wapping35
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Post by wapping35 on Apr 7, 2019 16:15:32 GMT
Hi wapping35 . In the last week of April, the website figures will be updated for April 1. This will be the pattern each month. Thank you. Dear RateSetter Thank you for replying and now providing a precise answer. I denote this does mean the PF numbers are now lagged by 30-60 days but at least I now know why no update is being provided (yet). I also presume the April 1 number (provided at the end of April) will include the quarterly update audit for the period Jan 1 - March 31, 2019. It would be good if when RS provide the April 1, 2019 number at the end of this month they state it includes the quarterly update changes (including the verbiage that RS has given for previous quarterly updates). Thank you, W35
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Post by imperial on Apr 8, 2019 9:55:27 GMT
The PF going below 100% really isn't a doomsday scenario - Zopa and Funding Circle lenders have repeatedly taken "haircuts" and they are doing fine. See here : www.altfi.com/article/3390_p2p_platform_zopa_expects_higher_loss_rates_lowers_return_projectionsZopa bad debt was greater than expected so the returns lenders are going to get now are less than Zopa originally forecast, aka a haircut. The PF going below 100% is just the exact same thing in a different format - bad debts are greater than expected so you are going to get a lower return. Even if this happens it will not necessarily be a big problem - it will depend on what is happening to other asset classes at the same time, i.e. it is RS performance relative to others that matters, not its performance relative to its own past. The real problem for RS is that a PF below 100% will invalidate a lot of their brand proposition. The good thing about the PF is that RS can take more contributions from new borrowers to bail out old lenders if it wants (and has to some degree already happened in its history), something that Zopa and FC can't do. Interested to see your optimism and glad someone has provided a different assessment to mine. I agree that Zopa did announce a reduced return on previous lending as well as cutting expected future rates. I would argue that this is not a "haircut" although I can see that it could be seen as such. Knowledgable Zopa Plus & Core investors understood that what they were investing in was a significantly higher average interest rate from which bad debts would have to be suffered. In addition, the headline rate was an estimate as the mix varied from borrower to borrower and month to month. As such the announcement was a change in estimates. In contrast, the RS approach pushes the expectation of receiving the known interest rates requested. I suspect that an announcement that they were retaining a proportion of the interest would come as a shock to most who had never seriously considered the impact of the PF Event.
Arguably what has happenned many times with announcements that the bad debt performance was worse than expected (indeed acknowledgement that for most of the money lent long enough ago to have a good guide to loan performance the bad debts will exceed the money paid in respect of them to the PF). This in turn made it clear that a higher payment would be required into the PF on future loans to cover this deficit. I am aware that they have obscured this latter obfuscating by increasing the risk level (and hence APR) so that after paying this additional premium rates remained comparable.
What I want to know is how they will manage the Event. Will they announce a flat proportional reduction in loan interest / withdrawal of interest and proportional reduction in capital of existing loans on the date of the announcement with no reduction on future loans? I think that this would give them the best chance of continuing in business as the impact on future investment would merely be the reduced PF coverage (presumably the action would only aim to increase the coverage ratio to 100%), a greater realisation of the risk and presumably they would again increase the proportion retained on new loans for the fund to rebuild the buffer and cover further minor reductions in loan performance. Any impact on new loans should merely raise the minimum investmet on the new loans and probably price them out of the market to such an extent that loan volumes (and hence RS income) would plummet. Conversely they might adopt the latter approach to give a larger pool of interest on which todraw and thereby reduce the necessary rpoportion that needed to be diverted to the PF. This might work on the grounds that there is a large amount of passive money much of which might not adjust to the continued reduction. In the short term at least, I would expect the passively recycled funds to provide the vast majority of the investment and so rates might not rise much and volumes not fall as catastrophically as expected. Against this, there may be sufficient active investors (or who become active in light of disclosures of the Event) selling loans to absorb a significant proportion of the Passive funds making this optimistic scenario less likely.
How do you see the likely reactions?
- PM
I think we are agreeing that the main difference here is the perception by lenders if the PF goes below 100%. It is interesting that people are concerned about how low the coverage ratio is. Think of it this way. The PF is in effect a system for realizing losses immediately. Funds paid into the PF would otherwise go to the lenders if it did not exist, that is what happens in the case of Zopa. Increasing the coverage ratio either means higher APRs which means riskier loans, or lower returns to lenders. Demands for an increase in the coverage ratio thus mean a demand by existing lenders to reduce returns (or increase the risk) for new lenders. There are broadly 2 reasons why the coverage ratio will go down - incompetent lending decisions or a change in the broader economic circumstances. In the latter case we can expect returns to reduce across all asset classes therefore paying lower returns to new lenders is entirely feasible and likely, as is increasing costs to new borrowers at the the same risk level as credit costs are also likely to increase across the market. Of course the other source of income for the PF is RS and its shareholders, they can reduce their own income to increase contributions to the fund, and they can pay in lump sums from their shareholders as has already happened. Also even it the coverage is below 100% it will take quite some time before there are no funds to make payments, so it is possible that lenders would continue to receive the expected return as the gap would be filled from new loans. Given how central the PF is to the RateSetter brand and proposition, I would expect them to do everything in their power to keep it above water. If any of this is true (and feasible) then the "real" coverage ratio is much higher in effect than it seems!
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wapping35
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Post by wapping35 on Apr 8, 2019 10:22:13 GMT
For me the PF ratio causing a haircut in itself would not necessarily be a terminal problem, in isolation.
The issue is how at RS (and indeed some other P2P platforms) any haircut impacts RS's intermediated interest rate model in the Rolling and One year markets which require liquidity to function.
That interaction for me is the bigger concern.
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Post by propman on Apr 8, 2019 15:23:49 GMT
The cynic in me believes that one of the ways in which RS will seek to delay / avoid a PF Event is by being over optimistic on bad debt recoveries and future bad debts. My own extrapolations have shown "real" PF ratios significantly below RS's for some time. As I have commented before when assessing their reevaluations of expected bad debts, it is suspicious that when they have recognised actual bad debts increasing for years far enough through that the majority of bad debts will have crystallised, that their expectations of bad debts for year's without such data has decreased. In each case it later became necessary to increase the bad debt estimates of these later years as bad debts crystallised. It may be that this is just the resulyt of a continuously deteriorating climate for bad debt recovery, but I remain unconvinced.
If I am correct in thinking that when PF is under pressure bad debts are understated, then a PF Event will be realised when this optimistic assessment becomes indefensible. At that time I expect that they will wish to realise a substantial call on investors funds (whether a large interest reduction or capital as well as all interest) to ensure that they do not need to make a further calls. hence I suspect any haircut to be late and very significant. I agree that if they can put this off to attempt to fix the deficit with increased PF deposits. They will. Using their own fees or balance sheet will happen if the Board believes that the benefit from continuing profits exceeds the costs. This will in turn require their backers to agree to this assessment. That may depend on the economic climate. The same conditions that will facilitate a PF Event may well preclude support from their backers!
Finally, I remember the over reactions from Zopa lenders experiencing there first bad debts. I think the reaction to losses on RS would be more extreme as I believe most investors do so on the assumption that they will get the headline rates on loans and that haircuts are not going to happen. That is why I believe that the reaction to a PF Event by the majority of investors will be much larger than warranted!
- PM
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robski
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Post by robski on Apr 9, 2019 13:13:41 GMT
I really see two events. 1) RS themselves take any initial hits. If its minor then they are quite likely IMO to add some funds to avoid a PF event. I still see a PF event as triggering potentially significant reaction from investors and as we know the rates on RS are pretty sensitive to supply vs demand. 2) Assuming 1 doesnt happen, or its overtaken so we do get a PF event and a haircut announced (I remember haircuts being announced as a kid and really not liking them ) My reaction will be to "price in" the haircut. So if say RS announce a 50% haircut then I would basically double my minimum lend rate from that point, so from say 6% to 12%. Below 12% I would simply be taking to holding and withdrawing. Some i guess would not even do this, and would literally withdraw all. So what I see is a situation where borrower rates would need to increase a lot, so investors see an actual rate not significantly different to what they would accept today. The whole situation looks iffy to me , I think RS would struggle a lot to fund much investment and hence would be forced to react, probably to go back to 1 above, or cease new business. I cannot see anything other than a miniscule haircut being accepted by active (ie non auto relend) lenders. If RS want to gamble on inactives, go for it, your risk. I suspect many investors would move from inactive to active at that point. My other concern is on timing. Assume they couldn't announce in advance, so suddenly you would get an email say that said, we are immediately applying a haircut whilst we build the provision fund. Would they reduce the interest received by this, or amend to have two rates on the system, written rate, and paying rate. Eg if it was just received then the exact timing could be an issue, if you had a 1 year loan pay back the following day would you lose a chunk of the interest earned over the life? Seems misselling to me, if its applied from x date then thats starting to create some tracking and other issues. How would they deal with sales. If I want to sell my portfolio, and lender x has listed £1M at 15%, will they action that. Or will they ignore it based on "market rate" being too high. Summary is i see a PF event triggering numerous reactions from lenders, and i see a real risk of a liquidity crisis for RS, and hence I believe it will either require RS themselves (owners) to take the initial brunt, or if not, they are going to potentially oversee the end of the platform, not from total failure, but from inability to attract funds to lend out.
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Post by propman on Apr 9, 2019 13:29:54 GMT
Broadly agree. However, if they could only apply a haircut to loans up to the Event, then to get 6% for new loans, you would only need to offer at 6%. Of course there is increased risk of a subsequent haircut. Also, I assume that the sale price would factor in the actual interest receivable rather than headline rate making a substantial capital loss on sale of any loan with more than a short time to run.
I seem to remember seeing a previous announcement that an interest cut would be based on interest accrued from some date, but don't know how definitive this was or where I saw it. This should stop the draconian effect on the annual market.
- PM
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reinvestor
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Post by reinvestor on Apr 9, 2019 13:53:11 GMT
They will need to do another round of fund raising to do that and Mr Woodford isn't exactly the most popular guy in the City at the moment.....
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dorset
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Post by dorset on Apr 9, 2019 17:07:49 GMT
Do not forget the lock in. RS are in effect borrowing short (rolling) to lend long and will be subject to a "bank run" when the PF drops to what? Probably about 105% or so. Liquidity complete dries up and lenders are then locked into rolling for up to five years at the rolling rate and will also get the the haircut if the PF keeps falling.
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robski
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Post by robski on Apr 11, 2019 12:22:08 GMT
Do not forget the lock in. RS are in effect borrowing short (rolling) to lend long and will be subject to a "bank run" when the PF drops to what? Probably about 105% or so. Liquidity complete dries up and lenders are then locked into rolling for up to five years at the rolling rate and will also get the the haircut if the PF keeps falling. I don't believe this is correct anymore Aren't all the rolling loans now paid back in the same way as 5 year, ie a partial amount each month?
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coogaruk
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Post by coogaruk on Apr 11, 2019 16:50:45 GMT
Do not forget the lock in. RS are in effect borrowing short (rolling) to lend long and will be subject to a "bank run" when the PF drops to what? Probably about 105% or so. Liquidity complete dries up and lenders are then locked into rolling for up to five years at the rolling rate and will also get the the haircut if the PF keeps falling. I don't believe this is correct anymore Aren't all the rolling loans now paid back in the same way as 5 year, ie a partial amount each month? I believe Rolling Capital is automatically reinvested* at the original rate for the entire life of the loan.
*I understand there are some sneaky ways around this but I do not partake
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dorset
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Post by dorset on Apr 11, 2019 17:29:51 GMT
Do not forget the lock in. RS are in effect borrowing short (rolling) to lend long and will be subject to a "bank run" when the PF drops to what? Probably about 105% or so. Liquidity complete dries up and lenders are then locked into rolling for up to five years at the rolling rate and will also get the the haircut if the PF keeps falling. I don't believe this is correct anymore Aren't all the rolling loans now paid back in the same way as 5 year, ie a partial amount each month? A run would occur when investors take out their rolling money at the end of each monthly roll over rather than reinvest. At the same time, scared off by the fall in the PF, no new money comes in to meet the payback. Hence you have a liquidity squeeze and RS are forced to block further withdrawals. This is my understanding of what could happen.
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robski
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Post by robski on Apr 12, 2019 14:14:11 GMT
Did they not change the market, admit i do not use rolling now, but i thought they were doing away with this full repayment then matching to a new loan, and you remain matched to one loan all the time.
"The monthly roll of matched loans has stopped and funds invested in the Rolling market are now being matched to borrowers for the full remaining duration of their loan"
So did this not happen, or are people still assuming it works like it used to?
Because if the bit in the "" above is correct you can't simply allow rolling to go to your holding account in full, only the repayment element.
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Post by oppsididitagain on Apr 12, 2019 17:29:52 GMT
Did they not change the market, admit i do not use rolling now, but i thought they were doing away with this full repayment then matching to a new loan, and you remain matched to one loan all the time. "The monthly roll of matched loans has stopped and funds invested in the Rolling market are now being matched to borrowers for the full remaining duration of their loan" So did this not happen, or are people still assuming it works like it used to? Because if the bit in the "" above is correct you can't simply allow rolling to go to your holding account in full, only the repayment element. Rolling is now functioning like most P2P lending. Its a standard amortising loan repayments model as per the 5yr market. The wording they use is a bit confusing, its meant to make the different between the old way. - Full repayment of your money and then re lent, when you choose too. To now which is a standard amortising system. The thing with the rolling market is , you don't know the possible time frame of the loan when you place your money on the market. It could be from 12 -48 months. where as the 5yr will be 60months.
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robski
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Post by robski on Apr 15, 2019 11:53:09 GMT
Did they not change the market, admit i do not use rolling now, but i thought they were doing away with this full repayment then matching to a new loan, and you remain matched to one loan all the time. "The monthly roll of matched loans has stopped and funds invested in the Rolling market are now being matched to borrowers for the full remaining duration of their loan" So did this not happen, or are people still assuming it works like it used to? Because if the bit in the "" above is correct you can't simply allow rolling to go to your holding account in full, only the repayment element. Rolling is now functioning like most P2P lending. Its a standard amortising loan repayments model as per the 5yr market. The wording they use is a bit confusing, its meant to make the different between the old way. - Full repayment of your money and then re lent, when you choose too. To now which is a standard amortising system. The thing with the rolling market is , you don't know the possible time frame of the loan when you place your money on the market. It could be from 12 -48 months. where as the 5yr will be 60months. Just to add to the confusion, 5 years isnt always either. They definately write 3, 4 and 5 years on this market, plus at times you can pick up loans someone else is selling, and people can also repay early as per their right, then you get defaults... My point was people making out that there could be a liquidity run due to rolling that I didn't believe existed now, and you confirmed thanks!
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wapping35
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Post by wapping35 on Apr 15, 2019 15:38:58 GMT
The changes to the Rolling market no doubt might help with any immediate liquidity issue in the event of a PF haircut.
I actually feel the change was good since it was more transparent for investors. i.e. It is far clearer that they are in fact lending long with instant access wholly dependent on future liquidity.
However a key component of the Rolling market is the fee free "immediate" withdrawal and that requires liquidity. Indeed it would need new money to take that exiting money out, loans taken up at the original interest rate given after haircut (for upto 5 years) and with the knowledge that immediate withdraw in the future is in doubt (after a PF event).
I suspect if a haircut was announced some investors in Rolling might want to exit immediately given the lower rates and that might set up liquidity dependent issues and of course then bad publicity. Albeit RS can point out that their T&C's do say withdrawal is liquidity dependent, much like they say the PF is a Buffer not a guarantee/insurance policy.
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