P2P Portfolio Performance
Cash return was 1.8% return in Feb-2016. 1.8% may not seem much, but this is the lending business, not the stock market. Slow and steady wins the race. 1.8% every month = 20% per year. Good returns and lower volatility than stock market.
% Cash return = (Interest + Late Fees received) / Principal Begin
Effective rate works the same way, but it refers to the rate provided on the repayment schedule. Cash returns uses the actual cash returns. I prefer to use cash return because it is the most accurate representation of what’s happening to my p2p portfolio.
The 4 cases of late repayment in Jan were all settled in February. This month, only one borrower (a light snack supplier) repaid late. This borrower was also late in Jan, due to CNY cashflow issues. But it is in a stable business and requested for several days of extension. So, I’m not too worried.
Two loans were fully repaid off in February – a travel agent and a ticketing agent. Both were supposed to finish repayment by January, but were delayed to Feb because cashflow issues. Nonetheless, I was happy to see the travel agent making its final repayment off my p2p portfolio. With the slowing global economy and Zika virus outbreak, small and niche travel agents may find it tough going. The ticketing agent seems better positioned and business is sticky.
I made several loans to a plastic injection manufacturer on Capital Match and Funding Societies platforms. This borrower now forms close to 10% of my p2p portfolio. There are several reasons why I like this borrower. Firstly, it has been operating for a long time (since 1990s), so it knows what it is doing. Secondly, it is borrowing money to take on a larger project, which can generate $1m additional revenue per month – which means good repayment after the initial startup phase. Thirdly, shareholders injected $5m into the company, demonstrating their confidence. Also, I don’t find anything dodgy about the company taking on p2p loans on different platforms as the total loaned amount is still acceptable in my opinion, and the interest rates are quite similar (no unhealthy competition). More likely, the borrower is checking out different platforms (like the way investors are trying out various p2p platforms) and hedging its bets.
Oil & Gas
The three big banks – DBS, UOB and OCBC, in Singapore recently reported their FY15 results. One common concern is their exposure to the oil & gas-related industry. With oil at US$30/barrel, it is no surprise that there is a lot of pain out there. Even the biggest – Keppel and Sembcorp Marine are facing difficult situations. Now that banks are looking to reduce lending to the oil & gas industry, I expect many of these smaller borrowers to seek alternative funding through p2p. Is this a good time to lend to oil & gas? There may be a few good oil & gas companies out there (and I’ll be looking out for these), but I think the risks are too high. Many small companies don’t have good bargaining chips and depend on their suppliers to pay them to meet their cashflow needs. Money flows down like a waterfall. At the top of the waterfall are oil-producing companies, such as Petrobras. If Petrobras is not paying Keppel and Sembcorp, what chances do downstream companies have? Then, there is an issue of default and recovery. When banks move in on the non-performing borrowers to recover their money, p2p lenders are less equipped to deal with such scenarios. To compensate for the high risk, the returns are good. But one needs to be very careful and selective with the borrowers. I don’t have any lending to the oil & gas companies in my p2p portfolio. I’m happy to stay away. =)