Huge updates to the business model of Bondora

Just when things were looking reasonably calm and settled, the new legal regulations that came into effect on March 21st pushed Bondora towards finally announcing their change of direction – from being an intermediary to being a credit provider.

What has changed?

In essence the situation now works like this – when a client wants to get a loan then  this loan is initially given out by Bondora, and then the pieces are sold to individual investors. Essentially what this means, is a move towards a more Lending Club like model – that investors purchase the right to a claim (which they’ve been actually doing for a while already, but now there seems to be some legal alterations to the process). Overall, the biggest change by far is the fact that Bondora now announced that due to their change in legal status they will be keeping a part of every loan in their own balance sheet. The definition of ‘part’ has not been announced but this has some impact how to assess risk.

Bondora now has ‘skin in the game’

While before, owners of Bondora also invested into loans (the CEO, Pärtel Tomberg, said this amounted to 1,2 million € worth of loan pieces, amounting to a total of about 3% of the portfolio), now Bondora as a business will also be impacted by the quality of the loans. In theory it does two things – firstly it somewhat increases the strain on the finances of Bondora; secondly it ties them more directly to the quality of the loan book.

It’s difficult to assess the long term impact of this. In many ways Bondora is now moving towards the model that several loan originators that list their loans at Mintos are using – keep a % of the loan in their loanbook and sell the rest. In theory it should be good overall. Also, this was a predictable change in their business model. In the long run it’s probably a stepping stone towards a full on banking license. This change would also allow to start some kind of securitisation based on the existing loan book, but there is no info so far on this.

Changes to the recovery process

Screen Shot 2016-03-26 at 14.42.37

Now, a much bigger change that was announced was more a aggressive debt collection strategy that outlines a new process where DCAs are to be involved in the process as early as 7 days into the collections process. This has predictably caused a serious uproar from some investors due to the fact that DCAs apply fees on money that they collect, reducing investor returns. One of the key questions that has arisen is the question of whether 7 days is a reasonable date for becoming more aggressive and whether waiting a bit further to verify increased likelihood of bankruptcy would be reasonable.

Now, the initial reactions seem to be very emotion based, and I’ve kept myself from making any rushed judgements. A lot of investors seem to consider this as a large loss without considering the fact that once DCAs take over collections they do not keep at it forever – if a settlement is reached the client keeps paying and further aggressive collections is not needed. Another issue that there isn’t much info on, is the rate at which collections happens – the main issue with court collections is that the time delay is immense, often more than a year before anything happens; for DCAs the recovery is clearly much quicker. Overall I’m expecting to hear more information on this before making any long term decisions.

 

My Bondora portfolio (2015, October)

There has been a significant amount of drama happening around Bondora this month.The new passive portfolio manager caused a fair bit of controversy and the API is still in testing so many investors have at least temporarily reduced investments. For me, the old PM is still active and can give out about 4K worth of loans, so I’m hoping that will tide me over until you can use the API to invest. This means that all the money I transferred into social lending this month went into Moneyzen and Estateguru. However, my Bondora portfolio is big enough that it just does its own thing even without adding in money.

octoberinvestments

Due to not adding much money into Bondora for the last couple of months, you can see the 60+ defaults becoming a more significant part of my portfolio. There are two reasons for this – firstly that the loans from the big growth months from last year are now defaulting, and the loan pieces that are defaulting at this point are starting to be the 15-25€ pieces as opposed to the 5€ pieces that used to default earlier. However, despite the continuously increasing defaults this was another record month for me in terms of interest earned:

octoberinterestearned

Total interest earned for October ended up being 108,29€, meaning that this year is likely to end at 110€/month from Bondora, so I’m quite happy with the overall result already due to how much less I’ve invested into Bondora this year compared to what I had originally planned. Adding in Estateguru and Moneyzen, my P2P monthly earnings come just close to 125€.

bondoraocttotal

I plan to add just a bit more money into Bondora this year to finish December with a total of 5K euros in deposits. My account will turn 3 years old in December and I guess I’ll have to write a longer overview into returns from Bondora and whether or not it’s been performing as I wished it to.

octoberrecovery

Another topic that’s starting to become more and more interesting as my portfolio ages is the recovery rate. I see pretty decent movement from recovery every month, and at this point I’m waiting for my monthly recovery to reach 20€/month. Should probably realistically happen mid-way through next spring. Recovery for last months looks like this:

recoverystatsoct

Overall, I’d say, keep calm and wait for the API. I’ll probably be looking into it soon as well, once other third parties have made their solutions accessible. Overall, I was thinking about it a bit and I don’t even need anything super complex. I’d probably set my PM to just what I had now – AA, A, B &C loans OR any kind of Estonian loan. Not rocket science, so I’d assume that with the help of some friends working in IT it should be doable once more details about how the API works come apparent (like how exactly do the loans get distributed between bids!)

My Bondora portfolio recovery

Recovery is a topic that tends to divide investors into two camps. One half argues that no recovery is happening and that defaults are climbing at an incredible rate, while the others dig around the data and come to the conclusion that recovery happens, but it’s just overall brutally slow.

A lot of people also seem to be very optimistic about the impact that recovery will have on their portfolio. The best way of thinking about recovery (in my opinion) is hoping for an overall break-even. This means that overall, while with a time delay, you do not lose money on defaults. The actual returns come from the loans that are paying on time – and they are the majority.

This month though, my portfolio hit 1000€+ in defaults, which of course is not pleasant to look at. I have however been keeping track of recovery, and I’m not particularly worried here, it’s a matter of time. I threw together some quick Excel graphs to visualize my portfolio happenings.

How much do people really owe me?

totalrecovery

This graph is a simple money recovered – exposure at default (recovery-EAD2). As you can see, in raw numbers the debts are big, and you can easily see them piling up to 1000 euros. Now, where things get interesting, is where you normalize the recovery to a 1 to -1 scale, to take into account the actual loan size as well. In this graph -1 means that absolutely no recovery has happened, 0 means break-even point and anything above that is bonus.

totalrecoverynormalized

The timeline of course runs from left to right, so the oldest defaults (I have 149 defaults in total) are on the far left. You can clearly see that the older loans are much closer to being recovered, but there is significant time delay. (Take into account that the loans are lined up by the day I invested into them, not by the date of when they defaulted.) Overall to visualize this – the part between 0 and -1, the white area is what has been recovered and the blue is what should still be recovered. For me, the total recovery is currently close to 180€, but it’s clearly speeding up.

monthlyrecovery

Sadly monthly recovery is a disaster to actually keep track of, but I’ve been religiously taking screenshots of the recovery table on your statistics page ever since it got launched to track the recovery information there. For the past 4 months recovery has been more than 10€ every month, which might not seem like much, but if we look at the time delay then it’s reasonable to expect that it will keep accelerating. (I mean, for a long time recovery was less than 1€ per month.)

My Bondora portfolio (2015, September)

September wasn’t a very active month for me in Bondora. Due to having extra expenses (plane tickets!), then I only added ~20€ into Bondora this month. I’m on the wait to see what Bondora will announce for the new market system before adding in more money, since I’m 80% decided on starting a second Bondora portfolio under a business account. That still depends on what Bondora is set to do with their investments.

septemberinvestments

As you can see, a sad moment has arrived – the 60+ overdue has finally hit 1000€. I’ll be honest, it hurts a bit to look at 😉 . Especially, knowing the upcoming changes for how overdue loans will be handled. Still, I’m currently enjoying some digging around the dataset so I’ll be taking a longer look into defaults and recovery soon.

septemberinterestearned

The ‘bump’ of adding in some more money at the end of summer hit, making September a record month – total interest earned was 104,7€. Hitting 120€ by the end of the year from just Bondora is looking very unlikely, but I’m not too bothered by it since I’ve just added a bit of money into Estateguru, so that compensates for overall social lending.

septembertotalinvestments

As I said, not much money was added, so there is a bit of a drop-off. However, you can clearly see the impact of the new rating system by how the defaults are dropping off a bit. It of course hurts seeing 25€ pieces default, but I don’t track them too much.

septemberrecovery

Recovery is still going nice and slow. I’ll look into that a bit more soon, so I won’t go into more detail now. Overall, looking forward to new announcements! (Likely that they will happen after the Lendit conference though, so still a while to wait.)

My Bondora portfolio (2015, August)

Fascinating times seem to be waiting ahead in Bondora, but so far I’ve decided not to react much. Overall I’ve reduced the monthly amounts I invest into Bondora a bit (from 200-ish down to ~100€), and it’s already showing its impact in terms of the ratio of defaulted loans in my portfolio.

augustinvestments

Due to the fact that I’ve reduced new funds, then the % of overdue and 60+ overdue loans has started to grow quite a bit. Most days the ‘current’ floats at about 70%, and it’s slowly losing ground to problematic loans. Not sure if that’s signs of a recession yet, or just the rebalancing, but soon my 60+ defaulted loans will reach 1000€, which is undoubtedly a bit painful to look at!

augustinterestearned

While I’ve been getting a bit of recovery here and there in the form in principal payments, then interest earned has kinda stumbled to a stop. This month it didn’t manage to pass the 100€ marker, remaining at 99,09€. Hopefully next month I’ll be back over 100€, but any growth seems problematic due to the constant influx of defaults.

augusttotalinvestments

As you can see, then looking at the older months of investments, then the green in some of them will start to lose out to the red of defaulted loans. Since my first investments are now more than 2,5 years old, then it’s time to start drawing some conclusions, since just a while back Q1 of 2013 has hit break-even. (Meaning interest earned > outstanding principal.)

augustrecovery

Recovery wise it was an OK month. While the chart shows +1 loan fully recovered (Stage 5), then at the end of the month another loan was fully recovered and is probably waiting to be manually market into the 5th stage.

0109xirr

Since the numbers might seem somewhat pessimistic, then just to show that the case isn’t that bad, I updated my returns calculations, and while the pessimistic rate of return looks, well, pessimistic, then overall the numbers are fine. Also, since long term returns are slowly dropping, then a moderate 13-14% is perfectly fine as a long term return.

Overall I’m looking forward to what exactly Bondora is planning to do with all their new changes. Until then I’ll keep my strategy of slightly smaller monthly contributions and then maybe readjust depending on what’s the final product that they’re going to serve to investors.