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Post by aroominyork on Jul 14, 2019 9:16:02 GMT
I have a few questions about the provision fund. First, if defaults start rising and the provision fund gets run down, will investors receive 100% of their interest and capital until the day the fund runs dry and subsequent defaulted-upon investors potentially receive nothing, or will RS start paying out only a proportion of outstanding capital and interest with the aim of all investors sustaining similar levels of loss?
Second, the provision fund’s interest and capital coverage targets include expected future provision fund inflows. Does this take into account in stressed market conditions RS may reject a higher proportion of loan applications so there will be fewer loans paying into the fund (albeit that in stressed conditions they may charge higher interest rates and hence more money per loan will be received)?
And third, I do not understand why the expected future losses for interest and capital are the same, currently £33,618,486. Based on that figure the site shows the fund’s interest buffer as £39m, or 117% coverage, and the capital buffer as £80m, or 238% coverage. Since the amounts of interest and capital which would be defaulted on a bad loan are very different from each other, so shouldn’t the expected future losses between interest and capital also be different?
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ashtondav
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Post by ashtondav on Jul 14, 2019 10:09:03 GMT
Paragraph 1. All investors share the same haircut, once PF is exhausted, regardless of the mix, number or value of loans.
Those more learned than me will have to answer your other points, and may even correct my view stated above.
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IFISAcava
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Post by IFISAcava on Jul 14, 2019 10:39:57 GMT
Paragraph 1. All investors share the same haircut, once PF is exhausted, regardless of the mix, number or value of loans. Those more learned than me will have to answer your other points, and may even correct my view stated above. So the time to sell up is just before the PF drops below 100%?
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Post by propman on Jul 15, 2019 7:24:19 GMT
I have a few questions about the provision fund. First, if defaults start rising and the provision fund gets run down, will investors receive 100% of their interest and capital until the day the fund runs dry and subsequent defaulted-upon investors potentially receive nothing, or will RS start paying out only a proportion of outstanding capital and interest with the aim of all investors sustaining similar levels of loss? Second, the provision fund’s interest and capital coverage targets include expected future provision fund inflows. Does this take into account in stressed market conditions RS may reject a higher proportion of loan applications so there will be fewer loans paying into the fund (albeit that in stressed conditions they may charge higher interest rates and hence more money per loan will be received)? And third, I do not understand why the expected future losses for interest and capital are the same, currently £33,618,486. Based on that figure the site shows the fund’s interest buffer as £39m, or 117% coverage, and the capital buffer as £80m, or 238% coverage. Since the amounts of interest and capital which would be defaulted on a bad loan are very different from each other, so shouldn’t the expected future losses between interest and capital also be different? AIUI technically RS should introduce a haircut on all investors as soon as the belieThe one provision they have confirmed is that they would not make capital haircuts unless they believe that all interest due ve that the PF will not cover all interest and capital on defaults. In practice I suspect that they would masage the figures in the hope that future loans will cover the shortfall.
The inflows assumed are only for loans already written. These are estimates on the contributions to PF made over the remaining life of existing loans. However, I do not think that these have been stressed so that in practice increased defaults will lower these contributions and interest.
The expected losses are total (ie covered by existing and future PF, capital or interest).
The one thing they have confirmed is that they will not make any capital haircut unless they believe that PF + contributions due to PF + interest expected exceeds expected defaults. I am confused how this would work as the timings of inflows will not match claims, so whteher there will be delays on PF payouts after PF runs short and how these will be managed has not been explained.
- PM
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Stonk
Stonking
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Post by Stonk on Jul 15, 2019 8:50:13 GMT
Paragraph 1. All investors share the same haircut, once PF is exhausted, regardless of the mix, number or value of loans. Those more learned than me will have to answer your other points, and may even correct my view stated above. So the time to sell up is just before the PF drops below 100%?
Use and maintenance of the Provision Fund is discretionary, so there's no magic number at which anything would definitely or automatically happen.
However, if the PF were to go below 100%, then that indicates that on then-current calculations the PF will be unable to cover anticipated defaults. If nothing were done about that, then the expectation would be that the PF precentage would further reduce as time went by -- so intervention of some sort is required. Don't be tempted to think that the PF would be allowed to drop to 0% before anything was done: the PF at 0% means there is no money left to cover any defaults or missed payments at all, not even today, let alone all those expected in the future.
RS have various things they can do, so an interest haircut is not necessarily the result, but might be. A haircut is probably one of the quickest ways to replenish the PF, so the further the PF goes below 100% and the more dire the outlook, the higher the chance of a haircut.
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Post by propman on Jul 15, 2019 9:19:21 GMT
So the time to sell up is just before the PF drops below 100%?
Use and maintenance of the Provision Fund is discretionary, so there's no magic number at which anything would definitely or automatically happen.
However, if the PF were to go below 100%, then that indicates that on then-current calculations the PF will be unable to cover anticipated defaults. If nothing were done about that, then the expectation would be that the PF precentage would further reduce as time went by -- so intervention of some sort is required. Don't be tempted to think that the PF would be allowed to drop to 0% before anything was done: the PF at 0% means there is no money left to cover any defaults or missed payments at all, not even today, let alone all those expected in the future.
RS have various things they can do, so an interest haircut is not necessarily the result, but might be. A haircut is probably one of the quickest ways to replenish the PF, so the further the PF goes below 100% and the more dire the outlook, the higher the chance of a haircut.
I don't follow the logic in the bold section I have highlighted above. In the absence of a haircut, they would need to increase the proportion of borrower payments scheduled for the PF. If the increased funds / loan more than offset any reduction from decreased lending then the shortfall on the PF would decrease. If this happened faster than the expected defaults crystallised, the coverage would increase.
What other options do RS have but some sort of haircut? They could sell thedefaulted loans that they hold, but this appears to be done routinely already, any other actions?
As for timing the withdrawal of funds, with statistics posted 3 weeks in arrears once a month, how would anyone know that 100% had been reached?
- PM
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mark123
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Post by mark123 on Jul 15, 2019 11:32:54 GMT
As for timing the withdrawal of funds, with statistics posted 3 weeks in arrears once a month, how would anyone know that 100% had been reached? Good question. When RS published more information more quickly I was willing to lend at 5.9%. Now I won't accept less than 6.1%. I guess they are reducing the information in an attempt to lower rates but a proportion of larger investors will invest less as they cannot see that the risk / reward ratio is right for them. Supply and demand may keep rates lowish during the ISA season. But lack of transparency may drive average rates during the year higher. Good luck, Mark
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Post by propman on Jul 15, 2019 13:54:27 GMT
I would be surprised if they believe that less info will lower rates, how do you see their logic coming to this conclusion?
I assumed that their logic was to give them a chance to act before the impact of any defaults was apparent. There is also a risk that they are seeing increased bad debts from a more recent cohort that might suggest an issue to anyone looking at the detail previously provided. Also, I was already concerned that their "default" policy has changed. I believe that it was once the case that any loan with a repayment >3 months overdue was automatically defaulted. Some time ago they changed the statistics to show the top lates categorie as 3+ repayments late (I was never sure how the "repayments late" worked with the bullet repayment loans...) showing that some were retained longer. This would reduce reported defaults while only paying out individual late installments rather than the entire loans and so increae the cash shown as available in the PF.
It was also quickly apparent that the calculations assumed that between quarterly reviews assumed that the expected defaults were assumed to be a constant proportion of the outstanding balance. This meant the calculations failed to respond to increasing lates between reviews. This then meant that when they pay out a significant default, rather than this being a reduction in expected future defaults, the coverage would fall. perversely this encouraged delaying recognition of defaults and increased the interest suffered on them.
RS has always tended towards the "trust us and don't look to closely" approach rather than transparency. It may even be that the FCA are insisting on more rigour on defaults and rporting that they are dealing with behind the scenes and don't wish to disclose the changes...
Finally, they may have at last realised that it is not whether but when they impose a haircut. Reduced information allows them to manage the disclosure rather than dealing with as much speculation when the statistics deteriorate. I still think that most investors will overreact when the haircut comes. Personally I consider part of my earnings to date to be a buffer against future losses rather than earnings.
- PM
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mark123
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Post by mark123 on Jul 15, 2019 14:40:45 GMT
I would be surprised if they believe that less info will lower rates, how do you see their logic coming to this conclusion? I assumed they were systematically removing information from the site for a reason. Maybe they see active investors as too thoughtful and would like to attract more careless investors (who like candy-coloured websites). If they do think less transparency will mean more funds at a lower rate, I believe they are mistaken. Comparing volumes and rates on 1 July 2017, 2018 and 2019 doesn't look like their changes are helping to increase supply and reduce rates. But, of course, there will be many reasons for this. But surely using the latest default data was the excuse reason for reducing the frequency of data updates! Investors may overreact but I think RS has a better chance to survive now they have prepared investors for a potential haircut. I also have allocated some of my earnings against a possible future haircut... ...but I won't trust funds to RS in future if transparency continues to reduce or if the website deteriorates further. Good luck, Mark
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Greenwood2
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Post by Greenwood2 on Jul 15, 2019 15:03:35 GMT
The 'Stabilisation period' (PF in trouble) is explained in the 'Investor Terms', you need to download Investor terms (not the key information) to see the details. It's a pdf so I can't cut and paste it.
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Post by propman on Jul 15, 2019 15:41:02 GMT
The 'Stabilisation period' (PF in trouble) is explained in the 'Investor Terms', you need to download Investor terms (not the key information) to see the details. It's a pdf so I can't cut and paste it. This appears a little unclear to me. Under 19.1 RS reserves the right to not instigate a "Stabilisation Period" if they believe that the PF can be retyurned to have sufficient funds in the normal course of business (presumably contributions from further loans). However 19.5 & 19.6 states that where the coverage falls below 100% or is expected to they will reduce interest or capital respectively. ISTM that they could only do this if they instituted a Stabilisation Period thereby reducing their discretion.
Regards
- PM
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