p2pmaster
investment is life.
Posts: 128
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Post by p2pmaster on Jan 28, 2017 16:47:53 GMT
Paper is okay, but we should not ignore claims against borrowers. At least default rates in Europe is not that high as in Georgia.
By the way, Blackmoon is a competitor to mintos, but focused on institutional investors, which are purchasing loans in bulk, including Creamfinance loans.
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Post by mopcku on Jan 28, 2017 16:52:12 GMT
Paper is okay, but we should not ignore claims against borrowers. At least default rates in Europe is not that high as in Georgia. By the way, Blackmoon is a competitor to mintos, but focused on institutional investors, which are purchasing loans in bulk, including Creamfinance loans.
But how high are they really? Do we know this? Some statistics on this? I heard things like that there are more buybacks than regular finished loans? Yes they are competitor i know.
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Post by rahafoorum on Jan 28, 2017 17:09:18 GMT
With buyback, you actually have a claim against the borrower and the originator has offered to guarantee the payments (in exchange for their cut off the interest).
Hi again now with the paper from the last post i start to think if this has any practical meaning. Since the rate we get (12% or similar) is not at all comparable with the risk of default (fair interest compensating the default risk should be above 100 %.) I think we can almost ignore our claim against the original borrower. At this low interest rate what counts is only our claim against the originator - the buyback .
BR Mopcku
There are a few omissions and a few possibly outdated claims in there, although in general I agree with their conclusions that the risk is not paid for properly. Yet, still some people claim that the interest rates offered are too high, although those people more often than not are the originators. One of the biggest issues is indeed the utter lack of any meaningful information or even ability to verify any existing figures. I have no idea whatsoever what must be going through the minds of the people who actually finance the loans without buyback, or if there is any minds there to begin with. However, I think the statement about it being utterly a claim against the company, is false. Unless the contracts and terms written up by the platforms are not legally binding. I'm not an legal expert so can't make any claims on this though. If we assume that the contracts and ToUs are legally binding, then as mentioned earlier, Twino claims that you will start receiving the full interest rate if the company goes bankrupt, so in essence what matters, is the underlying credit risk as well as the platform risk. In Mintos however, the last information I heard was that you will continue having same interest rate and difference will be used for collections/other fees. So in that case I think they're partially right, the originator risk is the main risk to look out for. However, even here, the loans are supposedly yours in most cases and not assets in bankruptcy, so the credit risk plays a role as well. Of course, in neither case you have practically any useful information whatsoever to determine the credit risk nor even the originator risk.
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Post by extremis on Jan 28, 2017 21:10:43 GMT
However, I think the statement about it being utterly a claim against the company, is false. Unless the contracts and terms written up by the platforms are not legally binding. I'm not an legal expert so can't make any claims on this though. If we assume that the contracts and ToUs are legally binding, then as mentioned earlier, Twino claims that you will start receiving the full interest rate if the company goes bankrupt, so in essence what matters, is the underlying credit risk as well as the platform risk. In Mintos however, the last information I heard was that you will continue having same interest rate and difference will be used for collections/other fees. So in that case I think they're partially right, the originator risk is the main risk to look out for. However, even here, the loans are supposedly yours in most cases and not assets in bankruptcy, so the credit risk plays a role as well. I think the point here is not whether the contracts are legally binding or not. Let's assume they are and the loans are really ours in case of a loan originators default. Let's also assume that the borrowers learn that the loan originator has defaulted and think they can get away without paying, so they stop making any future payments. What then? According to Mintos a third party will take over. Here comes the critical question: what will they do? If they receive a loan book with 10K loans with outstanding principal 50-100E each will they take all 10K borrowers to the court? If that was even possible, why the loan originators do not take this course of action? As far as i understand loan originators basically write off any debt covering their losses from the huge spreads on performing loans. Is there any reason at all to believe that this third party will have the expertise and resources needed to do any better in case the borrowers stop making any payments? My point is legal matters is one thing but what happens in practice is another. ps. Excellent paper, i totally agree that we take a far too great risk for the rewards. But what else is there? Investing in stock market is also risky for inexperienced investors, while banks offer virtually zero rewards today and are not as safe as they used to be anymore.
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Post by southseacompany on Jan 29, 2017 1:58:59 GMT
However, I think the statement about it being utterly a claim against the company, is false. Legally you do have the additional claim against the borrower, but in terms of risk, p2p investments of this kind are essentially balance sheet loans. Even though the borrowers are the basis keeping the whole business going, a single borrower is almost incidental to the value of a loan. You are of course entitled to have a different opinion. Note the following, however. What is the market price of a p2p loan with buyback guarantee where the borrower has stopped making payments? If you look at the secondary market on Mintos, these loans trade at par, or in rare cases at a small discount. Let's say the discount on such a loan late by 30+ days is 0.5% (in reality it's less). The financial statements of SIA ExpressCredit (Banknote) contain a table based on their analysis of impairments, from which we know that a fair provision for a receivable late by 30-60 days is a 32% impairment. (In Georgia the impairment is probably considerably higher than this.) So a one-third fall in the value of the claim against the borrower results in a drop of 0.5% in market value. Now compare that to a p2p loan where the borrower is up to date but there is no buyback guarantee. On Twino these sell at yields of 30-40%. If a 36% bond is traded at a yield to maturity of 12%, its value has tripled. So adding a buyback guarantee increases the value of a loan by about 200%. Therefore, solving back from the above numbers, the market price of these investments is comprised of: 60-75% | value of buyback guarantee
| 1.5% | value of claim against borrower | ~30% | hopes and dreams? |
My numbers are very rough and you can argue that the relationships are not exactly linear. You can also argue the market is wrong. However, I think it is beyond argument that currently the market considers the buyback guarantee orders of magnitude more valuable than the claim against the borrower. Addendum: Most of the 30% gap in my calculation can be explained away if you assume, as I do, that the non-BBG loans are substantially overvalued on Twino. For example, if their yield were 108% (pretty close to the rate Twino is receiving, net of all costs except defaults) then the buyback guarantee would account for 89% of the value of each loan (assuming 12% yield for guaranteed loans). It is a mystery to me who is buying the A/B/C rated loans on Twino at the current prices and why.
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Post by southseacompany on Jan 29, 2017 4:01:30 GMT
I found the paper under discussion laughable. Out of the two points of comparison I've only looked at 4finance, but come on. The author is seriously comparing the yield on very short-term p2p funding to 4.5-year bonds? Everyone knows that bond yields go up with duration. I could not find a current price for that bond, but 4finance's other bonds listed in Germany due 2021 now yield 9.55%, so loans on Twino/Mintos are indeed priced at a premium to them. It is clear that 4finance is financially pretty solid (equity to total assets 37%) and should get money cheaper than Creamfinance (equity to assets 10%), but since that is already the case, it's not obvious there is any mispricing there. The most absurd thing about the paper is the assumption that all originators have equal company-specific risk. Making that assumption inevitably leads to the conclusion that larger companies should get funds cheaper. Now that balance sheets for most originators are available, it should be possible to compare company-specific risks with some factual basis.
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Post by rahafoorum on Jan 29, 2017 10:24:03 GMT
I think the point here is not whether the contracts are legally binding or not. Let's assume they are and the loans are really ours in case of a loan originators default. Let's also assume that the borrowers learn that the loan originator has defaulted and think they can get away without paying, so they stop making any future payments. What then? According to Mintos a third party will take over. Here comes the critical question: what will they do? If they receive a loan book with 10K loans with outstanding principal 50-100E each will they take all 10K borrowers to the court? If that was even possible, why the loan originators do not take this course of action? As far as i understand loan originators basically write off any debt covering their losses from the huge spreads on performing loans. Is there any reason at all to believe that this third party will have the expertise and resources needed to do any better in case the borrowers stop making any payments? My point is legal matters is one thing but what happens in practice is another. ps. Excellent paper, i totally agree that we take a far too great risk for the rewards. But what else is there? Investing in stock market is also risky for inexperienced investors, while banks offer virtually zero rewards today and are not as safe as they used to be anymore. Your example has nothing to do with buyback guarantee. The worsening of payment behavior by borrowers can occur with same likelihood in every scenario of an originator going bankrupt. There's no specific connection to the buyback guarantee at all. If you want to know what can likely happen in case of a platform default, you can take a look at the TrustBuddy case for example. If the contracts are legally binding and the claims on those loans are yours, then at the moment of bankruptcy you are in the exact same boat as you would be with loans without buyback. Originators don't write off any debt. They either sell to debt collection agencies or use their own collection processes. If you'd do nothing with defaulting loans, there'd be no incentive to pay back for other borrowers as well
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Post by rahafoorum on Jan 29, 2017 10:33:40 GMT
southseacompanySecondary markets on P2P platforms are some of the least effective markets there are. At some point I've even sold some defaulted loans with 5%+ premium on Bondora secondary market and a lot more totally mispriced. The reason is a lot of so-called "dumb money" on the market or investors who don't really understand at all what they're doing. Plus, the liquidity is very low, so the sales price is dependent on essentially a handful of possible buyers. The reason why people are buying buyback loans at par, is that those have practically a guaranteed recovery of 100%+ interest. In other words, as long as the company doesn't go bankrupt, you're getting a very short-term loan with possibly a higher interest rate than available on the market at that same time. Of course, I'm not entirely sure people are accounting for the risk of bankruptcy correctly. But then again, it's also a very short time period until the buyback, meaning that likelihood of company default at that point in time is perhaps quite low. Of course, if it hits at one point, your investment is as good as gone For the non-buyback loans the price should be insanely low, because there's no demand for those and it's low even on the primary market. Or at least should be. The only people investing into those loans are either gamblers or "dumb money", since there's no meaningful way to actually figure out what the risk and return on those will be. In regards to the comparison with 4finance, I think they were comparing risk-return ratio, not simply offered return.
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Post by mopcku on Jan 29, 2017 15:24:05 GMT
southseacompany In regards to the comparison with 4finance, I think they were comparing risk-return ratio, not simply offered return. I think it is only return what they compare. e.g.
Nevertheless the evidence shows that less scaled companies raised money through marketplaces at less than 1% premium to yield to maturity of 4finance senior bonds listed on the Irish Stock Exchange with B3 rating from Moody’s and BB- rating from S&P and at a considerable discount as compared to Victory Park senior over-collateralized debt facility to Elevate.
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Post by mopcku on Jan 29, 2017 15:53:07 GMT
Hi
Since i would like to make a short calculation of the fair interest rate with or without BB i would need some assumptions about the following numbers.
One Year PD of the Borrower? 60%? One Year PD of an Originator? 10%? LGD for the Borrower? 50%?
LGD for the Originator? 80%? Think higher than for the borrower because I assume we will be one of the last repaid in case of default?
What do you think about the values? What could be realistic?
Thanks Mopcku
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Post by jackp2p on Jan 30, 2017 7:06:44 GMT
Why not just invest in loans with collateral?
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Post by southseacompany on Jan 30, 2017 15:08:49 GMT
One Year PD of the Borrower? 60%? One Year PD of an Originator? 10%? LGD for the Borrower? 50%? LGD for the Originator? 80%? Think higher than for the borrower because I assume we will be one of the last repaid in case of default?
What do you think about the values? What could be realistic?
I don't have any data to base estimates on, so your guesses are as good as mine, but there's one important point to take into consideration: The probability of originator default and the loss it causes aren't equal for all originators. To assess this risk, I would completely ignore the originator's current profitability. A rising tide lifts all boats. We're talking about default in case of a financial stress event, a "Lehman moment" that affects payday loan customers en masse. So let's assume things go south, defaults skyrocket, and the originator swings to loss. How much loss can it, and its p2p investors, withstand? Since p2p investors' claims are (probably) junior to all other creditors, the only place on the company's balance sheet that can cover the losses before we take a hit is the shareholders' equity. Thus, an originator with more equity (relative to company size) is safer and should have lower default probability and loss estimates. The market doesn't agree with my view, since the riskiest and safest originators are raising funds at basically the same rates at the moment. I've done some math along these lines but I'm not ready to share it at the moment, partly because I found I'm exposed to exactly the kind of stuff I don't want to have, so I'm gradually adjusting my holdings. The secondary market is illiquid enough without me talking against my position.
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Post by rahafoorum on Jan 30, 2017 17:26:38 GMT
Since p2p investors' claims are (probably) junior to all other creditors, the only place on the company's balance sheet that can cover the losses before we take a hit is the shareholders' equity. Well, that's my whole point, the investors' claims are NOT part of assets in bankruptcy, if the contracts and terms are legally solid the way the platforms are claiming them to be. There's no-one to be junior to, since only you have a claim against the loan A, B and C that you invested into. If the company goes bankrupt, you should still be the only one with a claim against that piece of those loans and they can't be used to cover any liabilities the originator has towards anyone. Although, I do see now how some creditor could argue that at minimum the interest difference WAS expected cash flow for the originator and thus at least that part should be part of the assets in bankruptcy...not sure how well us investors can argument against that in the courts to be honest.
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Post by southseacompany on Jan 31, 2017 1:05:56 GMT
If the company goes bankrupt, you should still be the only one with a claim against that piece of those loans and they can't be used to cover any liabilities the originator has towards anyone. Yes. I meant that our claim against the company under the buyback guarantee is subordinate to everything else. I agree we should have the sole claim against the borrower.
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Post by adjure on Feb 5, 2017 21:25:47 GMT
Hello
I am active in the p2p lending for couple of months now and want to share some thoughts.
I think I understand the original idea of p2p lending which is based on the idea that via diversification as result of the very small loan part sizes (5 or10 €) also the small investors like us can reduce their risk of extreme losses.
At the moment in continental Europe I see very small number of relevant platforms which are using this original model. Here I see only Bondora Fellow Finance FinBee (which belongs to this category only partially because of the their compensation fund)
There are increasingly bigger and bigger numbers of Platforms (and offered loans) which offer the so called buyback guarantees. The biggest of these platforms are Mintos Twino Viventor Swaper
The majority of you like these platforms but my problem is that with these platforms I see completely change of the original of p2p lending idea of diversifying between different borrowers. Buying a loan part from some platform with buyback is like borrowing to the originator company. If I get my money back always independently if the original borrower defaults or not it makes for me no difference how good I am diversified between the loans of the same originator. Actually I am even asking myself why at all I am getting some lists with loans when it makes no difference for if they default or not? Why just not make a button “give all money to the originator” independently of the distribution between different borrowers? Or is this some way to mask that what we are doing here as investor is company funding for the originator. Why an originator will give us buyback and take the risks of default of the borrower? The only reason I can see is that we with our 10% or 12% are a cheaper source of his funding then a bank or other provider of liquidity!?
Also I see that with these new platforms we are exposed to their (or the one from the originators) company risks and not anymore to the risk of the original borrowers. Even if we try to diversify between platforms or originators our risks are much more concentrated than in case when we were able to split our money between hundreds or thousands of single borrowers.
What also makes me concerned is the question, why these buyback platforms/originators are coming to us for their liquidity? Is it possible that a bank or other bigger funding provider is refusing to give them the money? Or will give it at higher interest? If yes why is the interest higher? Is it possible that we as individual investor are just not able to assess the risks of these companies and therefore are giving them our money at much lower interest? Or is this a regulation question?
About Finbee there is also a concern of different nature because having their compensation fund there is also socializing the losses and creating somehow wrong incentives to take more risk. When I can assume my losses will be covered by the fund I could ask myself why get less interest for better rated loan when I can get more for a worse graded loan and have so or so compensation in case of losses. Of course the things are not so easy but in all cases not anymore that transparent like the original p2p lending idea.
So guys tell me please your opinion about the above points?
Did you already asked yourself the same things? What are your answers to the questions?
Thanks Mopcku
The reason why you want to split the loans to the smallest allowed amount is because of the reinvestment can make some "compound" effect. e.g. for 10000 euro to invest on 1 loan for 10%, the worst case you get 10% return in 1 + 6(delay) + more Months. However if you have 1000 pieces of 10 euro loan, some of the loans will get you back the principals and the interests in coming months, the re-investment of the interests can make a difference if you compare results after 1 + 6 + more months. BUT for me, the whole p2p investment in these big platforms are founded on the fact that there are millions of fools like me (and you?:-) will continuously join/sponsor this "Ponzi scheme" to enable platform be able to buy back bad loans and continue issue trash for next generation fools to join and get more. I myself just cannot resist the temptation hence I am here to "play" and hoping once the Pyramid collapses I am running faster than the other fools. This is simply a defect in my nature, I think. However, we don't have to stop because after "some time" we will start to have a thought: hey why I diversify? why .....why why not just one click to get 10%+. Then you will start to double your investment and at the same time advertise for the platform so more fools will join and they will start to test-doubt-believe-invest more. As long as these pattern continuous, we are safe:-)
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