100% Loan Availability - 20% First Loss

You're obviously entitled to your opinion rocky1 and I hope you're right. However, there is no evidence the Kuflink's DD is any better than anyone else's. Only time will tell. The problem is that Kuflink's 20% skin gave us a warm feeling that they had a greater incentive to perform better DD than others, and they were initially very responsive to lenders questions on here. Their removal of the 20% skin, their lack of an explanation of its replacement, and their current radio silence has let that warm feeling get extremely cold.

Ace - apologies for the delay have been away on a personal front. I have got a working example from the team and I'll do my best to explain the proposition. Here are highlights on how things have changed so that you all are aware:

1) Instead of the initial 20% skin in the game on a first in last out basis, the new loans will have a 5% skin in the game (see guarantee below)

2) All old loans which are being drawn down as tranches will still have the 20% skin in the game to avoid confusion and also to ensure that we comply with the loans initial terms agreed with the borrower

3) On the new loans Kuflink Bridging will provide a guarantee to cover capital and interest on losses of up to 20% (this will include the 5% skin in the game)

littleoldlady - I can assure you, we have confirmed with our compliance team, our legal experts, our compliancy experts and with the FCA that we can use the word guarantee

Note: my numbers here are for illustrative purposes only, I am taking an average of costs involved in recovering costs etc.

Example 1 (Asset depreciation by 10%):

Asset value at beginning of term: £100,000
Loan: £75,000
Rate: say 7% pa paid monthly
Kuflink skin in the game: £3,750
Kuflink guarantee: £11,250
Asset value at end of loan term: £90,000

Distribution of funds:
Capital owed to investors: £71,250
Interest owed to investors (assume a full month's of interest): £415.62
Total owed to investors: £71,665.62


Asset cost recovered: £90,000
Costs: £15,000
Funds available to distribute: Asset cost recovered - costs = £75,000
Investors get their capital + interest without dipping into the guarantee, Kuflink on the other hand takes a hit


Example 2 (Asset depreciation by 20%):

Asset value at beginning of term: £100,000
Loan: £75,000
Rate: say 7% pa paid monthly
Kuflink skin in the game: £3,750
Kuflink guarantee: £11,250
Asset value at end of loan term: £80,000

Distribution of funds:
Capital owed to investors: £71,250
Interest owed to investors (assume a full month's of interest): £415.62
Total owed to investors: £71,665.62


Asset cost recovered: £80,000
Costs: £15,000
Funds available to distribute: Asset cost recovered - costs = £65,000

In this case, Kuflink guarantee steps in with £6,655.62 to pay the investor community the capital and interest owed, Kuflink takes a loss on the 5%.

I hope these examples help, please feel free to comment and I'll do my best to answer them. Just to let you know, we are on the lookout for community manager going forward to help you all with your queries and concerns here.

Kind regards,
Hari

PS: getting answers to other queries too

Dear Ace,

that's a very valid question, I'll be more than happy to model it out for you. Based on the statement, the cover will provide up to 20% which is a combination of the 5% skin in the game and the 15% guarantee. So in short, you are right the answer is no. I will illustrate these below one with a "break even" scenario and the second with a "loss making" scenario. 

Example 3 (Asset depreciation by 24.5%):

Asset value at beginning of term: £100,000
Loan: £75,000
Rate: say 7% pa paid monthly
Kuflink skin in the game: £3,750
Kuflink guarantee: £11,250
Asset value at end of loan term: £75,500

Distribution of funds:
Capital owed to investors: £71,250
Interest owed to investors (assume a full month's of interest): £415.62
Total owed to investors: £71,665.62

Asset cost recovered: £75,500
Costs: £15,000
Funds available to distribute: Asset cost recovered - costs = £60,500

In this case, Kuflink guarantee steps in with £11,250 to pay the investor community the capital and interest owed, Kuflink takes a loss on the 5% skin in the game and this is near the breaking point of our test.


Example 4 (Asset depreciation by say 30%):

Asset value at beginning of term: £100,000
Loan: £75,000
Rate: say 7% pa paid monthly
Kuflink skin in the game: £3,750
Kuflink guarantee: £11,250
Asset value at end of loan term: £70,000

Distribution of funds:
Capital owed to investors: £71,250
Interest owed to investors (assume a full month's of interest): £415.62
Total owed to investors: £71,665.62

Asset cost recovered: £70,000
Costs: £15,000
Funds available to distribute: Asset cost recovered - costs = £55,000

In this case, Kuflink guarantee steps in with £11,250, however, in this scenario the online community does incur a loss on the deal in the form of £71,655.62 - £66,250 = £5,405.62

Having said this, we have policies, process and monitoring set in place from the outset of to ensure we don't end up in a situation where the asset price has depreciated sharply in a short space of time during the loan term. We want to operate a profitable business and provide a relatively safer environment for our investors in the P2P sector.

I have to point out, some situations are beyond our control, even with processes and systems in place, property prices have depreciated in the past pretty sharply and their are certain risks involved while investing in property backed loans. 

Hope this clears up some of the points raised. Please feel free to ask any queries with come to your mind and I'll try and get the answers quicker.

Kind regards,
Hari

Theory always works perfectly in theory though. 

All very well quoting small projects, but how would Kuflink cope with a worst-case scenario loss? For instance, some of the projects are valued on GDV which, if the loan goes sour, can leave people with a big loss. 

Furthermore, we're working in an industry that seems rife with developers using the shield of the SPV to carry out some less than ethical behaviours, and in the areas that Kuflink operates, the prospect of declining property values in the short-term.

The examples seem to be taken in isolation, but as we have seen at Lendy, overall platform health will start to mean something in decisions.

So how would Kuflink cope with say, a string of big defaults in succession over the course of a year? For example, the amount owed under the guarantee rising to something like £1m? Is insurance in place should this event happen?

if borrowers are so confident of the success of these projects then maybe as the lender we should insist on PGs/debentures.increase our security so that borrowers know they cannot hide behind SPVs/ltd co,s and that in the event of default their own livelyhood will be seriously affected with all assets taken.if the borrowers thought they were going to lose their own property/cars/etc/etc we might see things running better. after all this is a business not a charity/piggy bank for dodgy borrowers to scam platforms and lenders.

Thanks for the extra examples hari .

Firstly I apologise for my previous question. I missed your line specifying the value of the Kuflink guarantee when quickly scanning your post this morning. It clearly shows Kuflink's extra first loss guarantee is equal to 15% of the loan.

I do have a few points/questions, in addition to those posted by others:

1) In example 3 I think that the amount that Kuflink guarantee steps in with should be £11,165.62. Otherwise investors would be compensated for slightly more than they had actually lost.

2) In example 4 it seems wrong to me that all of the unrecoverable costs are born by non-Kuflink lenders. If Kuflink really has a 5% first loss skin in the game then it should bear 5% of the costs. Otherwise the skin is meaningless and you may as well scrap it and have a 20% first loss guarantee instead! If you agree with this then example 4 should be modified to increase the funds available to distribute by £750 (5% of £15,000) and the loss incurred by the online community should be decreased by the same amount.

3) Can you confirm that, in the case of default, Kuflink will make all reasonable efforts to recover the costs from the borrower?

Oops! No, it's me that's stupid. It's been a long day. Corrected now.