Niall’s virtual diary archives – Monday 27 April 2020

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Sunday 26 April 2020: 23:20. Last month I reported on the fun on the Big Daddy of online supermarkets in subprime debt for retail investors Mintos, upon which I did a series of detailed virtual diary posts May – August 2019. People were fleeing for the exit, offering huge haircuts of 15-25% to get their money out immediately. I decided to double down, and buy them out at those discounts.

This led to rather stonking returns for March:

MonthAnnualised return for each month
December 201912.41%
January 202013.20%
February 202012.36%
March 202074.02%

That annualised return in March is quite usurious, obviously enough. And I felt slightly bad about it at the time. However, earlier this month I noticed that the discount for the very risky loan originators had dropped to about 8-12%, whilst the very safest loan originators was 5%. I thus sold all my loans in the risky loan originators, and replaced them with loans in the very safest loan originators. Paying for the ~5% difference in spread cost me most of my outsize gains in March, but I felt it worth it at the time: most of the riskier loan originators were having cash flow problems and had fallen behind, or stopped completely, paying what was owed for loans with them. I could see that a sixty day delinquent loan buyback guarantee from such loan originators would not be worth much. By completely exiting those riskier loan originators, even though it was expensive, I made a prudent move.

I then doubled down on buying dud second hand loans from the very safest loan originators which were within a month of being bought back under the buyback guarantee, which were trading at a 5% discount. The math went like this: within an average of 15 days, the loan originator would buy back the loan, and I’d pocket 5% from having bought them at a discount. That makes an upper bound of 322% annual return, though it would be lower than that due to some borrowers restoring their loan to health etc. I sat back, expecting to make a mint.

However, I actually began to bleed money! Not quickly, but little by little, I was losing money. When I dropped below my balance end of February i.e. I was now down a whole month of normal gains, I suspended the automatic investment bots, and began to dig into what was going on.

The very safest loan originators, which I hadn’t really invested in before until now due to their low interest rates, it turned out had very different borrower behaviour to what I had been expecting. The difference is that all their loans are collateralised with something important to the borrower, which for my strategy was mostly their primary car. It turns out, unsurprisingly, that people really don’t want their car to be repossessed, and they’ll keep paying at least part of the car loan. That meant that most of these loans which I had bought never reached buyback, and when they went healthy again I was selling them at a 6% discount as that is the going rate for loans not nearing buyback. I was thus buying at 5% discount, selling at 6% discount, plus another 0.85% to Mintos as a transaction fee. I was thus losing, on average, approximately 1.5% per loan bought!

The temptation at this point was to simply sink everything into new loans with five year terms currently paying 16% per year, and draw a line under the whole experience. But then it occurred to me: people really don’t want their car to be repossessed. And when would they least want their car repossessed? Why, at the very final payment of the loan of course, when you’ve been paying for the thing for five or more years, and you’ve just one final payment to make and you’re free of the loan, and you get to keep your car.

So I flipped the strategy on its head, literally the inverse from before: now buy second hand collateralised loans with the very safest loan originators whose remaining term is less than a month, and whose yield before maturity including discounts from the seller exiting Mintos exceeds 11%. That gives a best case return of 349% annualised, though it will be likely a good bit lower due to some not paying off the car loan, and then the buyback guarantee returns only the sum invested.

It’s too early to say how this new strategy will fare. It’s also the case that half my portfolio is under the previous strategy, so even more losses beckon yet. At some point Mintos investors will stop fleeing the platform taking haircuts to do so, and this whole game will end. Hopefully those five year term loans with the very safest loan originators paying 16% per annum will still be available, so I can lock in excellent returns for the next five years. We shall see!

#mintos #p2p-lending

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