|
|
Post by mopcku on Jun 2, 2016 22:17:02 GMT
Hi Guys
I would like to invest using the Bondora market. However since I want to optimize my investments for me is important to understand how the pricing is done and also how should I interpret the numbers shown.
I read the point “What is Bondora Rating and how is it calculated?” from the FAQ but unfortunately the description there is too general and not enough for me to be able to answer many of my questions.
Before I start to invest for me would be important to know.
• Are the loans repaid according to some payment plan (amortization) or are they bullet loans repaid at once at expiry date? Where can I see the payment flows or if the loan is repaid according to plan?
• Are the Interest rates which they show in the Market calculated based on the outstanding amount?
• Is the shown expected loss the EL and Expected Return over 1 year or over the life time of the loan? The same question for the PD and LGD? If life time is used are these values annualized? Is the cash flow of the payments also taken into account? Do they consider some risk free interest rate for discounting?
• In general since I want to optimize my loan portfolio and also to calculate and better diversify my risk, I need to understand the relation between the numbers PD, EAD, LGD, Interest, EL, ER etc. In order to use the data provided by their interface I have to be sure how to interpret it.
Do you know where I can find some more detailed description on the above topics which I can read in order to understand them? Probably an example calculation would be also helpful.
Thank you very much
Mopcku
|
|
james
Posts: 2,205
Likes: 955
|
Post by james on Jun 3, 2016 1:17:51 GMT
Bondora doesn't say how the Bondora ratings is calculated, except they have said that the target return is based on an index of loans that includes secured loans even though Bondora loans are not secured. This means that the target rate is using a benchmark that is likely to make the interest rates too low for the risk being taken.
The loans are amortising. The high default rates in many of the countries and loan qualities mean that it is common for payments to be late. As a very approximate guide you can expect the default rate to decrease after about a year but this varies with the country and loan details.
The outstanding amount makes no difference to the interest rates. It's an interest rate that is to be paid on the amount that is owed. As that amount decreases the same interest rate means that more of the capital will be in the next monthly payment. This works just like a mortgage.
The best way to optimise your portfolio is to lend somewhere else. You can get lending backed by security or guarantees with expected by the platform returns that match or beat those available today via Bondora. This is part of why you will find that many who post here are not investing new money at Bondora, though there are many other reasons. The returns available to those who invested three years ago do not seem to be available today for new lending. Twino might be interesting but I do not know the platform well enough to write much about it, it is just one I am considering for Euro investments.
|
|
|
|
Post by rahafoorum on Jun 3, 2016 10:24:26 GMT
Historically the Rating hasn't been very accurate outside of Estonia. See for example my old analysis on 2014 loans (were Rated backdatingly): rahafoorum.ee/en/performance-of-bondora-rating/Of course, Bondora claims that this analysis is incorrect etc (although they refused to clarify, what they actually meant by that). But then again, they also believe it's ok to compare XIRR and Expected Return: rahafoorum.ee/en/bondora-rating-has-outperformed-expectations/The Rating also wasn't very accurate for non-EST loans issued within first 6 months of 2015, but that analysis was in EST, so probably not too useful. Although tables are in ENG so perhaps:
rahafoorum.ee/bondora-rating-esimesed-6-kuud/The Rating was updated in December last year considerably and then at least partially interest rates adjusted again sometime a few months later. In addition a new aggressive DCA collection process (or DCA donation program as I like to call it for EST loans) was introduced recently without any public data available on the results yet. In short, good luck on trying to make any meaningful reasonably accurate predictions on new loans based on historical data. Not to mention that Bondora has the habit of changing rules after the fact, like this DCA process and affect the returns of your historically made investments as well. Or to put in another way, all the analyses done previously about the return of certain loans that you invested into in the past, can pretty much be thrown out the window today. |
|
|
|
Post by aemilius on Jun 3, 2016 11:14:22 GMT
The best way to learn is by trying. I did so by creating three separate portfolios. After three years of investing in Bondora a few things have become clear to me.
As indicated by James I can confirm that the historical returns can not be attained today. My youngest portfolio started with an investment of 400 euro in October 2014 and consequently reinvesting . According to Bondora the average contractual interest of the 86 investments currently running is 28.65%. Of these investments 30 have the status 60% overdue with 29.36% contractual interest. 7 are Finnish, 23 Estonian. I think between one third and a half of these loans have made some repayments the last 60 days, which makes me hopeful that the principal of these loans will be recovered.
It is possible to make cash flow forecasts and run scenarios. Based on the scenarios tested, I feel comfortable in any of my portfolios with the following assumptions:
90% return of principal for loans that are current (not 60 days overdue at some point in time).
80% return of interest on current loans
35% recovery of 60 days overdue principal
0% recovery of 60 days overdue interest.
The portfolio described above with these assumptions gives a lifetime net return of 12.66%.
my 3 year old portfolio gives a lifetime net return of 12.74%.
My third portfolio gives a lifetime net return of 11.24%. This one was started 2,5 years ago. (Average contractual interest 25,53% on 536 loans)
If you run an automatic portfolio and choose a conservative strategy the expected return is 14.33% according to Bondora. My returns are in the first quartile of my peer investors. If I would make an estimate of the real return of the conservative portfolio, I would guess that you have to think about 8 or 9 percent if you choose the conservative strategy.
That would make your Bondora investments a decent investment, definitely not a spectecular investment. Also take into account the specific risks of this platform (e.g. Country risk, risk of economic turn down). It could be a great way to diversify though.
I currently do not increase my exposure to Bondora, other than by reinvesting my returns on the platform.
|
|
|
|
Post by mopcku on Jun 3, 2016 11:48:44 GMT
Bondora doesn't say how the Bondora ratings is calculated, except they have said that the target return is based on an index of loans that includes secured loans even though Bondora loans are not secured. This means that the target rate is using a benchmark that is likely to make the interest rates too low for the risk being taken. The loans are amortising. The high default rates in many of the countries and loan qualities mean that it is common for payments to be late. As a very approximate guide you can expect the default rate to decrease after about a year but this varies with the country and loan details. The outstanding amount makes no difference to the interest rates. It's an interest rate that is to be paid on the amount that is owed. As that amount decreases the same interest rate means that more of the capital will be in the next monthly payment. This works just like a mortgage. The best way to optimise your portfolio is to lend somewhere else. You can get lending backed by security or guarantees with expected by the platform returns that match or beat those available today via Bondora. This is part of why you will find that many who post here are not investing new money at Bondora, though there are many other reasons. The returns available to those who invested three years ago do not seem to be available today for new lending. Twino might be interesting but I do not know the platform well enough to write much about it, it is just one I am considering for Euro investments. Hello James
First, thank you very much for your time and these explanations.
You write the loans are amortizing? Do they all have the same payment schedule? Are the repayments monthly? Are the payments such that the sum of repayment and interest each month stay the same? Or they pay always the same part of the loan (e.g. 1/60 of it) and depending on the remaining amount the interest?
If I understand you correctly your first paragraph means Bondora underestimates the PDs and/or LGDs. Therefore they are also offering lower interest rate which is not covering the risk.
The above is very important point but what I am now more interested in is the following.
Assuming the PD and LGD are calculated as result of Bondora rating system and have the values as shown in the market how are these values related to the Interest, Expected Return, Expected Loss and Estimated Monthly Payment.
For example for a loan I have the following values
Interest Expected return Loan term LoanAmount Expected Loss Loss Rate if Default Probability of default Estimated monthly Payment
23.72% 14.24% 60m 7440 9.48% 58% 15.26% 228.94
The only thing I can see is that
EReturn+ELoss=Interest
But still not clear for me is for example how they calculate the EL? The EL number is not fitting with the PD and LGD they publish there (EL<>PD*LGD) !
What would be also of great interest for me is if they have annual interest of 23.72% and face value of 7440 how they come to monthly payment of 228.94. If I calculate the rate of monthly amortizing loan (60 months) I am getting not very close to the 228.94 they provide.
BR & Thanks
Mopcku
|
|
|
|
Post by rahafoorum on Jun 3, 2016 12:11:34 GMT
The loans are annuity payment schedules, BUT depending on the size of the piece of the loan you get and weekends/holidays etc, the monthly payments may not be entirely 100% equal. Formula should be something in the lines of: I = EL% + E(R) = LGD*PD*EAD% + E(R) Into this they also account some sort of country macro risk and what James said, a risk-free interest rate based on some index (Markit iBoxx Eurozone Retail ABS Index EUR) that's pretty different compared to the large portion of sub-prime loans offered on Bondora. The model was also changed recently without much insight given into what exactly was changed. support.bondora.com/hc/en-us/articles/208484175-What-is-Bondora-Rating-and-how-is-it-calculated- |
|
|
|
Post by mopcku on Jun 3, 2016 13:08:40 GMT
The loans are annuity payment schedules, BUT depending on the size of the piece of the loan you get and weekends/holidays etc, the monthly payments may not be entirely 100% equal. Formula should be something in the lines of: I = EL% + E(R) = LGD*PD*EAD% + E(R) Into this they also account some sort of country macro risk and what James said, a risk-free interest rate based on some index (Markit iBoxx Eurozone Retail ABS Index EUR) that's pretty different compared to the large portion of sub-prime loans offered on Bondora. The model was also changed recently without much insight given into what exactly was changed. support.bondora.com/hc/en-us/articles/208484175-What-is-Bondora-Rating-and-how-is-it-calculated-Thanks
I also thought that the formula shuld be
I = EL% + E(R) = LGD*PD*EAD% + E(R)
but when i try to calculate the first term for the example loan acording to the formula
EL% = LGD*PD*EAD% 9.48%=58%*15.26%*EAD% 9.48%=8.85%*EAD%
So to be true this means we should have EAD%>100% which I think makes no sense. Some explanation?
Thanks for the link. I read it already yesterday but it is too general to answer my specific questions!
BR Mopcku
|
|
|
|
Post by rahafoorum on Jun 4, 2016 20:44:07 GMT
EAD can be above 100%, if loan goes into default with first few payments, since accrued interest is also included in that exposure.
However, in this instance it's probably this markit index and macroeconomic figures and alpha etc in there, which values you don't know.
Edit: But as I said, you're wasting your time. Wait 6-12 months and you might actually have some data that can be used for future predictions if you're lucky.
|
|
|
|
Post by jabardolas on Jun 4, 2016 23:24:58 GMT
In the Primary market we can see that the loss given default is: 58% for estonian loans 68% for finish 75 for spanish This means that the expected recovery is then 42%, 32% and 25% respectively. This recovery values are quite small, and if I apply them to my portfolio, I get very high losses.  What do you guys think, are this recovery values reasonable? |
|
|
|
Post by coolrunning on Jun 5, 2016 6:43:59 GMT
In the Primary market we can see that the loss given default is: 58% for estonian loans 68% for finish 75 for spanish This means that the expected recovery is then 42%, 32% and 25% respectively. This recovery values are quite small, and if I apply them to my portfolio, I get very high losses. What do you guys think, are this recovery values reasonable? My gut feeling is that expected recovery rates are perhaps half of what is posted here.  I just sell my defaulted loans on the 2nd market for whatever I can get.
|
|
|
|
Post by mopcku on Jun 5, 2016 11:55:23 GMT
EAD can be above 100%, if loan goes into default with first few payments, since accrued interest is also included in that exposure. However, in this instance it's probably this markit index and macroeconomic figures and alpha etc in there, which values you don't know. Edit: But as I said, you're wasting your time. Wait 6-12 months and you might actually have some data that can be used for future predictions if you're lucky. Hi
Thank you again for your answer
I am working on a model for my portfolio loss distribution and therefore I need to understand exactly their numbers and if and how much I can trust them.
You are writing about including the accrued interest to the exposure.. But which accrued interest? Over one year? Over the full life time? Some average taking into account the possibilities of default during the life time into account?
So specifically in the mentioned case I should have an EAD=107.11% (to be consistent with their EL) which is a number I cannot derive from neither the exposure in the beginning nor taking the interest payments from first year which are around 20% (not 23.72% if you take into account the loan amortization).
Also the other possible explanation you write about the markit index is something I think should not play a role in the EL calculation (this should have an impact on the unexpected losses and not on the expected).
BR
Mopcku
|
|
|
|
Post by jabardolas on Jun 5, 2016 13:11:02 GMT
EAD%, Exposure at Default (expressed as a percentage of the original loan amount), indicates outstanding investor exposure at the time of default, including outstanding principal amount plus accrued but unpaid interests.
Further, the calculated expected loss is adjusted for loan term as in various situations, longer term loans are considered riskier. Currently, a Maturity Factor M of 1.3 is assumed for loans with duration exceeding one year.
Taken from bondora's site in a post from end of 2014
|
|
|
|
Post by mopcku on Jun 5, 2016 15:00:10 GMT
EAD%, Exposure at Default (expressed as a percentage of the original loan amount), indicates outstanding investor exposure at the time of default, including outstanding principal amount plus accrued but unpaid interests. Further, the calculated expected loss is adjusted for loan term as in various situations, longer term loans are considered riskier. Currently, a Maturity Factor M of 1.3 is assumed for loans with duration exceeding one year. Taken from bondora's site in a post from end of 2014
Hi and thanks
The strange thing is that even for loans with the same maturity, LGD and PD Bondora calculates different EL.
If this is calculated the way how you describe the EL in both loans I marked with RED should be equal.
What is here the reason for the different EL??? They both are amortizing loans with identical maturities which means also their principal and accrued interest should be the same as percentage of the original loan amount?
BR
Mopcku
|
|
