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Post by zzr600 on Apr 30, 2015 16:59:56 GMT
I've been considering whether or not the 12% return is adequate to compensate for the the risk of default and loss of capital. I'm basing this on two assumptions: (a) the default rate is 1 in 8 for PBLs (this is the current default rate if you take into account that PBL07 is in default but 7 other loans have been paid back) and (b) that there is a total loss of capital by the investor.
I realise there is a provision fund, but this is discretionary and is currently big enough to cover moderate losses on 1 default, not large losses on one or more defaults. So based on this, assuming 20 loans of £500 each spread over 20 different investments:
Loans Value each Total Investment Interest at 12% p.a. Total
20 £500 £10,000 £1,200 £11,200
Current default rate is 1 in 8
Worst case: total loss of capital equals 2.5 loans in default equals £1,250 loss
Return on investment (£11,200 - £1,250) = £9,950
Loss on capital plus interest = -£50
So by my reckoning to generate a slight profit of £50, you require an interest rate of 13% (giving a total return of £10,050 including£1250 lost to default) or 17% to make profit of £450 equivalent to 4.5% interest. Any comments?
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ramblin rose
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“Some people grumble that roses have thorns; I am grateful that thorns have roses.” — Alphonse Karr
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Post by ramblin rose on Apr 30, 2015 17:40:57 GMT
The two general things I'd throw in to the discussion mix are:
- that anything approaching total loss of capital on a property would take quite an obscure circumstance, but as there has been some discussion sourrounding insurance on properties with another platform I guess it's not unimaginable that a property goes up in smoke and turns out not to be adequately insured.
- there is platform risk as well as loan risk, and for me that is probably a more pertinent risk in the case of SS than is the risk of total loss against the PBLs.
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bugs4me
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Post by bugs4me on Apr 30, 2015 20:06:12 GMT
The two general things I'd throw in to the discussion mix are: - that anything approaching total loss of capital on a property would take quite an obscure circumstance, but as there has been some discussion sourrounding insurance on properties with another platform I guess it's not unimaginable that a property goes up in smoke and turns out not to be adequately insured. - there is platform risk as well as loan risk, and for me that is probably a more pertinent risk in the case of SS than is the risk of total loss against the PBLs. I would agree that the biggest risk is not the total loss of a property but the ring fencing of the individual properties within the SS aka Lendy portfolio. AFAIK, loans are still made into the Lendy pot so if anything happened to them then effectively all lenders are affected irrespective as to any particular loan you are involved in. Is this information still correct?
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ramblin rose
Member of DD Central
“Some people grumble that roses have thorns; I am grateful that thorns have roses.” — Alphonse Karr
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Post by ramblin rose on Apr 30, 2015 21:35:15 GMT
The two general things I'd throw in to the discussion mix are: - that anything approaching total loss of capital on a property would take quite an obscure circumstance, but as there has been some discussion sourrounding insurance on properties with another platform I guess it's not unimaginable that a property goes up in smoke and turns out not to be adequately insured. - there is platform risk as well as loan risk, and for me that is probably a more pertinent risk in the case of SS than is the risk of total loss against the PBLs. I would agree that the biggest risk is not the total loss of a property but the ring fencing of the individual properties within the SS aka Lendy portfolio. AFAIK, loans are still made into the Lendy pot so if anything happened to them then effectively all lenders are affected irrespective as to any particular loan you are involved in. Is this information still correct? As far as I'm aware, it is.
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mikes1531
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Post by mikes1531 on Apr 30, 2015 23:45:14 GMT
- that anything approaching total loss of capital on a property would take quite an obscure circumstance, but as there has been some discussion sourrounding insurance on properties with another platform I guess it's not unimaginable that a property goes up in smoke and turns out not to be adequately insured. Here are a couple of factors that should mitigate the chance of a 100% loss of value... - Some of the SS PBLs are secured on land, which doesn't have the same risks as buildings. So a diversified portfolio of SS loans would reduce the chance of 100% losses.
- Similar to the above, the value of any building is a combination of the bricks and mortar value plus the land value, and in many -- most? -- cases the land value is a significant proportion. I don't remember seeing it in any of the valuation reports, but whenever I've seen building insurance recommendations, the cost of clearing away the rubble and building a replacement usually is estimated to be less than the value-added of the finished product. That's how property developers can make profits doing what they do. So even if a building were to burn to the ground and not be insured, there still should be significant value remaining, so a 100% capital loss shouldn't be possible.
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