littleoldlady
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Running down all platforms due to age
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Post by littleoldlady on Jun 12, 2016 17:21:00 GMT
I have been musing about the possibility of SS scrapping the PF and instead taking the first portion of each loan, ranked behind platform investors. This would solve the problem with the PF if they start taking loans of varying risk at varying rates. So how much of each loan could they afford to take? Say they have, very roughly, about 70 loans totalling £100m at an average of about £1.5m and a PF of £2m. (This will obviously change in size and profile with time.) Consider the worst case disastrous scenario which would, on its own, probably cause platform collapse; maybe 50% of loans default and lose on average 40%. This would be a loss of £20m so they could afford to take the first risk of 10% of each loan and be no worse off than using the PF.
Personally I would rather that they took the first 10% of any loss to having a discretionary PF.
Is my calculation reasonable and if so what would others prefer?
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boble
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Post by boble on Jun 12, 2016 17:40:01 GMT
I have been musing about the possibility of SS scrapping the PF and instead taking the first portion of each loan, ranked behind platform investors. This would solve the problem with the PF if they start taking loans of varying risk at varying rates. So how much of each loan could they afford to take? Say they have, very roughly, about 70 loans totalling £100m at an average of about £1.5m and a PF of £2m. (This will obviously change in size and profile with time.) Consider the worst case disastrous scenario which would, on its own, probably cause platform collapse; maybe 50% of loans default and lose on average 40%. This would be a loss of £20m so they could afford to take the first risk of 10% of each loan and be no worse off than using the PF. Personally I would rather that they took the first 10% of any loss to having a discretionary PF. Is my calculation reasonable and if so what would others prefer? Similar models to this exist, although none in P2P platforms as far as I am aware. If somebody creates and manages a lending syndicate it is often the case that the initiator will provide a minimum of 10% of the loan capital and they take the first hit in the event of a loss/default. Their upside are the facility and management fees from the borrower, and possibly the lenders too. In syndicates where the initiator doesn't invest and agree to take the first hit, I am not interested.
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ben
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Post by ben on Jun 12, 2016 17:52:38 GMT
The broadoak ones on MT take a 5% first losss hit.
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Liz
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Post by Liz on Jun 12, 2016 18:20:36 GMT
I don't think it matters what we think, but maybe start a poll.  If they scrap the PF, it will be to save them money. A couple of big defaults could cost SS a lot, if they have to too up the PF. A big default, bigger than the PF, could undermine the whole platform. |
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Post by dualinvestor on Jun 12, 2016 18:25:30 GMT
I have been musing about the possibility of SS scrapping the PF and instead taking the first portion of each loan, ranked behind platform investors. This would solve the problem with the PF if they start taking loans of varying risk at varying rates. So how much of each loan could they afford to take? Say they have, very roughly, about 70 loans totalling £100m at an average of about £1.5m and a PF of £2m. (This will obviously change in size and profile with time.) Consider the worst case disastrous scenario which would, on its own, probably cause platform collapse; maybe 50% of loans default and lose on average 40%. This would be a loss of £20m so they could afford to take the first risk of 10% of each loan and be no worse off than using the PF. Personally I would rather that they took the first 10% of any loss to having a discretionary PF. Is my calculation reasonable and if so what would others prefer? I suspect they couldn't afford it at the moment being more than £10 million. I suppose they could try and raise it but that would involve giving away some of the equity and a full independent audit of the loan book
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j
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Post by j on Jun 12, 2016 18:30:48 GMT
The whole concept could be somewhat academic, with or without PF or by taking a first loss. All it needs is a couple of big losses or a few small successive ones & investors lose confidence, look/move elsewhere & that given platform will be in trouble.
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Post by mrclondon on Jun 12, 2016 18:38:48 GMT
Also see the thread FCA bans skin in the game
I think it highly unlikely that it would wash with the FCA.
MT / Broadoak and TC / various sponsors is different as its the loan introducers that have skin in the game not the p2p platform.
Where I am less clear is the issue of MT / SS using their working capital as an underwriting float ....
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nick
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Post by nick on Jun 12, 2016 21:46:46 GMT
The last thing I would want is the platform to have any significant skin in the game that could potentially cause its collapse and lead to material losses to all investors. This downside in my view far exceeds any benefit from a a more direct alignment of interests. Btw it is for this reason that the FCA is very much against platforms taking on such credit risk.
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littleoldlady
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Running down all platforms due to age
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Post by littleoldlady on Jun 13, 2016 8:46:02 GMT
The last thing I would want is the platform to have any significant skin in the game that could potentially cause its collapse and lead to material losses to all investors. This downside in my view far exceeds any benefit from a a more direct alignment of interests. Btw it is for this reason that the FCA is 'very much against ' platforms taking on such credit risk. I agree, which is why I started by estimating the level of defaults which would cause platform failure on its own, regardless of anything else. I suggested 50% of loans default losing 40% each on average. You may of course have a different estimate to this and can simply rework the numbers using your assumption. You can find what share of each loan the platform could take using the money currently in the PF without any increased risk of platform failure. Returning to my own estimate, do you think the platform would survive half of its loans defaulting and losing 40% of each loan? (losing 52% after taking account of 12% paid up front for a 12 month loan or losing 70% of the asset valuation). The suggestion that the FCA object to skin in the game seems very unclear AFAIK. Where do you get 'very much against' from?
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Post by dualinvestor on Jun 13, 2016 9:06:56 GMT
The last thing I would want is the platform to have any significant skin in the game that could potentially cause its collapse and lead to material losses to all investors. This downside in my view far exceeds any benefit from a a more direct alignment of interests. Btw it is for this reason that the FCA is 'very much against ' platforms taking on such credit risk. I agree, which is why I started by estimating the level of defaults which would cause platform failure on its own, regardless of anything else. I suggested 50% of loans default losing 40% each on average. You may of course have a different estimate to this and can simply rework the numbers using your assumption. You can find what share of each loan the platform could take using the money currently in the PF without any increased risk of platform failure. Returning to my own estimate, do you think the platform would survive half of its loans defaulting and losing 40% of each loan? (losing 52% after taking account of 12% paid up front for a 12 month loan or losing 70% of the asset valuation). The suggestion that the FCA object to skin in the game seems very unclear AFAIK. Where do you get 'very much against' from? Whilst the skin in the game objections may be unclear in themselves I believe the FCA has big issues with conflicts of interest generally.
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