Linked Finance - Peer to Peer Lending

MrEarl

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Hi,

I was not entirely sure which forum to put this in, but it's probably investing ....

Does anyone know how these guys come up with their credit ratings for borrowers looking to raise funds ?

The reason I ask is because recently, I noticed they published a borrower at grade C (which from their scale, you might think was average), but when you looked at the financial information provided for the business there was absolutely no way the business could afford to repay the debt (it had a negative EBITDA and no mention of where improved financials were coming from, while the Current Ratio was also terrible - which was concerning, for a cash based business).

There was a question posted on their site about the financial results for this business, but it was never answered. Very disappointing for a regulated entity (UK regulated, as I understand it).

Thank you.
 
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losttheplot

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A lot of discussion on boards.ie about the credit ratings. No one seems to be able to make sense of it. Most loans are filled quickly (some in seconds) due to auto bids. So it would seem most bidders don't ever see the financials.
 

arbitron

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I invested with them a few years ago. The business we invested in was very sounds and we got all the money back with interest, but the communication from Linked Finance was very poor. For example, they ostensibly allowed withdrawals of repaid funds at any time, but when I tried to withdraw I was told it could only be done quarterly on specific dates - there was no warning of this change and the website for months afterwards still said you could withdraw any time. They were quite dismissive when I questioned it, and this was senior management replying. It's difficult to have confidence after that.
 

MrEarl

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....Most loans are filled quickly (some in seconds) due to auto bids. So it would seem most bidders don't ever see the financials.
Actually that highlights part of the problem here.

The autobids are set up based on certain credit criteria provided by Linked Finance. However, if Linked Finance's credit ratings cannot be trusted and relied upon, then those investing via the Linked Finance autobid sytem are potentially in big trouble !


.... They were quite dismissive when I questioned it, and this was senior management replying. It's difficult to have confidence after that.
That stinks of something bad.

I would have thought / hoped that with the FCA now regulating them, that they would have improved their standards, but based on what I've seen in recent days, Linked Finance cannot be relied upon from the investors / lenders point of view.

While we are Irish residents and transacting in Ireland, I wonder what the Financial Conduct Authority might say if we raised our concerns with them ?
 
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MrEarl

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Hello,

I am starting to see quite a few loans fall into arrears on Linked Finance and also, from reading Boards.ie it seems that I'm not alone.

A poor credit rating system to blame perhaps ?

Obviously, there is a risk with this form of lending, as with most other things and that is why we get paid a return, but I think the current Linked Finance pricing does not reflect the true risks associated with many of these loans and has been designed more to help draw in new borrowers (who clearly help Linked Finance generate fee income).
 

Leo

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I've seen some of that too, and I only have small money in there. Their Q3 Loan Book Report claims a 0.76% default rate.

Ever since they changed from the bidding model, I stopped putting any more in there. With the current model, you would need to have auto-bids set up to get in on many of the loans. There's just no time to do any proper assessment of the numbers or business case before committing.

I'd agree there are questions to be answered on the rating system also. Right now there is a firm formed 4 years ago as a freight/removals business claiming 30 years in operation as builders, the directors (I'm guessing husband and wife) are both listed as being in the 35-39 age group. They're looking for €100k and the loan has been rated at Grade B / 10.5%. There are other loans from long established businesses in more stable areas of business with much better financials getting a higher risk rating and attracting a 12.5% interest rate.
 

Merowig

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I put a very small amount in Linked Finance. I would not recommend autobid and would do my own due diligence as far as possible. The rating system is for me not transparent enough and balance sheets provided are sometimes as well not the latest...

Some of the borrowers are raising their third or fourth loan on the platform but you are not told about this - this raises for me an eyebrow...
 

Leo

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~40% of loans are completely subscribed by auto-bids of late, many more within minutes of launch. So if you're not on top of the notifications you will be limited in the loans you can support.
 

MrEarl

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Hello Leo,

I am not at all surprised by that 40% statistic and would wager that it will grow further over the next few months. The P2P market is growing with more and more novice "investors" putting their cash in, then out of desperation to get involved in many of the loans they see filled in seconds, they set up too many autobids without considering the associated risks.

....Their Q3 Loan Book Report claims a 0.76% default rate.
Needless to say, much depends on what they define as "default".

In most Banks a loan is considered to be in default if it has missed three consecutive payments, but do Linked Finance define it the same way ?

Furthermore, how many borrowers on their loan book have started to run into problems, then simply raised a further loan on Linked Finance or another P2P, to deal with the problem (albeit, they may be kicking the can down the road and creating a bigger problem for the future) ?

Or how many borrowers have told Linked Finance after missing one payment that they cannot service the current repayment schedule so had their repayment schedule altered and never gone as far as three payments in arrears ?

If we were to take a simple sample of the amount of borrowers that are now starting to miss their scheduled loan repayments, I would say that in my own experience it's now running at about 3% - 4% of my loan portfolio (and I have avoided many of the medium to higher risk deals).

....Ever since they changed from the bidding model, I stopped putting any more in there. With the current model, you would need to have auto-bids set up to get in on many of the loans. There's just no time to do any proper assessment of the numbers or business case before committing.
I agree 100%.

The fact that Grid Finance see their loans priced by virtue of the bids submitted by the Borrowers, is far more equitable and appropriate system imho.

....I'd agree there are questions to be answered on the rating system also. Right now there is a firm formed 4 years ago as a freight/removals business claiming 30 years in operation as builders, the directors (I'm guessing husband and wife) are both listed as being in the 35-39 age group. They're looking for €100k and the loan has been rated at Grade B / 10.5%. There are other loans from long established businesses in more stable areas of business with much better financials getting a higher risk rating and attracting a 12.5% interest rate.
Some of this stuff defies belief !

One thing that I think we should all be doing is asking a hell of a lot more questions, on the Q&A section for each borrower.

It is long past time that people risking their money started asking a few more questions before they put their cash at risk and also, it may illustrate to Linked Finance (and others) that people are not just willing to accept everything they are told without challenge.




.
 
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MrEarl

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Linked Finance are now trying to attract in personal retirement funds ...

https://info.linkedfinance.com/pension-accounts-interest

https://blog.linkedfinance.com/linked-finance-pension-accounts

I do hope the Pension Trustees are not relying on Linked Finance's credit rating system, to decide on where funds get invested.

The Risk -v- Return (net of fees) would give me reason for concern, given the specialist nature of this type of "investing", with no liquidity in this market should you wish to withdraw your pension funds during the term etc.
 

Merowig

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Although I am lending via Linked Finance I would not want to see my pension fund getting involved in it... at least not at this stage yet.
 

Gordon Gekko

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There’s a hint of “reaching for yield” about a lot of this stuff.

With interest rates at zero or below, suddenly an investor is lending to the Rwandan Government or The Wily E Coyote Burrito Bar just to get 7%...caveat emptor x 100 in my view.
 

MrEarl

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Gordon said:
There’s a hint of “reaching for yield” about a lot of this stuff.
Very true,

But that often also brings trouble !

(easy on the old burrito bars btw ;))
 

SBarrett

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Angel investors know that they will lose their money most of the time but will get a big pay out from the few that do succeed. They are wealthy enough to be able to take the hit.

Linked Finance type investments are allowing your joe soap to invest like an angel investor. When they are not because they are not financially independent and cannot afford to throw away money. And by only getting an interest rate return, you get limited upside for taking a lot of risk for rates that are not a whole lot better than what a bank would charge.

Dealing with smaller companies, there is also going to be a lack of information as they tend to have limited number of staff, all of whom have a million and one things to do when dealing with a start up company. This is going to drive investors nuts as they can't get any information.

If you want to make money, do it the old fashioned way and invest in solid companies that are going to be around in the long run. Wealth accumulation is a long term game and most of the time very unexciting. Investing in tiny companies who can't get the finance from a bank is more exciting and you can make money quicker. You can also lose it all just as quick.




Steven
www.bluewaterfp.ie
 

Daddy Ireland

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If all lending is by way of 'buyback guarantee' e.g Mintos where is the danger in that. You lose the interest but capital is secure. Is not the one risk only if Mintos go under.
 

MrEarl

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Should we not be discussing Linked Finance here, and Mintos on their own discussion thread ? :)

.
 

Daddy Ireland

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Ok Mr Earl. Does Linked Finance offer a Buyback Guarantee which appears available on other platforms. If Linked Finance dont they are more risky than platforms that do e.g Mintos
 

MrEarl

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Ok Mr Earl. Does Linked Finance offer a Buyback Guarantee which appears available on other platforms. If Linked Finance dont they are more risky than platforms that do e.g Mintos
No, they don't offer any buy back as far as I know.

Even if they did, you'd have to ask how strong Linked Finance are, and by extension, how strong the guarantee might be. Something to think about when considering others' offering guarantees too, needless to say :)

Personally, I've been losing faith in Linked Finance more and more over recent years - they are pricing their loans too cheap to reflect their true risk, they are failing to publish reasonably up to date financials, they don't appear to be taking account of borrowers who have raised debt (or are in the process of raising debt elsewhere etc.), they continue to rely on very poor security for the loans advanced, and their autobid system is near dangerous for those who don't really understand the risks associated to lending to businesses.
 

RedOnion

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Something to think about when considering others' offering guarantees too, needless to say
Indeed. In the case of those with guarantee, it's not actually the platform that offers the guarantee, but the originator. I think Montis have already had one originator collapse while still with active loans, and another 3 or 4 collapsed after being removed.
You're talking about 'lenders' with tiny balance sheets writing loans at 200% interest rates (APR > 1,000%). A few loans go bad, and that guarantee will be out the window. Meanwhile, you're getting 6% interest for the risk.
 
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