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4thWay PLUS Rating Update On Lending Works. Assetz Capital Delayed
4thWay's specialists have reassessed Lending Works' ratings. This mostly involves reassessing the performance of their loans and stress testing them with horrible disaster scenarios, such as assuming a severe recession and property crash. In these circumstances, can lenders still end with an overall profit?
The current 4thWay PLUS Ratings are for people lending money today. But we do mention the historical ratings for existing lenders (from 2020 and earlier) in another piece published today: Has Anyone Lost Money At Lending Works And How Variable Are Lending Results? (P.S. Please Don't Unsubscribe).
Lending Works 4thWay PLUS Rating and 4thWay Risk Score update
Assessing future lending risk when we're already in a downturn or its aftermath is a very special time. One downturn (which can include a single “w”-shaped downturn) is not likely to be immediately followed by a completely separate downturn event, because each downturn makes the surviving businesses and consumers more robust afterwards. Through all the horror a downturn produces, the silver lining is its cleansing effect.
However, particularly with this being 4thWay's first downturn, 4thWay's specialists are still interested in what might happen if a severe downturn did pile on top of the current one. So, they've been using recent levels of bad debts as a baseline case – as if recent results were “normal” results – and looking at what would happen if a severe recession and property crash equivalent to 2008 were to happen this year, adding to many borrowers' woes.
Using that extreme internal test, 4thWay still finds that those who lend money through Lending Works* today will continue to have positive results overall, by the time their loans are fully repaid. This is quite remarkable, not least because Lending Works doesn't pay lenders especially high lending rates to cover any increase in bad debts…
How Lending Works is covering the risk of an overall loss
The main reason for this is that Lending Works is diverting a much greater amount of money to its “Shield” reserve fund. Cash in it went up 12-fold over 12 months to roughly £1 million, despite the outstanding loan amounts falling during the pandemic and payouts from the fund rising a lot.
Adding on the expected payments to the reserve fund from existing borrowers over the course of their loans, the total fund rose to £8 million from £5.5 million at the end of last year.
Over the past few months, Lending Works has paid off another load of the bad debts that had been delayed to give borrowers a chance to recover from COVID-19 related money problems. The total pot has now come down a tick, but lots of loans have also been repaid, meaning a smaller reserve fund is needed.
Today, the total reserve fund is massive, as over 12% of the total outstanding loans are covered by it. This is simply a very huge amount. It's now what I'd call a war chest not just to cover mundane, everyday bad debts, but seemingly stocked to cover any all possible increased losses.
Interestingly, it also inverts lenders' defences against losses. Usually, the biggest defence against losses is the interest charged to the borrower and specifically the interest you earn, with reserve funds being more like icing on the cake. Now, the reserve fund seems stocked to take any potential hits from further borrower difficulties.
Perhaps this shouldn't be surprising. A fair chunk of this larger pot is being funded by existing lenders' interest being diverted to the reserve fund to cover the risks of existing loans, but Lending Works* is also putting more in from the borrowers' interest.
The reserve fund is not the only boosted defence. Both before and after the pandemic started, Lending Works tightened its lending criteria and increased borrower rates to boost reserve-fund contributions. Borrower rates have still come down overall though as the P2P lending company is targeting more exclusively the prime end of the borrowing market during this period. Thus lowering the risks.
While it's not possible to calculate the impact of this tightening from the loan book at this time, it's likely that it's also making a substantial difference.
Lending Works maintains its rating and risk score
So, overall, the risk-reward balance has improved further since the pandemic started and Lending Works' Growth Account/IFISA maintains the top 3/3 Exceptional 4thWay PLUS Rating, as the likelihood of overall lender losses from bad debts over the course of the loans is very low.
Its Flexible Account/IFISA maintains its 2/3 Excellent 4thWay PLUS Rating.
Similarly, Lending Works' 4thWay Risk Score on both its accounts remains at 5/10.
If you're an existing lender surprised by the above results, please read:
One caveat about Lending Works
The one caveat to Lending Works' ratings and risk scores is that Lending Works doesn't provide a detailed breakdown of how much money is set aside to cover each annual batch of loans. (These batches are often called annual cohorts or vintages.)
The reserve fund segregates funding for each annual cohort of loans, e.g. if it approves 5,000 loans in a calendar year then payments to the reserve fund from borrowers in that year will be used to protect lenders from bad debts in that cohort. But the amount going into the reserve fund for each cohort is unknown to us.
Lending Works has said it will cross-subsidise where possible, which is useful, but what would help further is more information on this aspect.
Read the Lending Works Review.
Assetz Capital rating reassessment delayed
Assetz Capital is one of those platforms that most fries 4thWay's specialists brains when it comes to evaluating its performance, and to reassessing it for rating and risk-score purposes. This is due to the complexity of its loan book, containing a large variety of different property loans with different charges and repayment schedules, as well as the structure of its various lending accounts and different versions of its accounts, with separate reserve funds.
While 4thWay automates a lot of its assessments, Assetz Capital's multiple types of large property loans, which are often highly bespoke, require a lot of manual attention too.
This past month, we've all had a few more pressing items crop up requiring research and that has put the job of finishing the relatively large task of assessing Assetz Capital's ratings and writing it up back to the end of May. I hope you can understand!
Research mentioned on this page:
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The 4thWay® PLUS Ratings are calculations developed by professional risk modellers (someone who models risks for the banks), experienced investors and a debt specialist from one of the major consultancy firms. They measure the interest you earn against the risk of suffering losses from borrowers being unable to repay their loans in scenarios up to a serious recession and a major property crash. The ratings assume you spread your money across hundreds or thousands of loans, and continue lending until all your loans are repaid. They assume you lend across 6-12 rated P2P lending accounts or IFISAs, and measure your overall performance across all of them, not against individual performances.
The 4thWay PLUS Ratings are calculated using objective criteria that can be measured and improved on over time, although no rating system is perfect. Read more about the 4thWay® PLUS Ratings.
*Commission, fees and impartial research: our service is free to you. 4thWay shows dozens of P2P lending accounts in our accurate comparison tables and we add new ones as they make it through our listing process. We receive compensation from Assetz Capital and Lending Works, and other P2P lending companies not mentioned above either when you click through from our website and open accounts with them, or to cover the costs of conducting our calculated stress tests and ratings assessments. We vigorously ensure that this doesn't affect our editorial independence. Read How we earn money fairly with your help.