November turned out to be a reasonably good month. Our portfolio returned 2.0%, bringing our total return to 13% for Jan to Nov 2016. We have several missed repayments, but the loans don’t look particularly worrisome. With just one month to go to year-end, we’re quite optimistic we can hit our original target of at least 12% return for 2016!
Problem loans look manageable
Although we have five loans that did not make full repayment in November, we were not too worried. Two of the more problematic cases, an offshore marine subcontractor and a metal parts manufacturer, have small loan balances (less than $120). The others have demonstrated goodwill by making partial repayments despite being late. Our experience also tells us that most SMEs will do their best to repay their debts. Only a small number of bad sheep (like TLC Cars) choose to abscond.
A not-so-bad outcome
Not all bad debts end up in losses. One example is a 12-month loan that we extended to a seafood supplier in September last year. By July this year, repayment was behind schedule by more than 3 months. Clearly, the borrower is in cash-flow difficulties. Nonetheless, the borrower demonstrated goodwill by making frequent partial repayment. Today, we have only $9 of principal left against our original $1000 loan. We expect full repayment by end of year.
Of course, this situation is not ideal. Even if we collect back all our principal, we may lose out on some interest, late fees and/or opportunity costs. But the borrower is trying its best to repay and there is really no point in squeezing them any harder. This is subjective, but it seems to us like an acceptable outcome to a bad debt problem.
Our favourite loan has completed repayment
In November, we also received final repayment from our favourite borrower, MKM. We participated in this loan through MoolahSense platform last year. Although the loan interest – at 16% APR – is not the highest, we love this loan because the risk is very low. MKM is in the car leasing business. All its cars are bought at discounts to market rates and had long-term contracts already secured with corporate customers. Director is an ex-banker who understands cash-flows. Hence, it is no surprise that its repayment were all prompt. Our only complaint is that the loan has completed repayment and we can’t find another MKM to borrow from us again.
P2P lending restarting soon
We haven’t been investing significantly since June when MAS made an unexpected announcement on regulatory requirements for p2p platforms. As a result, we were unable to re-invest our loan repayments. This will depress our return in the future. Thankfully, the regulatory storm seems to be clearing. MAS has issued licenses to MoolahSense and Funding Societies to operate p2p lending for retail investors. We expect the other major platforms to obtain their licenses in the coming months and resume p2p lending activities next year.
However, the business environment is now weaker. This is both a risk and an opportunity. The risk is that SMEs are more likely to run into cashflow problems, which means investors will encounter more bad debts. The opportunity is that banks will be less willing to lend, which means less competition and probably better p2p lending rates.
For p2p investors willing to take some risk, this is interesting times again.