Featured News

May 31st 2016, Daily News Digest

US

  • An in-depth article on p2p loan valuation methods and implications. A must read.
  • An argument that OnDeck is highly undervalued.
  • A well-summarized discussion about the payday loan industry.
  • 43% of US women say learning a person’s credit score will affect their dating interest.

UK

  • An argument that UK’s P2P trust are highly undervalued as well.

Australia

  • RateSetter , #2 UK P2P lender now, is going to focus on pure P2P SME lending.
United States

Fair value?, (Structured Credit Investor), Rated: AAA

In a sector where there is no standardised pricing methodology or standardised pricing reference data, a wide variety of approaches are currently being used to value marketplace loans (MPL) and peer-to-peer (P2P) loans. Not all of these approaches are deemed appropriate for the assets, however, and their continued use could have significant repercussions for the securitised MPL market.

Against a backdrop of primary market activity, questions over how best to value the underlying loans persist. Most investors or managers of the loans have a fiduciary obligation and will apply – or seek to apply – a FAS 157 standard. However, there is currently no mandate relating to the interpretation of the valuation approach for these Level 3 assets.

The first methodology he has encountered is where the value is calculated using the outstanding balance plus accrued interest.

Ram Ahluwalia, ceo at PeerIQ, says

“That gives an overestimate of a portfolio value, as it doesn’t include potential defaults and there’s no haircut for loans that are not performing or that are associated with higher losses,” he says.

The second is a haircut matrix approach, which is somewhat more sophisticated. In this approach, Ahluwalia explains that a matrix is used where one axis is the status of the loan (current, 30 days past due, etc) and the other axis is a risk score, grade or term.

“You map these loans to a matrix and measure historical losses and prepayments curve,” he says. “You can make default and prepayment curves based on empirical data. A major weakness is that losses are not forward looking, there are no macro variables and loan-level granularity is lost. For example, if you look at never-late seasoned E or F loans, these loans should be valued above par, but the matrix will not value those loans correctly.”

Another valuation technique involves looking at other loans with comparable obligors and tenors. Ahluwalia explains: “For example, in the treasury market, a 10-year bond five years from now will have the same price and yield as a new-issue five-year treasury bond. By definition, they have the same obligor and projected cashflows and tenor.”

He adds: “But I also see people applying that technique in the P2P loan market. None of these projections work, as every loan in the P2P market is unique. The risk is highly idiosyncratic. They are not comparable or fungible.”

A further methodology Ahluwalia has encountered is an amortised cost approach. “This is when you look at the outstanding balance of the loan. The flaw there is that it doesn’t capture changes in discount rates. Also, as a portfolio seasons, you get more charge-offs in the final 6-9 months.”

“If you are selling a seasoned portfolio of loans via this method, you’re selling them at too-high a price into the SPV,” says Ahluwalia. “The equity buyers are going to feel the pain.”

He also suggests that if banks are holding off marketing MPL securitisations because of negative headlines, the loans will continue to age on-balance sheet and approach the point where charge-offs start happening. “The default curve takes a couple of months before defaults start increasing. You want as much excess spread early in the portfolio life before that happens,” he says.

The correct methodology, says Ahluwalia, is a discounted cashflow approach, where cashflows are projected using low-level borrower attributes and macro conditions. “You are also projecting cashflows as the loan seasons and has updated borrower or payment information. The way to do that is to have a discount rate framework that discounts loans or bonds based on the risks of cashflows. It is worth looking at the ABS market to see what those risk premiums look like. This is the approach we take.”

Meanwhile, initiatives are underway to improve pricing transparency in the MPL sector, such as the establishment of a secondary market for the loans. Ldger is one such firm looking to set up a secondary platform.

James Wu, founder and ceo at MonJa: “A lot of people are still bragging about the Sharpe ratio in this asset class. There’s very little volatility from one month to the next. This has nothing to do with the asset, but because there is no market, the price remains stable.”

Wu suggests that some platforms do not have an interest in setting up a secondary market. “First, they don’t want price discovery, but also a secondary market could offer another source of supply for anyone looking to buy loans,” he says. “And for some platforms, that is competition.”

The MPL assets sold to date via the Ldger secondary platform have consisted solely of Prosper loans. The firm is not currently auctioning loans for other platforms, but it is apparently just a matter of time before this happens.

“We’ve started discussions with other platforms,” explains Kim. “The only reason we haven’t gone forward yet is because we want full partnership with the platform. Most platforms retain the servicing rights and effectively the settlements of the trades that take place via our auctions will be handled at the lending platform level. We want to make sure they are set up operationally to handle volume.”

Without a voluminous secondary market, MPL loans will remain Level 3 assets. In terms of valuation, this means noteholders will have to do estimations, as opposed to using observed prices.

OnDeck Capital: Business On Track, Despite The Stock Falling Off The Rails, (Seeking Alpha), Rated: AAA

OnDeck Capital trades near the lows despite solid metrics in the key areas.

A shift in Marketplace loan levels impacts short-term revenues providing an opportunity for patient investors.

The stock trades far below private valuations despite the company still being in growth mode.

ondeck business on track

Speaking of loan charge offs, OnDeck Capital has an excellent history of performing well with each yearly cohort of loans outside of 2008 staying below a 7% charge-off rate.ondeck strong charge off performance

OnDeck Capital remains an interesting value with a market cap of a meager $350 million. With all of the discussions of unicorns in the private markets where valuations exceed $1 billion, yet the public market now offers a stock like OnDeck far below that level. Not to mention, an investor gets a position in a leading online lending platform for businesses still in growth mode with revenues set to sail beyond $300 million next year.

US peer-to-peer lending model has parallels with subprime crisis, (Lending Times), Rated: A

Comment: I believe this article is misinformed and does not understand at all the business. Originators do care about the quality of the loans or nobody will buy them anymore.   There is a lot of data and a lot of companies report and audit them. And the underlying collateral is fairly transparent.

First, P2P platforms, like the originators of subprime mortgages — and the banks that repackaged them — have no “skin in the game”. They originate loans to distribute them and have little reason to care whether the borrowers can repay.

Second, there is limited data on loan quality — P2P credit deals are audited, but only summarily.

And third, for the banks that are lending to hedge funds, who in turn are buying the P2P loans, there is scant information about loan collateral.

Are Payday Loans as Addictive as Cocaine?, (Trade Financing Matters), Rated: AAA

In essence, the CFPB believes payday loan lenders must regulate who they lend to and how many times a borrower can renew a payday loan annually. Payday lenders of course believe these new rules would be game changers.

It is hard to take the research on this subject too seriously, as many are financed by the industry itself – see here

The problem is payday loans are not always used as designed, ie, a quick solution for emergencies, but are used for everyday expenses – rent, utilities, groceries, etc. One study said the industry business model is structured as a debt trap by design.

In the USA, payday loan fees are an estimated $3.4bn year. 75% of industry fees come from borrowers that take out 10 loans or more a year.  Because these loans are so small, for every $100 borrowed, the lender gets $15 fees.

Typical credit card rates are 20% or thereabouts, but the payday loan industry says it’s not reasonable – they operate on a thin margin. When you hear 400% on an annual basis, it’s not so bad in nominal terms for a loan for a few weeks, but if you do continuous roll-overs for 52 weeks, its crazy. Instead of paying 400% to borrow money, if you move to APRs to 36% will payday lenders have enough to be in business?

But where do people who need cash get it if don’t have payday lenders? Loan sharks? Family?  Would banks fill the gap?  There are an estimated 10m people that use them in a year – but how do you regulate the industry without shutting it down?  Having access to payday loans can help reduce financial stress.  I am sure there are studies that show the opposite.  The key is rollovers.

Bottom line if you need $300 fast and marketplace lenders are not an option given your credit score and have to pay $70 to get it, a payday loan may not be a bad trade-off.

What do you think? Should Congress limit roll-overs? Interest rates?  Is this a death knell for payday lenders?

 

This Stanford MBA Founded A Billion-Dollar Peer-To-Peer Lender — And It’s Disrupting Banks, (Business Because), Rated: A

Comment: article promoting Stanford’s MBA program.

Since founding their venture in 2010, Funding Circle has facilitated more than $2 billion in loans, expanding into the US, Germany, Spain and the Netherlands. It has also raised $270 million in venture capital, from funds that backed Facebook and Dropbox, securing a valuation of more than $1 billion.

“We’re just scratching the surface,” says Sam Hodges, the Stanford MBA who is co-founder and managing director of Funding Circle USA. “Small business lending is still very badly broken.”

The entrepreneur joined Funding Circle after founding Endurance Funding Network, a San Francisco-based lender. The two merged in 2013, forming Funding Circle USA.

Sam hit on the idea while studying for an MBA at Stanford’s prestigious Graduate School of Business. “With classmates I invested [in] and built a network of gyms. But it was painful to get a loan — we applied to 90 lenders to get credit,” he says. “That drove me to start-up Funding Circle USA.”

As well as inspiration, the Stanford MBA program gave him a set of solid entrepreneurial skills, as well as leadership development, Sam says.

Before we go out, I need to know your credit score, (Washington Post), Rated: AAA

“What’s your sign?” was the annoying opening line when guys would hit on me.

Now, with so many people carrying so much debt, potential mates want a sign that you’re not a deadbeat debtor.

“What’s your credit score?” is the preferred dating line for many people, according to a survey by Bankrate.com.

“Nearly 4 in 10 adults say knowing someone’s credit score would affect their willingness to date that person,” writes Bankrate’s Mike Cetera on the site’s Money Pulse survey. “It’s a more important factor for women: 43 percent of women say learning a person’s score would have either a major or minor impact on their dating interest, while just 32 percent of men say the same.”

Don’t wait until the ring is bought and the hall booked to share the information. Too many couples fail to walk away when they see financial red flags because they have so much money invested in the relationship at this point.

United Kingdom

Forget Lending Club, there’s a buying opportunity in the likes of P2P GI and VPC investment trusts, says Cantor’s Tepes, (Alt Fi News), Rated: AAA

Data from FE shows that P2P GI is down 8.85 per cent over the past three weeks while VPC is down 7.03 per cent.  Ranger and Funding Circle SME Income are also both down although they have seen some recovery in the past week while GLI is marginally down.

Tepes argues these falls are unjustified on the basis of Lending Club’s afflictions and should not impact how the underlying loans are doing within UK listed marketplace and P2P lending funds.

P2P investment trusts performance

P2P investment trusts yiel

P2P investment trusts performance in 2016

Australia

“You never stop learning:” Why choosing the hard path paid off for TruePillars founder John Baini, (Startup Smart), Rated: A

Two years ago, when the financial concept of P2P lending was virtually unheard of in Australia,  instead of aiming to launch his startup, TruePillars, quickly to capitalise on the opportunity, the Melbourne-born entrepreneur decided to take his time and do it right.

After nearly two years of development, TruePillars has received ASIC approval and will officially launch any day now.

TruePillars offers an online two-sided platform allowing retail and wholesale investors to fund loans for SMEs. The loans can range from $15,000 to $250,000 across a five-year period, with investors able to contribute as little as $50 to as many businesses as they want.

Small and medium businesses can apply for a loan, with the application then assessed by a group with banking and finance backgrounds. Those that are approved are then listed on the platform with investors able to bid for the loans in real-time.

As the auction continues, the most expensive bids are eliminated, with the system giving the business the best composition of all the bids.

RateSetter Takes First Business Lending Steps, (Pymnts), Rated: AAA

RateSetter, which already operates in the P2P consumer lending space but recently revealed plans to focus on business lending.

Reports said lenders using the RateSetter platform will not predetermine whether they are lending to a consumer or a business but will instead set forth their terms, loan amount and interest rates. RateSetter then matches up those terms with an appropriate borrower, which may now include businesses.

Interest rates begin at 7.3 percent for small businesses taking out a two-year $30,000 loan, reports said. Financing can reach as high as $150,000 for small business borrowers.

RateSetter has grabbed a hefty portion of the alternative lending space outside of Australia, too. Reports last year said the company was one of the U.K.’s top two P2P lenders, followed by business lender Funding Circle.

Author:

George Popescu
George Popescu

About the author

George Popescu

Serial entrepreneur.

George sold and exited his most successful company, Boston Technologies (BT) group, in 2014. BT was a technology, market maker, high-frequency trading and inter-broker broker-dealer in the FX Spot, precious metals and CFDs space company. George was the Founder and CEO and he boot-strapped from $0 to a $20+ million in revenue without any equity investment. BT has been #1 fastest growing company in Boston in 2011 according to the Boston Business Journal and the only company being in top 10 fastest in 2012-13 as it was #5 in 2012. BT has been on the Inc. 500/5000 list of fastest growing companies in the US for 4 years in a row ( #143, #373, #897 and #1270). After the company sale in July 2014 until February 2015 George was Head-of-Strategy for Currency Mountain ( www.currencymountain.com ), a USD 100 million+ holding company focused on retail and medium institutional currencies, precious metals, stocks, fixed income and commodities businesses.

• Over the last 10 years, George founded 10 companies in online lending, craft beer brewery, exotic sports car rental space, hedge funds, peer-reviewed scientific journal ( Journal of Cellular and Molecular medicine…) and more. George advised 30+ early stage start-ups in different fields. George was also a mentor at MIT’s Venture Mentoring Services and Techstar Fintech in NY.

• Previously George obtained 3 Master's Degrees: a Master's of Science from MIT working on 3D printing, a Master’s in Electrical Engineering and Computer Science from Supelec, France and a Master's in Nanosciences from Paris XI University. Previously he worked as a visiting scientist at MIT in Bio-engineering for 2 years. George had 3 undergrad majors: Maths, Physics and Chemistry. His scientific career led to about 10 publications and patents.

• On the business side, Boston Business Journal has named me in the top 40 under 40 in 2012 in recognition of his business achievements.

• George is originally from Romania and grew up in Paris, France.

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