bugs4me
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Post by bugs4me on Jul 10, 2015 8:27:09 GMT
I'm a 'refugee' from a while back from Financially Cumbersome after finding out that basically PG's weren't worth the paper they were written on - silly me.
My confusion is that many of the platforms are listing loans with a risk band but there doesn't seem to be associated definitions as to what a risk A is or a risk C, etc, etc. I presume these risk ratings are issued by the platforms themselves but that throws up the question in my mind as to what professional qualifications they possess in order to make a risk rating determination.
To be brutally frank IMO, just about anyone can set up a P2x platform and join the FCA and by supplying a risk profile be it A, B, or what have you then prospective lenders could be lulled into believing the 'these guys must know what they are doing'. It follows - in my mind at least - that there is every incentive for the platform to see the loan fully funded and if the worst comes to the worst, then there would be zero recourse for the lenders irrespective as to the risk band originally supplied. I accept it is the responsibility of the individual lender to do as much DD as possible and the decision to invest or not is firmly with themselves. Nonetheless, the platform I would have thought would be in possession of far more information than the lender.
Is there anywhere a 'table' as to what determines these risk ratings or are they entirely left to the individual platforms. I think I can already guess at the answer but would prefer to be corrected as whilst P2x is a risk which I fully accept, it also appears to be a minefield.
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Post by mrclondon on Jul 10, 2015 10:49:37 GMT
Not really answering your question, but each platform splitting loans in to risk bands should publish an expected annual bad debt rate ( FC's is here ) for each band. FK's equivalent table doesn't make it clear whether its quoting annual or lifetime default rate, but assuming its annual, then a FK 3 shield loan (which accounts for the vast majority of their loans) is roughly equivalent to a FC B loan. This all pre-supposes that the platforms are able to identify the expected default probability of any given loan with any accuracy, something I very much doubt with "desktop" due dilligence. |
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Post by yorkshireman on Jul 10, 2015 12:25:31 GMT
Currently there’s a prime example of what I consider to be the illogical and untrustworthy method of risk assessment on FC.
The loan is an A+ yet it’s credit history is appalling and has a payment performance of 109 days with the comment “significant improvement”
Pardon my French but how the hell does that justify an A+?
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jonno
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nil satis nisi optimum
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Post by jonno on Jul 10, 2015 12:33:56 GMT
Currently there’s a prime example of what I consider to be the illogical and untrustworthy method of risk assessment on FC. The loan is an A+ yet it’s credit history is appalling and has a payment performance of 109 days with the comment “significant improvement” Pardon my French but how the hell does that justify an A+? Probably because it's better than the rest of the total sh*te that it's got on its hands
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Post by ablrateandy on Jul 10, 2015 12:55:32 GMT
As users will know, we don't apply risk bands and that is an active decision on our part. Having sat at the pointy end of the financial crisis and seen ratings agencies and banks with hundreds and thousands of analysts struggle to keep pace with developments and STILL get it wrong, I don't think that we are in a position to make such fine decisions as "This is an 'A'" or "This is a 'B'". That's not to say that we don'd do any credit work on lessees, purchasers and companies, but for us it is a binary decision. Do we think that in all probability the loan will be paid back and would we put our own personal money into it? If yes, list. If no, don't list.
Some people don't like that approach and prefer what they see as comfort from a risk rating and that's their choice to make.
Maybe we will change our mind in future, but I doubt it.
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bugs4me
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Post by bugs4me on Jul 10, 2015 18:29:43 GMT
So it would appear that these rate bands (risks) are often about as useful as a chocolate fire-guard. This factor, coupled with some minimalist information being supplied for loan opportunities very much puts the emphasis on the lender to ask where necessary for more detailed information in addition to carrying out their own DD where possible. This information must be readily available but the platform simply chooses not to publish it.
In my eyes this demonstrates a degree of amateurism on the part of the platform excluding Fortuitous Circular who were one of the first in the P2x ring. If the minnow platforms wish to expand rather than simply plateau which more than one or two appear to have done, then they need to raise their game. It's no use simply following or copying the more established platforms available IMO.
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Post by ablrateandy on Jul 10, 2015 20:24:31 GMT
I don't think that you can ever have any form of standardisation in rating approach across platforms unfortunately. Even guys like S&P and Moodys don't use the same approach to ratings and you can have wide divergences (notably on Icelandic banks pre-crisis where Moodys was Aaa'ing everything!). Litigation is inevitable at some point in my opinion and with my law degree hat on I've seen at least three things on this board in the last week that made me cringe. A friend of mine is one of the founders of Crowdcheck which I think is a fabulous idea. They are promoting standardisation of information in the USA. I think that an independent resource like this would be invaluable if the pricing model supported wide adoption by investors. |
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bugs4me
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Post by bugs4me on Jul 11, 2015 10:57:12 GMT
I don't think that you can ever have any form of standardisation in rating approach across platforms unfortunately. Even guys like S&P and Moodys don't use the same approach to ratings and you can have wide divergences (notably on Icelandic banks pre-crisis where Moodys was Aaa'ing everything!). Litigation is inevitable at some point in my opinion and with my law degree hat on I've seen at least three things on this board in the last week that made me cringe. A friend of mine is one of the founders of Crowdcheck which I think is a fabulous idea. They are promoting standardisation of information in the USA. I think that an independent resource like this would be invaluable if the pricing model supported wide adoption by investors. I find myself in probable agreement with yourself on this but I'm certain that if push came to shove, S&P or Moodys could justify their ratings. Having looked at more than a couple of A risk rated offers on other platforms and carried out limited DD things just didn't stack up in my findings. For example, there was an offer which was A rated and the proposal (on the surface) looked worth an investment even though the company concerned had only recently been established. Drilling down, one of the directors (there were only two - him and his wife) had more than a chequered past and this was company number ?? that he had been actively involved in - forget the exact number but it it was in the teens. The average lifespan of his companies was about 18 months. IMO, the platform would have been aware of this and whilst the idea, concept, etc may have appeared great, unfortunately the same cannot be said about the individual behind it. I feel it is reasonable to assume that the platform would have carried out their own DD before listing the loan. Failure to do so would fail the Duty of Care obligation at the very least IMO. Sooner or later, assuming the loan (or another) goes pear shaped then litigation will follow irrespective as to all the disclaimers regarding platform responsibility. At that stage the platform will be required to justify their rate bands and what approach they adopt. It will be interesting but at the same time lenders will be the casualties.
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Post by westonkevRS on Jul 11, 2015 12:17:37 GMT
The thing with the platform ratings is that there is a clear conflict of interest. A platform wouldn't get to match a loan if the rating was terrible, or the APR would be too high (which could influence bad debt likelihood, and therefore platform reputation).
At least, partly, Moody's etc. are independent. Athough I appreciate even they had conflicts previously as it was in their interests to give triple A ratings on debt in order to create a new business model and gain more work.
@@westnkev
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Post by ablrateandy on Jul 11, 2015 13:22:37 GMT
It's not just this market. I saw one boiler room establishment specialising in "bonds" who define investment grade correctly as being bonds which are rated BBB or higher and in the same sentence state that all of the bonds (which were at best mini-bonds) issued through them are investment grade. Errrm... No they aren't.
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james
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Post by james on Jul 11, 2015 21:45:14 GMT
Surely it would be simple for the FCA or other P2P body to set out criteria on how a loan rating is to be derived. Just give me your thoughts on the appropriate ratings for: 1. an unsecured loan to a consumer with no credit history. 2. as 1 but spotless history and lots of borrowing already in place, up to 50% of income. 3. 1 or 2 with a platform having some form of protection fund - are all loans A+++? 4. And what about platform risk? 5. A consumer loan in Estonia or Spain or Finland or Slovakia, by an FSA regulated P2P platform. (Hint: Slovakia had a non-default rate that might never have left the single digits for 6 month old loans) 6. A loan secured on two gold rings and a watch in a pawn shop. 7. A loan secured on a boat, pawned? Not pawned? 8. A loan secured on about 200 small items in a pawn shop. 9. A loan to a firm leasing aircraft to buy a plane that it is leasing to a national airline in a South American country. 10. As 8 but the lending business is in a tax haven. 11. As 9 but the loan is to a special purpose vehicle (company) created just for the purpose. 12. A loan to buy containers from a Chinese maker 2/3 of which have sale agreed to a buyer in the UK with delivery to be in a few months, loan secured on the containers and sale agreement. 13. A loan secured on a car. 14. All of the above for a platform five years old, five months old or five weeks old. 15. The same loan with terms of 3 weeks, 3 months, 3years or 8 years. 16. The secondary market, if there is one, and whether it allows sales of impaired and/or defaulted loans or not. By now you might see why there's a problem with the suggestion. Everything I've mentioned has some impact on the risk level.
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james
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Post by james on Jul 11, 2015 21:58:46 GMT
It's not just this market. I saw one boiler room establishment specialising in "bonds" who define investment grade correctly as being bonds which are rated BBB or higher and in the same sentence state that all of the bonds (which were at best mini-bonds) issued through them are investment grade. Errrm... No they aren't. I'm wondering, has Ablrate ever offered a loan to investors that is investment grade, or would be if a rating was paid for? Mini-bonds worry me. I haven't yet noticed one that I thought offered a sensible combination of risk, returns and security, if any, and place in the debt hierarchy of the business.
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Post by ablrateandy on Jul 11, 2015 22:06:45 GMT
The answer would almost certainly be no. Ratings agencies, in my experience, hate single asset securitisations. Could we structure a multi-asset investment-grade product? Probably, yes, once we get volume up. Do I consider some of our loans to be better credit than some rated bonds that I have seen in the market? Yes.
Mini-bonds are heresy to me. Most of them are equity products dressed up as debt. (especially in the F&B market where the failure rate is huge).
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Post by easteregg on Jul 13, 2015 11:36:53 GMT
I'm a 'refugee' from a while back from Financially Cumbersome after finding out that basically PG's weren't worth the paper they were written on - silly me. My confusion is that many of the platforms are listing loans with a risk band but there doesn't seem to be associated definitions as to what a risk A is or a risk C, etc, etc. I presume these risk ratings are issued by the platforms themselves but that throws up the question in my mind as to what professional qualifications they possess in order to make a risk rating determination. To be brutally frank IMO, just about anyone can set up a P2x platform and join the FCA and by supplying a risk profile be it A, B, or what have you then prospective lenders could be lulled into believing the 'these guys must know what they are doing'. It follows - in my mind at least - that there is every incentive for the platform to see the loan fully funded and if the worst comes to the worst, then there would be zero recourse for the lenders irrespective as to the risk band originally supplied. I accept it is the responsibility of the individual lender to do as much DD as possible and the decision to invest or not is firmly with themselves. Nonetheless, the platform I would have thought would be in possession of far more information than the lender. Is there anywhere a 'table' as to what determines these risk ratings or are they entirely left to the individual platforms. I think I can already guess at the answer but would prefer to be corrected as whilst P2x is a risk which I fully accept, it also appears to be a minefield. Each platform operates their own risk bands and there may be little correlation between the platforms.
A good example of this is the former peer-to-peer company called YES-secure which tried to mirror Zopa's risk bands, but these extended from A* to E. Ironically their lowest risk band "A*" suffered the most bad debt, whereas their highest risk band "E" suffered the least.
I've enclosed a link to an old review which shows the bad debts in October 2012. www.p2pmoney.co.uk/companies/yes-secure.htm
Some lenders at the time were comparing a Zopa "A" with a YES-secure "A" as they believed that the risk bands were somehow standard but unfortunately there is no such comparison. What really matters is the bad debt against predictions, rather than the prediction itself.
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Post by yorkshireman on Jul 13, 2015 12:28:31 GMT
I don't think that you can ever have any form of standardisation in rating approach across platforms unfortunately. Even guys like S&P and Moodys don't use the same approach to ratings and you can have wide divergences (notably on Icelandic banks pre-crisis where Moodys was Aaa'ing everything!). That just about sums up the financial services sector as a whole, make up the rules as you go along whilst ensuring they are to your advantage.
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