Among the 388 loans we financed so far, 3 of them have experienced serious problems of payment and reached 120 days delay. As planned for such kind of situation, we sold these loans to the debt collection agency which offered the best price. The total amount due of 16 756.47 BGN was purchased at 5 814.50 BGN, i.e. with a discount of 65.3%.
What are the impacts?
Nothing unexpected. Losses from bad debt are part of the P2P model. Their impact has been considered when building the product. Part of all the interest paid by the loans performing well is dedicated to cover such losses.
In this article, we’ll show how the profit and the yearly return have been impacted. In a final section, we’ll explain what’s going to happen next after this first debt sale.
1. Impacts on the whole Klear portfolio
Profit
As we can see, the total amount of interest paid by all the borrowers exceeds by far the loss coming from the sale of these non-performing loans.
Yearly return in %
The Average Yearly Return of the whole portfolio logically falls from 7.4% to 6.7%, remaining well above the forecasted 5.5%.
2. Dispersion of the impacts and factors influencing them
After the debt sale, the yearly return per investor varies from –18.9% to 142.0%, with an average of 6.9%. The graph below shows the distribution of the yearly returns.
The dispersion of the returns comes from 2 main reasons, the activity on the secondary market and the number of loans.
Below are 2 graphs representing the yearly return by average number of loans. The first graph relates to investors having transacted on primary and secondary markets, the second to investors having only transacted on the primary market.
As we can see, the dispersion is higher on the first graph. Some investors have an abnormal low return because they purchased at a discount lower than 65.3% one of these bad credits, which means that they ended up with a negative balance on this operation.
The dispersion on the second graph (investors not having transacted on the secondary market) is way narrower and none of them has a negative return.
Besides, we can notice that when the number of loans increases, the dispersion of the yearly return is lower. It proves that investing in many loans (high diversification) reduces the volatility.
Key takeaway 1
If you decide to buy on the secondary market, do not overpay for a loan in trouble. Check that the discount proposed by the seller is close to the KIP of the loan.
If you decide to liquidate your portfolio, don’t sell it below its value. Sell loans which are OK (KIP =0) without discount and the others with a discount close to KIP.
If you notice loans in delay in your portfolio, don’t panic. It’s normal. That’s part of the model. There is no need to sell them immediately.
Key takeaway 2
Investing in more than 150 loans, only in the primary market, is the best strategy to ensure a return close to the expected average.
3. What’s going to happen next after this first debt sale
On the whole portfolio
As the portfolio grows, we’ll eventually sell more regularly loans in serious delay.
After some time, the average yearly return will progressively converge towards the forecasted value, around 5.5%.
For each investor
With time, if you keep reinvesting in loans, the return should converge progressively to a value close to the average forecasted.
This will happen if the diversification level is high. We recommend each investor to set up a strategy to achieve a level of 150 loans in a maximum of 3 months.
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