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On 19 June 2020, we live-streamed the third AMA (Ask Mintos Anything) session with CEO Martins Sulte. In AMA sessions, Martins answers questions asked by Mintos investors and collected during the days prior to the live-stream.
In the opening of the AMA session, Martins addressed the current state of Mintos business operations. Partially, Mintos team is still working remotely, while 50% of employees work from the company’s head office in Riga.
Teams are actively working on the further development of the Mintos mobile app, and optimization of marketplace features based on investors’ feedback. The most important current work on the technical side is put into adjustments of the pending payments dashboard, but work is also done on the upcoming new release of the Mintos investment strategies.
Management and staff across the partnership, legal, and risk teams are doing a lot of behind-the-scenes work on the cases of lending companies that experience problems with collecting payments and honoring the 60+ days buyback guarantee. Approximately 50 Mintos people are collaborating in the creation and execution of adequate strategies for the current issue cases, as each company is struggling with different root causes, needing an individual approach. In some of these cases, we also work with external legal advisors.
The company is also gradually restarting hiring: one of the key hires in the last few months is our new Chief Risk Officer, who is joining Mintos from one of the leading banks in Latvia and has more than 15 years of experience in credit risk management.
Significant progress is also made with the regulation-related projects, as Mintos has applied for an investment brokerage firm license and for an electronic money institution license, which will be passported across the European Union. To further support the regulation of the fintech industry in Europe, Mintos joined forces with other leading European fintech companies (Funding Circle, N26, Raisin, Transferwise, and others), establishing and launching the European Fintech Association (EFA). The EFA will be working with the regulators from the EU Commission, voicing the position of fintechs and helping in the establishment of fintech-related laws and regulations.
In this 60 minutes session, Martins replied to more than 20 questions. In the following summary, we are sharing some of the most important takeaways from the third Ask Mintos Anything session.
Investors asked about: Pending payments
The current structure of the presentation of pending payments on Mintos will be changed, specifically a segment “in recovery”, mainly constituted from the unexecuted buyback payments that are in line for an extended period of time, and a smaller part of of untransferred borrowers’ repayments. With new adjustments, these payments will be shown separately from the pending payments with the regular flow (of around 7 days) on the overview page.
“From the regular outstanding portfolio, a part of about 2-3% is in pending payments, with dues being in pending status for two days on average. A total of 15-20% in pending payments comes from the problem cases, and we expect to recover a significant part of this amount,” said Martins.
Investors asked about: materialized risks
“What we have seen in the past few months is that many risks have materialized in a rather short period of time, accelerated by developments of the COVID-19 pandemic,” said Sulte.
There were some cases of borrower-related defaults, e.g. people were not able to repay their loans due to job loss, or lending companies had problems with repayment collection. There were also other obstacles due to the government-imposed moratorium for borrowers when many loans had to be restructured and extended.
In normal market conditions, pending payments are just a regular flow of settlements, and investors are not exposed to this technical process of the platform operation. A global crisis has affected this rather smooth process on the Mintos marketplace, as the settlements have deteriorated because of some loan originators’ inability to honour buybacks or even to transfer the collected borrower repayments. Such dues are different from the regular pending payment process, and Mintos is working to separate these two types of payments into pending and recovery streams in reporting for investors.
When it comes to the recent increase in buybacks, it is caused by the deteriorating quality of the lending companies’ underlying portfolio, due to fewer repayments made by borrowers, and more buybacks being activated. “What happens during the crisis is that the underlying portfolio does not perform well, lending companies must buy back more loans than they had to previously. In such cases, the buyback guarantee is much harder to honor,” said Martins Sulte.
Soon, investors on Mintos will be able to see separate statistics about borrower-related pending payments, and pending payments related to buybacks in the suspended and defaulted company’s updates.
“By splitting pending payments by sources, we will see that 2/3 them are related to the lending companies’ buybacks. Working on these cases to get the buybacks fulfilled takes time,” said Sulte.
Besides borrower-related risks, there are also lending company-related risks. Realistically, no one could have predicted a crisis this severe. Sulte said that “although lending companies do have future projections, they couldn’t anticipate such severity that has affected their ability to service the loans and fulfill their buyback guarantees”.
During the crisis, the country-related risks have materialized too, along with the currency exchange and regulatory risks. “With the very diversified offering for investors that we have on the Mintos marketplace, with more than 30 countries and more than 60 lending companies and no universal pattern across all cases, these risks have materialized in very different ways,” said Martins.
From around €500 million of the current outstanding portfolio, around €100 million could be classified as ”at risk” due to some of the aforementioned problems. Anyhow, Mintos expects to recover a significant part of this amount.
We’re posting regular updates on individual cases of suspended and defaulted lending companies on Mintos on our blog on a weekly and bi-weekly basis.
Investors asked about: the Mintos financial report for 2019
To show the company’s business results from 2019, this year Mintos is preparing a consolidated report. “Such a report takes more time both on our and the auditors’ side. The deadline to share it is 31 July 2020, but we’re doing our best to finalize it as soon as possible,” said Sulte, adding that on a current monthly basis, including all the cost-cuts introduced and available revenue sources, the company is on average break-even.
Investors asked about: the buyback guarantees
“We are now working based on the medium-term strategy, which is looking to recover as much of dues as possible. To exercise our legal agreements (with the lending companies) and to go after companies pushing them to bankruptcy might be seen as a good move by investors, but that’s a short-term strategy,” said Sulte.
On the other hand, the long or medium-term strategy considers the expected value of possible recovery, and the Mintos team questions expected outcomes of different courses of action.
“It’s quite rare to see that going for the court and pushing lending companies to bankruptcy would be working in the best interest of investors and result in efficient recovery of their funds,” said Sulte. He said that working with courts and liquidators can be costly and take a lot of time, resulting in pretty low recovery. “We could jump in and take over the loan servicing. But, if lending companies have problems with loan servicing and repayment collection, the success of a third party would be even less likely,” added Sulte.
He said that Mintos is confident with the company’s strong legal team, experienced partnership team, and many other supporting functions, including outsourced legal help.
The Mintos experience so far has shown that the best way to deal with issue cases is to cooperate with lending companies to restructure unfulfilled buybacks. “In some cases, we are considering the portfolio takeover, but it’s not something that can happen overnight. In other cases, we might go to court, but that is the last resort. Very often, legal action is not the best strategy,” he concluded.
Investors asked about: the group guarantee
The guarantee is a term used in finance to describe certain safety layers for investors, but no guarantee is protecting the investment 100%. Sulte said that the guarantee is only as good as the provider of the guarantee and that there is a ‘fake certainty’ that the word guarantee gives to investors.
“Investors are buying underlying credit, claim rights against the borrowers who owe the money to investors. On top of that, we have a buyback guarantee and/or a group guarantee. We could put insurance on top of that, too. In finance, these are called ‘credit enhancements’ that improve the quality of the underlying asset. Anyway, none of them can ever guarantee that return will be exactly the same as the interest rate. In situations where we see a group company experiencing problems with the cash call, e.g. the case of Varks and the Finko Group, credit enhancements lose their value,” said Sulte. Martins said that precisely this is the reason why the company will be introducing the Mintos Ratings for the loan portfolio performance. “If the loan portfolio performance is good, all credit enhancements are of secondary importance,” he added.
Investors asked about: the Mintos Ratings
At Mintos, we believe that ratings are appropriately made at the moment of rating-lead evaluation, and based on the information available while the overview is carried out. Evaluating Mintos Ratings based on problem cases is “result-driven thinking, so we need to look back and always look at the ratings relatively: if a company has an A rating, that does not mean this company might not have a problem. We can not compare Mintos Ratings to Fitch ratings,” said Sulte.
Improvements of the Mintos Ratings are on its way. The ratings will be split into several categories – there will be a loan portfolio rating for the loan performance, a rating for the buyback guarantee, and a separate rating for the structure of the lending company. Sulte said that these improvements are expected to be developed in the third quarter of 2020.
Investors asked about: the lending companies’ call option
A lending company can not buy back a loan and place the same loan again on the marketplace with a lower interest rate. Instead, while lending companies are allowed to buy back their outstanding loans, they can place only new loans on the marketplace, with an interest rate that is prevalent in the market at the specific moment.
There is also a misconception that a ‘call option’ (a possibility given to a lending company to buy back their loans once placed on the Mintos marketplace) comes without a charge for the loan originator. “This price is already embedded in the interest rate that the lending company offers to investors. If there was no call option included, lending companies would almost certainly provide loans with lower interest rates,” said Sulte.
Martins also addressed the case of the Delfin group which, like some other companies, currently experiences extra liquidity. Their borrower portfolio is decreasing, while the previously issued loans are being repaid. Such a case is aligned with global market trends. “Globally, we see a decrease in discretionary spending – the saving rate is increased, hence not many people are borrowing. For lending companies, this means extra liquidity. With cash available, it doesn’t make much sense to continuing paying for the funding source,” explained Sulte.
If a user notices the same loan being bought back and placed again on the marketplace with a lower interest rate, Martins invites investors to report this, although Mintos has an internal control to monitor this activity.
Investors asked about: how to improve the offer of the lending companies available on the marketplace
Martins said that there are two possible ways to look at these improvements. “One way would be to take the underlying assets and types of loans originated by lending companies and to try to make them more secure. But, this would come with a lower return for investors. We could put, for instance, a bank guarantee letter, insurance, and other things on top of that, but it would all eat into the yield for investors,” explained Sulte.
The other way around might be more viable and it would mean introducing loan originators that are more established, companies with huge origination volumes, and different lower-risk borrower segments – in other words, a more secure underlying asset. “In this case too, lower risk means lower return. This is something that is offered by the western European platforms which have lower interest rates of 6-7%. That’s something we can work with, depending on investors’ appetite to invest in these loans,” he added.
Investors asked about: lessons learned
Although there were some problem cases before the COVID-19 pandemic, the crisis it caused materialized many risks, simultaneously. Now, Mintos has a strong confirmation about the importance of some of the criteria that were included in the lending companies’ evaluation prior to the crisis. Such are the lending company’s funding sources or the experience of the company’s management. Martins said that the Mintos team will double down on the evaluation of the appropriate minimum portfolios of the companies, on a clear understanding of the necessary track record, etc.
“Another important topic we’ve been discussing recently is the education of investors. What we’ve seen so far is that investors are expecting quite high returns, without consideration of the risks involved. This is a quite simple relation: the higher the return, the higher the risk. These risks might and might not materialize, but investments do carry risk and we address this topic on our Security page,” said Sulte.
He added that this misconception probably comes from the fact that the Mintos marketplace was operating smoothly since the founding in 2015, with a calm 5-years period during which investors earned double-digit returns. “Investing is a long-term game,” said Martins.
Among other topics, investors also need to have a better understanding of diversification. Martins gave a projection to illustrate why diversification is important: “When we look at the current outstanding portfolio of €500 million, we see around €100 million at risk and we do expect to recover quite a big portion of that. But even if we take a look at this very pessimistically and think that nothing from that €100 million would be recovered, which is very unlikely, then we are talking about 20% of the total portfolio. If an investor would have diversified across all companies on Mintos, then we would see 20% of the total investment portfolio potentially at risk. Assuming that the recovery rate would be 50-60%, we are talking about 10% of a well-diversified investment portfolio being at risk, which is one year of returns on Mintos,” said Sulte. He added that the real return of loans as an asset class will be seen only in a decade or so, measured through its performance in both the good and the bad times of the global economic trends.
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