mark123
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Post by mark123 on Oct 23, 2017 12:33:09 GMT
The provision fund is currently 112% of expected losses. So 100% expected to be needed plus a 12% safety margin.
Ratesetter's target is "125% to 150%" ... take the average of 137.5%.
So the safety margin target is 37.5% and is currently 12% of expected losses.
Would it be an unfair presentation to say "The provision fund safety margin is below one third of Ratesetter's published target"?
p.s.
Reported projected usage for the last three complete years is 101.35%, 107.71% and 101.94%. I hate it when people quote a projection to 2 decimal places of accuracy - it leads people to believe the projection is far more precise than could possibly be justified.
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Post by propman on Oct 23, 2017 15:21:53 GMT
The provision fund is currently 112% of expected losses. So 100% expected to be needed plus a 12% safety margin. Ratesetter's target is "125% to 150%" ... take the average of 137.5%. So the safety margin target is 37.5% and is currently 12% of expected losses. Would it be an unfair presentation to say "The provision fund safety margin is below one third of Ratesetter's published target"? p.s. Reported projected usage for the last three complete years is 101.35%, 107.71% and 101.94%. I hate it when people quote a projection to 2 decimal places of accuracy - it leads people to believe the projection is far more precise than could possibly be justified. I don't think they can be held at fault if within the band, so I would say the safety margin is less than half of the published target. Worryingly 2017 is already expected to fall below target as the £2,337k margin is only 18% of the £13,220k expected defaults. That is despite expecting a cumulative deficit on the fees to the end of 2016 of £872k (7% of the 2017 fees to date). I can accept that bad debts exceeded expectations in the past, but I expect the fees to be adjusted to raise the additional funds required to meet the expected defaults in addition to providing coverage for the future.
- PM
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mark123
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Post by mark123 on Oct 26, 2017 16:25:53 GMT
Another percent drop to 111% today.
Is this the lowest point ever?
M.
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Post by beeje13 on Oct 27, 2017 9:55:09 GMT
It's concerning but I have a fair amount if confidence in RS. Things would have to get very bad (which is possible) for anybody to actually lose some of their capital, compared to Zopa for example which is happening to some lenders on there.
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Post by propman on Oct 27, 2017 13:10:58 GMT
It's concerning but I have a fair amount if confidence in RS. Things would have to get very bad (which is possible) for anybody to actually lose some of their capital, compared to Zopa for example which is happening to some lenders on there. The uncertainty is how they would respond to the coverage falling below 100%.
As I understand it, the bad debt calculation is supposed to be formulaic based on defaults of the loans made 18 - 30 months before, although this formula has been amended several times. It appears to calculate the % of O/S PF loans required for each year's loans monthly and then these %ages are applied until the next update. How this would operate if the number dropped below 100% remains to be seen. I think that there needs to be a formal decision by RS before interest & or capital is diverted from lenders to the PF. I am not at all sure how they would implement this if required.
The comforting picture of interest on existing loans being sufficient to cover shortfalls in most forseeable circumstances is unlikely to reflect what would actually happen. Key here is the cashflow requirements for the PF to continue to meet defaults as they occur, while ensuring reducing the disruption to RS's business.
The company operating the PF should push to ensure that they have sufficient funds as soon as possible especially as invoking this is likely to curtail the scale of RS's ongoing business and lead to a run on sales of existing loans and drying up of lender funds. Whether they agree to allow time to fill the deficit by a partial transfer of interest for an extended period or divert all payments for a short period to try and reestablish a viable service before the majority of lenders react remains to be seen.
Critical would be how RS attempt to continue in business. It could restart a new PF with a cash deposit to make new loans as attractive as possible (thereby preventing future contributions being used to mitigate the losses on existing loans as done to date) would be key. Personally I am expecting a capital haircut which is subsequently compensated by the remaining interest over subsequent years. It remains to be seen whether they would provide that any contribution by lenders directly to the PF is repayable if not subsequently required rather than carried forward to offset future loans.
- PM
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ashtondav
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Post by ashtondav on Oct 27, 2017 15:01:07 GMT
Given there is a PF (of any coverage) and higher interest rates there is no reason to currently invest in Zopa. You would always be better with RS.
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Post by newlender on Oct 28, 2017 7:44:16 GMT
Zopa has an ISA and RS doesn't.
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Post by beeje13 on Oct 28, 2017 10:25:53 GMT
It's concerning but I have a fair amount if confidence in RS. Things would have to get very bad (which is possible) for anybody to actually lose some of their capital, compared to Zopa for example which is happening to some lenders on there. The uncertainty is how they would respond to the coverage falling below 100%.
As I understand it, the bad debt calculation is supposed to be formulaic based on defaults of the loans made 18 - 30 months before, although this formula has been amended several times. It appears to calculate the % of O/S PF loans required for each year's loans monthly and then these %ages are applied until the next update. How this would operate if the number dropped below 100% remains to be seen. I think that there needs to be a formal decision by RS before interest & or capital is diverted from lenders to the PF. I am not at all sure how they would implement this if required.
The comforting picture of interest on existing loans being sufficient to cover shortfalls in most forseeable circumstances is unlikely to reflect what would actually happen. Key here is the cashflow requirements for the PF to continue to meet defaults as they occur, while ensuring reducing the disruption to RS's business.
The company operating the PF should push to ensure that they have sufficient funds as soon as possible especially as invoking this is likely to curtail the scale of RS's ongoing business and lead to a run on sales of existing loans and drying up of lender funds. Whether they agree to allow time to fill the deficit by a partial transfer of interest for an extended period or divert all payments for a short period to try and reestablish a viable service before the majority of lenders react remains to be seen.
Critical would be how RS attempt to continue in business. It could restart a new PF with a cash deposit to make new loans as attractive as possible (thereby preventing future contributions being used to mitigate the losses on existing loans as done to date) would be key. Personally I am expecting a capital haircut which is subsequently compensated by the remaining interest over subsequent years. It remains to be seen whether they would provide that any contribution by lenders directly to the PF is repayable if not subsequently required rather than carried forward to offset future loans.
- PM
The coverage ratio would have to fall to 0% before any capital 'haircut'/loss (not taking into account cashflow of course).
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Post by propman on Oct 28, 2017 15:36:02 GMT
The uncertainty is how they would respond to the coverage falling below 100%. ...
The company operating the PF should push to ensure that they have sufficient funds as soon as possible especially as invoking this is likely to curtail the scale of RS's ongoing business and lead to a run on sales of existing loans and drying up of lender funds. Whether they agree to allow time to fill the deficit by a partial transfer of interest for an extended period or divert all payments for a short period to try and reestablish a viable service before the majority of lenders react remains to be seen.
Critical would be how RS attempt to continue in business. It could restart a new PF with a cash deposit to make new loans as attractive as possible (thereby preventing future contributions being used to mitigate the losses on existing loans as done to date) would be key. Personally I am expecting a capital haircut which is subsequently compensated by the remaining interest over subsequent years. It remains to be seen whether they would provide that any contribution by lenders directly to the PF is repayable if not subsequently required rather than carried forward to offset future loans.
- PM
The coverage ratio would have to fall to 0% before any capital 'haircut'/loss (not taking into account cashflow of course). Is that right? I thought that they were obliged to top up the PF from investors cap if the PF was deemed insufficient. 0% would mean that it was actually out of cash and there were actual liabilities due (presumably likely to be due more quickly than repayments at least at times. Is there any indication that they would require the lenders to wait and pay them out as the money comes in? IIRC they have a pretty wide discretion. If they followed your approach then they would definitely have ceased effective business (not only would there be no current PF, but a liability to meet past claims from your repayments!). Do you think that this would just be for capital, or would they not withhold interest until the PF was empty as well?
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wapping35
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Post by wapping35 on Oct 28, 2017 16:05:56 GMT
I have copy pasted below the T&C (Lender terms) s 8.4 on the PF which covers when a interest rate "hair cut" occurs (in summary it is when the coverage ratio is below 100% not 0%.
p.s. As at the current PF coverage ratio of 111%, Cash only represents 47% the strategy of triggering a hair cut at 100% seems sensible to me at least. The rest of the coverage ratio (64%) is expected future income. i.e. If the coverage ratio was to go below 100% the cash component would be well below 40% (I estimate it would be 37% of expected liabilities).
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8.4. An Interest Reduction will be applied if RateSetter reasonably believes the Provision Fund Coverage Ratio is or will imminently be below 100%. An Interest Reduction will result in a reduction to the Lender Rate you are entitled to receive during the relevant period. For example, if you have invested £1,000 at a Lender Rate of 5%, during normal operation approximately 14p of interest would accrue daily ((£1,000 x 0.05) / 365). If there is an Interest Reduction of 50% for 10 days, the Lender Rate for those 10 days would reduce to 2.5% and interest would accrue at 7p per day. When the borrower pays that interest (which could be during or after the Stabilisation Period), 70p will automatically be deducted from the payment due to you (10 x 7p) and paid into the Provision Fund.
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Post by beeje13 on Oct 28, 2017 17:15:59 GMT
I think there is confusion between interest and capital here.
The coverage ratio that has been quoted is for the interest payments.
I repeat that the interest coverage ratio would have to fall to 0% before any CAPITAL losses occur.
There is another coverage ratio, for expected actual bad debt, called the capital coverage ratio. This currently stands at 278% of expected losses. This measure would need to fall to 100% before CAPITAL losses occur.
Hope that clears things up, it took a while for me to get my head around it.
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wapping35
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Post by wapping35 on Oct 28, 2017 17:39:29 GMT
Yep that is covered in s8.5 on the Capital Coverage ratio being below 100%.
The problem I would envisage there is lenders will need to have defaults paid for in cash as opposed to IOU's from expected future payments (interest , capital , etc) from XYZ person in x months/years time.
I see you mention ignoring cash flow / liquidity, in reality if things got that bad (hopefully a v big IF) I would expect RS will need to instead ensure a chunky % of that Capital Coverage ratio is held as a cash reserve.
That is of course if RS still existed if such a dire scenario occurred.
It is interesting (as someone who has a substantial investment in RS) to think the issue through. In the end liquidity will be an issue if that did occur.
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mark123
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Post by mark123 on Oct 28, 2017 20:51:24 GMT
I have copy pasted below the T&C (Lender terms) s 8.4 on the PF which covers when a interest rate "hair cut" occurs (in summary it is when the coverage ratio is below 100% not 0%. p.s. As at the current PF coverage ratio of 111%, Cash only represents 47% the strategy of triggering a hair cut at 100% seems sensible to me at least. The rest of the coverage ratio (64%) is expected future income. i.e. If the coverage ratio was to go below 100% the cash component would be well below 40% (I estimate it would be 37% of expected liabilities). ======= 8.4. An Interest Reduction will be applied if RateSetter reasonably believes the Provision Fund Coverage Ratio is or will imminently be below 100%. An Interest Reduction will result in a reduction to the Lender Rate you are entitled to receive during the relevant period. For example, if you have invested £1,000 at a Lender Rate of 5%, during normal operation approximately 14p of interest would accrue daily ((£1,000 x 0.05) / 365). If there is an Interest Reduction of 50% for 10 days, the Lender Rate for those 10 days would reduce to 2.5% and interest would accrue at 7p per day. When the borrower pays that interest (which could be during or after the Stabilisation Period), 70p will automatically be deducted from the payment due to you (10 x 7p) and paid into the Provision Fund. So, if I understand correctly, we do not have a provision fund of 111% of expected losses... ...the PF only has to shrink another 11% before our interest payments are used to top it up. And, if that happens, new lending may dry up for a while, triggering liquidity problems on Rolling and meaning some people's 1 month loans become 5 year loans. Which could further reduce new lending meaning there is less new money going into the provision fund. Triggering... etc. It seems to me vital to the RS business model that the next movement in the PF is upwards, from 11% towards its target of 25% to 50%.
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mark123
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Post by mark123 on Oct 28, 2017 21:21:27 GMT
Provision fund trend... | Date | 26 Oct 15 | 21 Sep 16 | 1 Nov 16 | 28 Jan 17 | 8 Mar 17 | 28 Oct 17 | | Provision fund cash | £16m | £17m | £16m | £15m | £14m | £12m | | Contractual future income | Nil | £6m | £6m | £7m | £7m | £9m | | Expected bad debts | £10m | £18m | £18m | £19m | £19m | £19m | | Coverage total | 160% | 130% | 120% | 116% | 113% | 111% | | Margin before default | 60% | 30% | 20% | 16% | 13% | 11% |
If I have got these figures right, on the current trend the PF will drop below the magic 100% even if Brexit or whatever does not cause an increase in defaults. I think it is time we heard from RS their proposals to get the PF stable and then to grow towards their published target range. Good luck, Mark123 |
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Post by BrianC on Oct 29, 2017 20:18:52 GMT
That’s a worrying trend.
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