am diversified between the loans of the same originator. Actually I am even asking myself why at all I am getting some lists with loans when it makes no difference for if they default or not? Why just not make a button “give all money to the originator” independently of the distribution between different borrowers? Or is this some way to mask that what we are doing here as investor is company funding for the originator. Why an originator will give us buyback and take the risks of default of the borrower? The only reason I can see is that we with our 10% or 12% are a cheaper source of his funding then a bank or other provider of liquidity!?
Also I see that with these new platforms we are exposed to their (or the one from the originators) company risks and not anymore to the risk of the original borrowers. Even if we try to diversify between platforms or originators our risks are much more concentrated than in case when we were able to split our money between hundreds or thousands of single borrowers.
What also makes me concerned is the question, why these buyback platforms/originators are coming to us for their liquidity? Is it possible that a bank or other bigger funding provider is refusing to give them the money? Or will give it at higher interest? If yes why is the interest higher? Is it possible that we as individual investor are just not able to assess the risks of these companies and therefore are giving them our money at much lower interest? Or is this a regulation question?
About Finbee there is also a concern of different nature because having their compensation fund there is also socializing the losses and creating somehow wrong incentives to take more risk. When I can assume my losses will be covered by the fund I could ask myself why get less interest for better rated loan when I can get more for a worse graded loan and have so or so compensation in case of losses. Of course the things are not so easy but in all cases not anymore that transparent like the original p2p lending idea.
So guys tell me please your opinion about the above points?
Did you already asked yourself the same things? What are your answers to the questions?
Thanks Mopcku
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Post by jackp2p on Jan 25, 2017 12:10:43 GMT
Hi, Interesting questions and you answered most of them yourself. Yes, we are just lending to the company, and there is no point of evaluating every loan, if there is a buyback, you need to evaluate the company itself. And yes, it is hard for pawnbrokers and payday loans to attract investments from banks, because they don't really have normal collateral to give. Maybe this information about bond % rates for some of the lending companies will make it clearer - highyield.eu/ So p2p is just a diversification method for them. From my point of view, long-term it is better to invest in loans such as Hipocredit, with a good collateral, and in case of financial problems or some sort of crisis they will be able to sell it and cover your investments. With LTV 30-40% even if the real estate prices plunges hardly, it still looks good.
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Post by southseacompany on Jan 25, 2017 16:51:35 GMT
What also makes me concerned is the question, why these buyback platforms/originators are coming to us for their liquidity? Is it possible that a bank or other bigger funding provider is refusing to give them the money? Or will give it at higher interest? If yes why is the interest higher? Is it possible that we as individual investor are just not able to assess the risks of these companies and therefore are giving them our money at much lower interest? Or is this a regulation question? It is not only the interest rate. Lenders and bond issues often impose covenants regarding debt to EBITDA ratios and the like, effectively limiting how much the company's owners can take out of the company. Based on published accounts, all of the owners of these originators (with only one exception I am aware of) prefer to get money out of the company quickly despite the astronomical returns on equity the companies have, suggesting that they think the situation is unsustainable. I think the covenant issue is bigger than a couple of percentage points of interest rates that could be saved. See this quote from Twino's most recently published accounts: During the reporting period estimated weighted average annual effective interest rate of receivables from customers was 152%. And contrast it with this quote, from a different page of the same report: The weighted average annual effective interest rate for assignment rights for the reporting period was 12.2%. Let the size of that interest rate spread sink in for a minute. (I am only picking Twino as an example because they have clearly quantified this. Other platforms like Swaper claim even larger spreads.) Even with large delinquency rates, this sort of business creates returns on investment normally unattainable outside the heroin trade. The p2p market is full of pricing errors on the micro level, for example the yields on Mogo loans have little relation to duration and LTV values, and some of LTV's are up to date while others are computed using valuations up to 1.5 years old. I believe it also has larger scale errors in that investors treat all buyback guarantees equally. For example, how is it that a tiny newcomer like Swaper only has to match the yield on established larger competitor Twino to attract investment? Logically their yields should be around 20% at least to be comparable in risk-reward ratio. My gut feeling is that many investors are very complacent about originator counterparty risk. I don't think that risk-free interest is available at 12%-14% in times when central bank rates are zero or negative. The situation should normalise, either through a gradual decline of p2p rates (which is perhaps ongoing, albeit very slowly) or through insolvency of some of the originators. I would not be surprised to see an originator default this year if there is an external trigger. Consider one specific risk: Lendo, Creamfinance, Swaper and Twino are all making massive profits borrowing in euro and lending in Georgian lari. (Twino's most recent accounts reveal that Georgia accounts for over 50% of total profit, and that they use no currency hedging whatsoever.) Is this country of under 4 million people really the El Dorado that supports an entire segment of Europe's financial industry? What happens if GEL suddenly falls sharply against the euro? It might be interesting to create a deadpool of originators, based on everyone's estimates of who will be the first to crash. But perhaps I'm the only one expecting that to happen? In any case the analysis is complicated by the fact that a few originators are black boxes with no financials available (such as Lendo and Swaper).
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Post by mopcku on Jan 25, 2017 17:33:04 GMT
"My gut feeling is that many investors are very complacent about originator counterparty risk. I don't think that risk-free interest is available at 12%-14% in times when central bank rates are zero or negative. The situation should normalise, either through a gradual decline of p2p rates (which is perhaps ongoing, albeit very slowly) or through insolvency of some of the originators."
I was also surprised by the (funny in my eyes) complaints in some other threads about interest rates falling to 10% and though this couldn’t be something sustainable. If there are such returns they should compensate for some risks. My problem is that in the original p2p concept you could make your estimation of PD LGD etc., or even try to model your loan portfolio. Here the whole story becomes very intransparent and full of other uncertainties like counterparty risk or FX risk.
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Post by rahafoorum on Jan 25, 2017 20:18:01 GMT
A few points I'd like to make here: 1. No, the buyback is not the same thing as giving your money to originator. This is where most investors seem to be going wrong, although many also seem to be thinking that it means risk-free, which is even worse of course. If you gave your money to the originator directly, you would simply have a claim against the originator. With buyback, you actually have a claim against the borrower and the originator has offered to guarantee the payments (in exchange for their cut off the interest). This might not be the case everywhere though of course, so good idea to check your contracts. The big difference is that when the company goes bankrupt, in one case, the loans are not part of assets in bankruptcy and it doesn't really matter how much obligations/debts the company has, you still have claim on those specific loans. In the other case, you'd simply be one of many who has a claim against the originator and the proceeds from those loans would be divided by the bankruptcy manager between all who have a claim against the company and you may not even be first in line. For this reason, you also need to account for credit risk of the borrower (although it's near impossible to do on most of these platforms since there's virtually no info...). If the platform/originator goes belly up, it's the investor who's stuck with these specific loans that you invested into. If you picked , then you'll be stuck with that . Another thing to consider is the bankruptcy process. In case of Twino, they have mentioned that in case of bankruptcy, you're the holder of the claim and will start receiving the full interest in the loan contract, when the buyback disappears. In case of Mintos, only time I have heard anything about this, was in a facebook conversation with Mintos representative who mentioned that this is not thought out and it is likely that you'll still continue receiving the same interest, but without buyback. The difference will then be used to cover the rundown/collection costs. No matter the process, your outcome will be extremely dependent on what's in your portfolio when the sh*t hits the fan. 2. I don't believe it's very accurate to claim that 10% or lower return is competitive on these platforms. It may be the case in UK or Germany, but we're talking about Eastern Europe or even farther east AND payday lending type of businesses. In most cases the bonds these companies can issue, carry higher interest rates than 10% and include more clauses and costs associated with it than the P2P lending route. These are not as safe investments as some bonds in Germany or UK and this should be reflected in the interest rates. Not to mention that many of these originators probably wouldn't be able to issue bonds even close to these rates or at all. One of the benefits for the platform for getting funding this way, is also the ease with which you can control your cash flow. If you need more money, you sell more loans. With bonds they get one lump sum, which will likely have a significant cash drag for a while, before it's fully deployed. In addition there are platform risks, regulative risks, interest risks, ton loads of conflicts of interests that are not being dealt with in any meaningful ways, no history for the business model in bad times with majority of the companies not even existing prior to the last crises etc etc. I personally find 10% to be very low for the risk we're taking to be honest. The problem here is not the interest rate, but the incorrect assumption that it is risk-free. 3. The effective interest rate can be 150% for Twino, but you also need to account for processing and acquisition costs and default rates, which can be quite large for the payday lender type business. Especially if you consider that these are usually very short-term loans so performing ones will bring in pretty tiny amounts in EUR, but defaults will take out the entire principal. So you have to keep the default rate pretty low to cover costs and default rates. They're definitely making profit and getting their cut here, but I don't think it's as big as it may seem. If I had to invest directly into these risky payday type of loans, I wouldn't do it. For me as an investor, it's a lot better this way, since we're not allowed to deduct losses from the taxable income, so this model effectively increases my returns due to lower taxes. Of course, I have to trust that the originator is doing a good job on underwriting and enough of cash cushion to cover their buyback promises. Where they are more likely making the hefty profits from the actual vs sold interest rates, is in selling those same loans without guarantee and even more cream taken off the top. Sure, the interest rates are higher, but if you run even pretty rough calculations, you'll see it doesn't come even close to covering the actual increase in risk. Nor are those loans even close to being priced right. Loans with apparently totally different risk levels have the exact same interest rate (both, in Twino and on Mintos).
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Post by mopcku on Jan 25, 2017 21:45:37 GMT
rahafoorum Thank you very much for the insightful comments. They made many addditional points clearer. Still I think the following point is not anymore valid for couple of the originators on Mintos like Banknote and Hipocredit? A few points I'd like to make here: 1. No, the buyback is not the same thing as giving your money to originator. This is where most investors seem to be going wrong, although many also seem to be thinking that it means risk-free, which is even worse of course. If you gave your money to the originator directly, you would simply have a claim against the originator. With buyback, you actually have a claim against the borrower and the originator has offered to guarantee the payments (in exchange for their cut off the interest). This might not be the case everywhere though of course, so good idea to check your contracts. The big difference is that when the company goes bankrupt, in one case, the loans are not part of assets in bankruptcy and it doesn't really matter how much obligations/debts the company has, you still have claim on those specific loans. In the other case, you'd simply be one of many who has a claim against the originator and the proceeds from those loans would be divided by the bankruptcy manager between all who have a claim against the company and you may not even be first in line. BR Mopcku
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Post by rahafoorum on Jan 25, 2017 22:08:04 GMT
rahafoorum Thank you very much for the insightful comments. They made many addditional points clearer. Still I think the following point is not anymore valid for couple of the originators on Mintos like Banknote and Hipocredit? A few points I'd like to make here: 1. No, the buyback is not the same thing as giving your money to originator. This is where most investors seem to be going wrong, although many also seem to be thinking that it means risk-free, which is even worse of course. If you gave your money to the originator directly, you would simply have a claim against the originator. With buyback, you actually have a claim against the borrower and the originator has offered to guarantee the payments (in exchange for their cut off the interest). This might not be the case everywhere though of course, so good idea to check your contracts. The big difference is that when the company goes bankrupt, in one case, the loans are not part of assets in bankruptcy and it doesn't really matter how much obligations/debts the company has, you still have claim on those specific loans. In the other case, you'd simply be one of many who has a claim against the originator and the proceeds from those loans would be divided by the bankruptcy manager between all who have a claim against the company and you may not even be first in line. BR Mopcku
They supposedly changed the structure in a way that you have the claim against the specific loan even in case of bankruptcy. Not really sure how watertight that structure legally is though in the bankruptcy process. I'm not a legal expert. With Banknote and Hipocredit I personally think the bigger issue is the topic of conflict of interests. I see no reason whatsoever, why Mintos would choose the side of the investor in any situations that might come up in critical moments. Nor have I seen a proper policy on how they are to mitigate any of the conflicts of interests present. There isn't even a single mention on this in terms of use or any of the information sections on the website as far as I have been able to find. I have also posed this question more than once in different discussions on Facebook where related topics are discussed by Mintos representatives, but somehow it has always been left unanswered. My concern about this topic is further fueled by the track record so far from Mintos where they have repeatedly promoted one of their related parties in their marketing material as a third party and have failed to mention even by a small disclaimer in the end that this is a related party to Mintos. The most basic thing to do in cases of conflict of interests and they have failed on this more than once. In fact, it happened at least twice pretty much right after the topic was very aggressively brought to their attention in a conversation started by the mostly fake news story from (most probably) a disgruntled competitor. I think this is possibly a bigger issue here, since this conflict of interests can affect you negatively even in cases where the company does not go bankrupt.
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Post by extremis on Jan 25, 2017 22:19:02 GMT
They supposedly changed the structure in a way that you have the claim against the specific loan even in case of bankruptcy. Not really sure how watertight that structure legally is though in the bankruptcy process. I'm not a legal expert. Does this also apply to Banknote? I thought it only affects Hipocredit
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Post by rahafoorum on Jan 25, 2017 22:47:30 GMT
They supposedly changed the structure in a way that you have the claim against the specific loan even in case of bankruptcy. Not really sure how watertight that structure legally is though in the bankruptcy process. I'm not a legal expert. Does this also apply to Banknote? I thought it only affects Hipocredit I'm not entirely sure. I remember seeing some e-mail, but it may have been only Hipocredit as well. Haven't really followed this development too closely, since I don't invest in either.
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fric
Member of DD Central
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Post by fric on Jan 26, 2017 7:23:49 GMT
I think the buybacks and how much diversity we have here is a result of "mainstreaming and simplifying". Just look at Bondora 1) you have a bad track record, because the loans range from sort of decent ones, that actually pay to loads of loans that make 0 repayments; 2) you have loads of indicators to look at, its hard to actually get the best out of it (or not lose money actually).
Think of it like this - you can buy/sell individual stocks, currencies, ETFs etc yourself or you can invest in a fund operated by a bank or some institution. Here you can see the similarities with that imho. Its mainstreamed, its easier and the goal is to bring in more average investors, who want to have part of the pie since deposit rates in banks are 0.
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Post by southseacompany on Jan 26, 2017 15:46:22 GMT
In most cases the bonds these companies can issue, carry higher interest rates than 10% and include more clauses and costs associated with it than the P2P lending route. That is correct. For example: SIA ExpressCredit (legal name of Banknote) issued 5-year bonds at 14% although it had to cut the amount due to lack of interest (indicating that perhaps ~14.5% would have been fairly priced according to the market). Finabay (now Twino) has 15% bonds outstanding. VIA SMS (of Viainvest fame) issued 3-year bonds at 12.5%. So, broadly speaking, the bonds issued by originators have similar yields as their p2p funding (but, of course, longer maturities), and therefore the p2p investments they have issued are (more or less) fairly priced. If there is a pricing error (and I believe there is), then it seems to be with small or obscure originators (e.g. Swaper) that haven't issued bonds and would not realistically be able to do so; their p2p funding should offer yields commensurate with the risk levels, which are in junk bond territory.
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Post by mopcku on Jan 26, 2017 18:15:40 GMT
I think the buybacks and how much diversity we have here is a result of "mainstreaming and simplifying". Just look at Bondora 1) you have a bad track record, because the loans range from sort of decent ones, that actually pay to loads of loans that make 0 repayments; 2) you have loads of indicators to look at, its hard to actually get the best out of it (or not lose money actually). Think of it like this - you can buy/sell individual stocks, currencies, ETFs etc yourself or you can invest in a fund operated by a bank or some institution. Here you can see the similarities with that imho. Its mainstreamed, its easier and the goal is to bring in more average investors, who want to have part of the pie since deposit rates in banks are 0. Hi
I think the diversification plays a very big role. It is very important to have big numbers of loan (parts) with as independent behavior as possible. It has a very big effect on the probability of extreme losses whether you have exposure against 5 originators with each 1000€ or against 50 end-borrower with each 100 euro exposure.
BR Mopcku
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Post by mopcku on Jan 28, 2017 15:43:36 GMT
I found a paper claiming:
On the other hand such pricing combined with a buyback guarantee from the originator makes such investment essentially a loan directly to the company, since the investor takes the risk not of the underlying but of the originator
In this perspective such a rate of return seems inadequate for such an investment.
You can find it here:
blackmoonfg.com/site/pdf/bm_retail_discount.pdf
Also this from the conclusion
Investment opportunities with a buyback option from loan originators facilitated on Mintos and Twino marketplaces are essentially balance sheet loans to these alternative lenders packaged in the form of peer-to-peer consumer lending. Given the size of companies and little information on the originators these investment opportunities don’t seem to provide investors with sufficient return to compensate for the risk being taken. Nevertheless unsophisticated investors take these risks given the long-lasting period of near-zero rates of return for their investments.
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Post by mopcku on Jan 28, 2017 15:56:47 GMT
With buyback, you actually have a claim against the borrower and the originator has offered to guarantee the payments (in exchange for their cut off the interest).
Hi again now with the paper from the last post i start to think if this has any practical meaning. Since the rate we get (12% or similar) is not at all comparable with the risk of default (fair interest compensating the default risk should be above 100 %.) I think we can almost ignore our claim against the original borrower. At this low interest rate what counts is only our claim against the originator - the buyback .
BR Mopcku
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kulerucket
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Post by kulerucket on Jan 28, 2017 16:35:38 GMT
Very very interesting report.
I have generally based my decisions on the assumption that if a platform goes under, I will get nothing back. Anything else is a bonus. With this in mind, I spread everything across multiple and only really invest "play" money into these.
I have noted that on Omaraha, the autoinvestor on buyback loans just stuffs all of the money you allocate into the next available loan and does not allow you to place a limit per loan.
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