We now encounter our first default in TLC Cars Pte Ltd. After missing two payments, the director, Timothy Gay, disappeared and seems to have abandoned the company, the employees, the customers and creditors. We consider the director extremely irresponsible. Apparently, the company also borrowed new money just before the director’s disappearing act. Is this fraud? The police is currently investigating. Our total loss is about $500 or a 6% hit to our portfolio. Thanks to our diversified portfolio, we are still positive at an estimated 9% return to-date.

Loan to TLC Cars Pte Ltd

In Feb this year, we participated in a p2p loan to TLC Cars Pte Ltd. The company is a parallel car importer and a used car dealer. TLC Cars is growing quickly (according to its financial statements) and it needed additional working capital. The loan quantum was $100k, payable over 12 months with an effective interest rate of 25% p.a.

TLC’s margins are low and its leverage ratio is high. But we thought that the business is not too risky because car imports are usually back-to-back and sales should be improving because of lower COEs. The director (also the personal guarantor), Timothy Gay, seems credible and had several years of experience in the auto industry. We were wrong.

Payments and Default

We invested $1,000. Payment in the first 7 months were prompt, but delays started in September and October. At the end of October, a Notice of Debt Collection was sent to TLC.

But the director, Timothy Gay, vanished. His house was vacated, the office was locked down by the landlord and his employees do not know his whereabouts. His hand-phone is off.

Apparently, TLC Cars also borrowed substantial amounts of new money (amounting to at least $1 million) from banks, financial institutions and private creditors in the last few months before he disappeared. The police is currently investigating the case.

What exactly happened at TLC Cars?

The situation at TLC Cars is bewildering. Directors do not just disappear. There is no reason to suspect anything was amiss. TLC Cars’ financial performance is good earlier in the year (assuming the figures are real) and it was paying promptly for 7 months.

If it faces cash-flow difficulties, there is always room for discussion. Restructuring or partial payments are common solutions. There is no need to abandon ship.

One possibility is that the problems lurking below the surface are so severe and can no longer be managed. The director must have dreaded facing the consequences so much that disappearance is a better option.

The situation may be similar to S-Travels, the previous case of p2p default. S-Travels was a tour agency whose business is challenging. Both the company and the director took on plenty of debt to keep the business going. The moment of truth came when there is no new fresh debt to cover up its old debts. The director fled Singapore.

The second possibility is even more frightening. If TLC Cars had borrowed substantial amount of new loans (amounting to $1 million), it would be able to stay afloat at least for another 6 months. Did the new money disappear together with the director? Could this be fraud?

Unfortunately, there are more questions than answers. Except for the director, Timothy Gay, nobody really knows what happened.

Lessons learnt

An unsecured loan is an unsecured loan is an unsecured loan. Personal Guarantee (PG) looks nice on paper, but when the crunch time comes, it may not mean anything. In the TLC Cars case, the unsecured loan is guaranteed by the director, Timothy Gay. When TLC Cars fail to pay, the director also disappeared. This means that the PG is essentially useless. The same also happened to S-Travels, the other major case of p2p default.

The second lesson we learnt is to pay more attention to character. According to legendary financier J.P. Morgan, the first thing in credit is character even before money or property. In the TLC Cars case, we think that the root cause lies with the director. His actions imply that either there could be bigger problems below the surface, or that he had simply decided to abscond with the company’s money.

For investors, making a judgement on a director’s character is never easy. But there are several hints. First, the company’s operating history is short. Secondly, the company has only one director, who is also the guarantor. Lastly, the director stays in a rented apartment. These factors do not mean there is anything questionable about the director’s character. But it means that investors are not getting a clear picture of his track record and history. The odds are not favourable.

The last lesson is diversification. It is also our saving grace. We don’t anticipate any recovery and estimate a $500 loss. Against our portfolio of p2p loans, the impact is just 6%. Most of our p2p loans are still healthy and helps to offset our losses at TLC Care. Our total return for the year is still positive at 9% return so far (even including the TLC Cars loss).

 

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Picture credit: Straits Times.