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Post by samford71 on Oct 18, 2018 22:47:31 GMT
cashmax . A few counters to your statements On an investment platform like this that uses secured assets, the interest should be the risk element, not the capital. The recovery rate for bank loans is 90-95%. Lendy, however, does not deal with bank quality loans. They deal with highly speculative property development loans and bridges, paying 24% (IRR 30%+). The average recovery rate on secured traded loans, globally since the 1970s is 65-70% (source: Moodys, S&P). If speculative grade (junk) corporate bonds pay 6-7% currently, how can you possibly think a loan paying 24% (4x the yield of junk bonds) has no capital risk? No capital risk and a 24% yield, yet all those sovereign wealth funds, Ivy league endowments and hedge funds collectively decide to be charitable and let retail investors take the cream? Just think about what you have written, "for a 12% interest loan, you should expect only a 50-75% recovery on defaulted loans" really?  ?? Your figures suggest that if more than 12% of loans default you can't make money??? Even their own (badly) manipulated figures say that they have more than 12% of 6 month old defaulted loans. Take a portfolio of 12-month par loans, with coupon 12%, paying monthly, in arrears. If the default probability is 12% and the recovery value is 50%, the NPV is 105.55; at 70% recovery the NPV is 108.28. For you to breakeven, at a recovery rate of 50%, the default probability has to be 23.53%; at 70% recovery, the default probability has to 38.70%. SS has originated over £410mm in loans since 2013. Over £200mm in loans have redeemed. To be clear, some of these are clear cut redemptions at par, some are rollovers of say a PBL into a DFL. Some are rollovers are variants of “extend and pretend”. That’s a subjective call. Nonetheless, you can split these into loan cohorts by year (or quarter) to get some real idea realized default rates. Those annualized default probabilities aren't even close to 23.53% or 38.70%. Go and run the cohort analysis. They can't even get a valuation right ... Lendy claim that LTV ratios never exceed 70%. Thats a lie. This whole issue about LTVs being wrong misses the point. The basic proposition of SS is the borrowers get to speculate, with constrained downside, and highly leveraged upside (example: DFL004 where the borrower has a payout ratio in his favour of at least 8:1, possibly 16:1). Lenders get "carry" trade, with a payout ratio of 1:8 (max upside 12, downside 100). It should be 1:4 but they allow SS to take 50% of the return for no risk. As a result borrowers only need a small proportion of development projects to succeed to make a very positive return. The fact this works is nothing to do with dodgy valuations. It works because the criteria for lending is GDV, while most professional lenders use LTC for spec development loans. LTC forces the equity down for borrowers to rise substantially, and thus reduces the speculative leverage. As a result default rates must be lower for borrowers to make a positive return. You need to change the lending criteria; you don't even need a valuation at that point. People keep complaining about SS but the risk-return proposition was there for everyone to see. When you accept 12% for loans where the market rate is 24% you're going to have a potential issue. When you lend on a criteria like GDV, instead of LTC, then you're going to have a potential issue. The most surprising thing about SS is not the high default rates, the low recovery rates or the fact the management team didn't have enough experience to run this business. The most surprising thing is that, given the basic proposition was so poor for lenders in the first place, that returns actually haven't been that bad!
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zedi
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Post by zedi on Oct 19, 2018 7:39:43 GMT
People keep complaining about SS but the risk-return proposition was there for everyone to see. When you accept 12% for loans where the market rate is 24% you're going to have a potential issue. I don´t get how people can beleive they will receive 100% of their capital back from defaulted 12%-above-base-rate loans...Therefore I agree with you on most of your points but not on the market rate one. How do you know the borrower´s APR? AFAIK, this (important) measure never have been made public (correct me if I am wrong). The only thing you could do is to estimate it by the max. fees Lendy charges but it´s very likely that the huge loans got huge discounts. Then one also should subtract the provision fund fees (whether the provision fund is helpful or not, that´s money which is in theory dedicated to lenders and not part of Lendy´s profit share) and keep in mind that other lenders the borrower could have turned to would also have had a spread in the interest rate to cover their costs. To assess whether the Lendy 12%-offer to investors was good or bad, one would have to know the borrower´s APR and the APR similar borrowers are paying elsewhere (i.e. knowing the market rate). The average Lendy lender didn´t know neither of these both measures which determined the risk of the loans (nor did he ask for them) because of the low transparency of Lendy and the lack of knowledge in the developement/briding finance industry. Thus the conclusion stays the same, if one invests in products one doesn´t understand, there is no reason to complain.
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Post by cashmax on Oct 19, 2018 10:44:47 GMT
cashmax . A few counters to your statements On an investment platform like this that uses secured assets, the interest should be the risk element, not the capital. The recovery rate for bank loans is 90-95%. Lendy, however, does not deal with bank quality loans. They deal with highly speculative property development loans and bridges, paying 24% (IRR 30%+). The average recovery rate on secured traded loans, globally since the 1970s is 65-70% (source: Moodys, S&P). If speculative grade (junk) corporate bonds pay 6-7% currently, how can you possibly think a loan paying 24% (4x the yield of junk bonds) has no capital risk? No capital risk and a 24% yield, yet all those sovereign wealth funds, Ivy league endowments and hedge funds collectively decide to be charitable and let retail investors take the cream? Just think about what you have written, "for a 12% interest loan, you should expect only a 50-75% recovery on defaulted loans" really? ?? Your figures suggest that if more than 12% of loans default you can't make money??? Even their own (badly) manipulated figures say that they have more than 12% of 6 month old defaulted loans. Take a portfolio of 12-month par loans, with coupon 12%, paying monthly, in arrears. If the default probability is 12% and the recovery value is 50%, the NPV is 105.55; at 70% recovery the NPV is 108.28. For you to breakeven, at a recovery rate of 50%, the default probability has to be 23.53%; at 70% recovery, the default probability has to 38.70%. SS has originated over £410mm in loans since 2013. Over £200mm in loans have redeemed. To be clear, some of these are clear cut redemptions at par, some are rollovers of say a PBL into a DFL. Some are rollovers are variants of “extend and pretend”. That’s a subjective call. Nonetheless, you can split these into loan cohorts by year (or quarter) to get some real idea realized default rates. Those annualized default probabilities aren't even close to 23.53% or 38.70%. Go and run the cohort analysis. They can't even get a valuation right ... Lendy claim that LTV ratios never exceed 70%. Thats a lie. This whole issue about LTVs being wrong misses the point. The basic proposition of SS is the borrowers get to speculate, with constrained downside, and highly leveraged upside (example: DFL004 where the borrower has a payout ratio in his favour of at least 8:1, possibly 16:1). Lenders get "carry" trade, with a payout ratio of 1:8 (max upside 12, downside 100). It should be 1:4 but they allow SS to take 50% of the return for no risk. As a result borrowers only need a small proportion of development projects to succeed to make a very positive return. The fact this works is nothing to do with dodgy valuations. It works because the criteria for lending is GDV, while most professional lenders use LTC for spec development loans. LTC forces the equity down for borrowers to rise substantially, and thus reduces the speculative leverage. As a result default rates must be lower for borrowers to make a positive return. You need to change the lending criteria; you don't even need a valuation at that point. People keep complaining about SS but the risk-return proposition was there for everyone to see. When you accept 12% for loans where the market rate is 24% you're going to have a potential issue. When you lend on a criteria like GDV, instead of LTC, then you're going to have a potential issue. The most surprising thing about SS is not the high default rates, the low recovery rates or the fact the management team didn't have enough experience to run this business. The most surprising thing is that, given the basic proposition was so poor for lenders in the first place, that returns actually haven't been that bad! (can't get the quote tool to work like you have) On your first point, bank loans are UNSECURED lending. We are talking about SECURED lending. Even so, I didn't expect to get away without any capital losses, just that they would be the exception. I just expected some transparency around this element. Every single other platform I invested with managed this. There can be only one way this will end with Lendy pretending there hasn't been a single loss of capital. Second point - too many numbers for me. Third point - I accept that the platform has stretched the truth of LTV using GDV's etc and other means of disguising the true LTV, but I'm talking about loans with a single tranche for residential property like PBL081. You wouldn't expect to have lost significant capital on a basic investment like that. In essence, I do accept that this is the fault of the lenders for becoming complacent, when I used to invest with SS and Funding Secure, I used to spend the time to go and check out the assets for myself, do my own DD and invest large amounts across only a few loans, but loans that I was confident had a decent security in place and the reasons for the loan were logical in the first place. In fact, the polar opposite of what the modern thinking says you should do regarding diversification. Then I started to trust Lendy to invest on my behalf, across many loans and that's where things started to go wrong.
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copacetic
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Post by copacetic on Oct 19, 2018 11:21:17 GMT
Second point - too many numbers for me. You should probably make the effort to understand the simplified example Samford71 has presented since it's pretty much the basics of how you should expect a diversified portfolio of loans to perform. When you're getting free advice from a finance professional that knows the industry well and who isn't trying to sell you anything, grab it, it could save you a fortune!
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Post by cashmax on Oct 19, 2018 12:19:47 GMT
Second point - too many numbers for me. You should probably make the effort to understand the simplified example Samford71 has presented since it's pretty much the basics of how you should expect a diversified portfolio of loans to perform. When you're getting free advice from a finance professional that knows the industry well and who isn't trying to sell you anything, grab it, it could save you a fortune! I tried - Still not making much sense to me. All I read was that less than 50% of the loans have redeemed. Either way, without a flux capacitor, there isn't any advice there than will help me with my Lendy investments.
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richox
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Post by richox on Oct 19, 2018 13:44:22 GMT
What are the new hired hands doing to turn the loan book around? No new borrowers in the pipeline for months. An increasing list of non performing loans with quite a few now over 2 years overdue. With DFL012 added to it tomorrow it's looking out of control. DFL005, DFL007, DFL008, DFL027 and PBL148 have all turned negative within the last 4 weeks. Loan sale queues are increasing daily.
Unless Lendy improves the management of its loans they are not going to see much more investment money heading in their direction.
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wuzimu
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Post by wuzimu on Oct 19, 2018 14:27:14 GMT
I don't see any contradiction in what Samford71 says about the generality of higher risk lending and Cashmax personal feelings about his situation.
I think all accept a risk to capital and losses are to be expected.
But that doesn't excuse the state of the LY loanbook , which in turn has focussed lenders attention on the misleading information, probably misrepresentations and crp loan management. Obviously if most lenders were sitting on a comfy profit they wouldn't care about those things.
But as most lenders are stuck with defaulted loans on average >200% of the interest LY ever paid them , most lenders are in what psychologists term a 'loss frame'.
People feel the pain of loss over twice as sharply as they feel happy about the same magnitude of gain.
I am expecting that sentiment to produce a LY victims action group, maybe a little early yet. We'll see.
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jo
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Post by jo on Oct 19, 2018 14:56:56 GMT
I don't see any contradiction in what Samford71 says about the generality of higher risk lending and Cashmax personal feelings about his situation.
I think all accept a risk to capital and losses are to be expected.
But that doesn't excuse the state of the LY loanbook , which in turn has focussed lenders attention on the misleading information, probably misrepresentations and crp loan management. Obviously if most lenders were sitting on a comfy profit they wouldn't care about those things.
But as most lenders are stuck with defaulted loans on average >200% of the interest LY ever paid them , most lenders are in what psychologists term a 'loss frame'.
People feel the pain of loss over twice as sharply as they feel happy about the same magnitude of gain.
I am expecting that sentiment to produce a LY victims action group, maybe a little early yet. We'll see.
Not sure what this says (if I'm correct), but I get the impression that no stakeholders in several platforms actually what to be there anymore. Owners want out before tshtf. Similarly a lot of the staff. Similarly the lenders. Guess which group can't proactively do anything about that? All a bit asymmetric.
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Post by samford71 on Oct 20, 2018 11:53:22 GMT
SS did state on this forum, in 2015, that for bridge loans and early DFLs they were charging 4% fees, 18% interest (both upfront) and 2% in exit fees. They were proud to be "the most profitable platform in the universe". Nonetheless, I suspect you are correct in the assumption that they discounted these fees by varying amounts for the big DFLs. Their cost of sales is very high but even taking that into account their profitability would have been much higher in 2015-17 if full fees had been charged. Nonetheless, we can also get an idea of where the floor was. Lendinvest, a much larger platform was charging around 14-15% to borrowers on higher quality projects (more residential bridges and development loans in SE England) during 2015-17. Lenders were getting 6-8%. Platforms like TC were doing smaller loans where the all-in-cost to borrowers was 17-20% (with lenders getting say 12-13%). Abl still charge 24% to borrowers on many of their loans, with lenders seeing 12-14%. P2P property platforms rarely offer lenders more than 70% participation in the borrower's rate and it can be as low as 40%. We can also look at the 7 or so institutional lenders in the UK that are now involved in "speculative" development lending (i.e. less than 50% pre-let). It's an incredibly small market with less than £5bn a year in financing. The average margin for a speculative commercial development loan is in the region of 450-500bp for the senior tranche (say 50% LTC) and 900-1000bp for the junior tranche (70% LTC), over the lender's long term funding rate (say LIBOR+100/200), with fees of say 200bp. So say 7.5%-9% for senior and 12-14% for junior. P2P platforms locate themselves at the riskiest end of that market that these institutions don't want to cover (the instos also prefer much larger deals of £25mm+). Moreover, it should be very obvious why borrowers prefer to pay even 24% to SS on a 70% GDV criteria than 9% on a 50% LTC criteria. Take DFL004. On a £23mm GDV, the borrowers gets £14.5mm on a 65% LGDV basis. Fees and interest mean they receive just £11m. Given the build cost is £11.5mm, then their equity stake is just £0.5mm. If the completed project sells for say £16-23mm (say 70%-100% of the valuation's GDV) then the profit is £1.5-8.5m, a multiple on equity down of 3-17x. By comparison, using 50% LTC and 9% rate, then the total loan is £5.75mm, which after fees and interest is £5.25mm, so their required equity is £6.25mm. At the same sale price of £16-23mm, their multiple on equity down is just 0.6-1.8. So SS offer a much more attractive deal at 24% than an instititution at 9% because they offer a more constrained downside and much more levered upside. Perhaps it's counterintuitive to some but SS by charging "only 24%" is basically offering a dirt cheap option to a property speculator.
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cwah
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Post by cwah on Oct 20, 2018 12:27:51 GMT
SS did state on this forum, in 2015, that for bridge loans and early DFLs they were charging 4% fees, 18% interest (both upfront) and 2% in exit fees. They were proud to be "the most profitable platform in the universe". Nonetheless, I suspect you are correct in the assumption that they discounted these fees by varying amounts for the big DFLs. Their cost of sales is very high but even taking that into account their profitability would have been much higher in 2015-17 if full fees had been charged. Nonetheless, we can also get an idea of where the floor was. Lendinvest, a much larger platform was charging around 14-15% to borrowers on higher quality projects (more residential bridges and development loans in SE England) during 2015-17. Lenders were getting 6-8%. Platforms like TC were doing smaller loans where the all-in-cost to borrowers was 17-20% (with lenders getting say 12-13%). Abl still charge 24% to borrowers on many of their loans, with lenders seeing 12-14%. P2P property platforms rarely offer lenders more than 70% participation in the borrower's rate and it can be as low as 40%. We can also look at the 7 or so institutional lenders in the UK that are now involved in "speculative" development lending (i.e. less than 50% pre-let). It's an incredibly small market with less than £5bn a year in financing. The average margin for a speculative commercial development loan is in the region of 450-500bp for the senior tranche (say 50% LTC) and 900-1000bp for the junior tranche (70% LTC), over the lender's long term funding rate (say LIBOR+100/200), with fees of say 200bp. So say 7.5%-9% for senior and 12-14% for junior. P2P platforms locate themselves at the riskiest end of that market that these institutions don't want to cover (the instos also prefer much larger deals of £25mm+). Moreover, it should be very obvious why borrowers prefer to pay even 24% to SS on a 70% GDV criteria than 9% on a 50% LTC criteria. Take DFL004. On a £23mm GDV, the borrowers gets £14.5mm on a 65% LGDV basis. Fees and interest mean they receive just £11m. Given the build cost is £11.5mm, then their equity stake is just £0.5mm. If the completed project sells for say £16-23mm (say 70%-100% of the valuation's GDV) then the profit is £1.5-8.5m, a multiple on equity down of 3-17x. By comparison, using 50% LTC and 9% rate, then the total loan is £5.75mm, which after fees and interest is £5.25mm, so their required equity is £6.25mm. At the same sale price of £16-23mm, their multiple on equity down is just 0.6-1.8. So SS offer a much more attractive deal at 24% than an instititution at 9% because they offer a more constrained downside and much more levered upside. Perhaps it's counterintuitive to some but SS by charging "only 24%" is basically offering a dirt cheap option to a property speculator. What do these borrower do after defaulting? They have personal guarantee I assume? They'd have sent the ££ abroad and move out of the country? Or they just declare themselves bankrupt and open another SPV to get fresh new loans?
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zedi
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Post by zedi on Oct 22, 2018 8:06:36 GMT
SS did state on this forum, in 2015, that for bridge loans and early DFLs they were charging 4% fees, 18% interest (both upfront) and 2% in exit fees. They were proud to be "the most profitable platform in the universe". Nonetheless, I suspect you are correct in the assumption that they discounted these fees by varying amounts for the big DFLs. Their cost of sales is very high but even taking that into account their profitability would have been much higher in 2015-17 if full fees had been charged. Nonetheless, we can also get an idea of where the floor was. Lendinvest, a much larger platform was charging around 14-15% to borrowers on higher quality projects (more residential bridges and development loans in SE England) during 2015-17. Lenders were getting 6-8%. Platforms like TC were doing smaller loans where the all-in-cost to borrowers was 17-20% (with lenders getting say 12-13%). Abl still charge 24% to borrowers on many of their loans, with lenders seeing 12-14%. P2P property platforms rarely offer lenders more than 70% participation in the borrower's rate and it can be as low as 40%. We can also look at the 7 or so institutional lenders in the UK that are now involved in "speculative" development lending (i.e. less than 50% pre-let). It's an incredibly small market with less than £5bn a year in financing. The average margin for a speculative commercial development loan is in the region of 450-500bp for the senior tranche (say 50% LTC) and 900-1000bp for the junior tranche (70% LTC), over the lender's long term funding rate (say LIBOR+100/200), with fees of say 200bp. So say 7.5%-9% for senior and 12-14% for junior. P2P platforms locate themselves at the riskiest end of that market that these institutions don't want to cover (the instos also prefer much larger deals of £25mm+). Moreover, it should be very obvious why borrowers prefer to pay even 24% to SS on a 70% GDV criteria than 9% on a 50% LTC criteria. Take DFL004. On a £23mm GDV, the borrowers gets £14.5mm on a 65% LGDV basis. Fees and interest mean they receive just £11m. Given the build cost is £11.5mm, then their equity stake is just £0.5mm. If the completed project sells for say £16-23mm (say 70%-100% of the valuation's GDV) then the profit is £1.5-8.5m, a multiple on equity down of 3-17x. By comparison, using 50% LTC and 9% rate, then the total loan is £5.75mm, which after fees and interest is £5.25mm, so their required equity is £6.25mm. At the same sale price of £16-23mm, their multiple on equity down is just 0.6-1.8. So SS offer a much more attractive deal at 24% than an instititution at 9% because they offer a more constrained downside and much more levered upside. Perhaps it's counterintuitive to some but SS by charging "only 24%" is basically offering a dirt cheap option to a property speculator. Absolutely correct, the whole P2P property market seems to have quite high fees (maybe except Assetz Capital, who also are focused on less speculative projects). But the problem remains, the is a lot of bargaining about the fees going on behind the scenes, so one cannot be sure how high the APR is in a specific case (but one should know to make an informed decision). I agree that "only 24%" (btw, it´s even higher than 24% in your calculation, since it´s only the paid out amount of 11.5mm which has to be used as basis) can still be dirt cheap and a bad offer to lenders but I don´t see the problem in the riskier end of the market. High risk is ok if you get a sufficient compensation for it. I even see the sweet spot of P2P lending in higher risk loans, where banks want to stay out or are forced out by regulation. The question is how can a lender be sure to get a fair offer? And for me the answer is by a combination of a suitable fee structure (less reliant on upfront fees, more on management and exit) and a high degree of transparency concerning borrower´s APR, the performance of older loan cohorts and recovery results. Many platforms are still to young to provide meaningfull data on recovery. And unfortunately it´s a bad practice in much of the P2P industry to not provide lenders with data on APR or even defaults (some platforms have funny definitions of when a loan should be classified as default). So my conclusions from my experiences with the UK P2P property market are: - I won´t invest if the fees or APRs aren´t made transparent - I won´t invest if the fees are heavily focused on upfront fees - I won´t invest if there is no clear definition for defaults - I won´t invest if there is not enough transparency on the performance of the whole loan book (especially defaults & recovery results) - I won´t invest if the track record isn´t long enough - It´s a big plus if the whole loanbook (with all necessary information) on a daily updated basis is disclosed - It´s a big plus if the platform has some skin in the game So far I don´t know any platform which satisfies all of my points (with Assetz Capital and maybe in future Kuflink or CrowdProperty coming closest), so I will stay out of this market for the moment. Btw, where did you get the data for the institutional lenders? Can you provide any links?
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On an investment platform like this that uses secured assets, the interest should be the risk element, not the capital.
?? Your figures suggest that if more than 12% of loans default you can't make money??? Even their own (badly) manipulated figures say that they have more than 12% of 6 month old defaulted loans. 
