Assetz Capital’s 4thWay PLUS Ratings Down & Upgrades – Nov 2017
As peer-to-peer lending website Assetz Capital's loans have matured (got closer to their final repayment dates or been fully repaid by borrowers) we can now see better how they perform in terms of bad debt. In addition, the mix of different types of loans offered by Assetz Capital, and their characteristics, has changed, which impacts forecasts of results.
The proportion of loans that 4thWay classes as “bad debts” is higher than at some other P2P lending sites doing similar loans, and yet these loans are very secure from a lender's point of view, which leads to better recovery of that bad debt. So the loans appear to still be well within tolerance in lending accounts provided by Assetz Capital*.
As lenders, it's important to know more details on this seemingly contradictory higher bad debt/better security combo, so that you can better judge how to react at critical times.
I'll tell you about that after updating you on Assetz's new 4thWay PLUS Ratings, with some of its lending accounts gaining our ratings and others being demoted.
Which Assetz lending accounts are rated?
Four of Assetz Capital's lending accounts now have a 5/5 PLUS Rating, the highest 4thWay rating.
This shows an excellent balance between the interest you earn and the risk of suffering bad debts, even in a major recession or property crash.
The Great British Business Account and the Green Energy Income Account have kept the top rating while paying 7.23% interest to all account holders**.
Now we have rated two more accounts, the Manual Investment Account and the Property Secured Investment Account, which have also earned the top rating. Loans you choose for yourself in the manual account pay 5.5%-15% lending interest before bad debts with no reserve fund to cover expected losses. The property account pays 5.64%**.
The underlying loans have high-quality security. I mean that borrowers are required to have valuable real property or business assets (lender “security”) and a legal charge is taken on them.
Assetz Capital can therefore repossess and sell those property and assets if the borrower is unable to repay the debt.
Recovery is paramount
Assetz Capital* focuses on quality recoverable security over the quality of the borrower.
On the one hand, this means that more loans go bad than you will see at some other P2P lending sites doing the same kinds of loans.
It could also at times lead to long delays in getting part of your money back, except perhaps in the Quick Access and 30-Day Access accounts. (More on that in Assetz Capital Provision Fund To Pay Out For First Time.)
But, ultimately, we have pretty good grounds to believe that lenders should expect great recovery of bad debt:
- Assetz Capital takes property/assets as security that it judges to be worth considerably more than the size of the loan.
- It has already recovered a good proportion of the debts that have gone bad and expects to recover most of the rest. For example, of the loans that were issued in 2015 or earlier that went bad, just a quarter of the total debt is still outstanding.
- Its key decision maker has emphasised his bad-debt collection credentials and experience. His top priorities are arranging loans where he expects a high recovery of bad debts, plus great procedures to recover them.
Most Assetz Capital* lending accounts offer the additional protection of reserve funds. If bad debts are not fully recovered, these funds will eventually pay you back, provided there is enough cash left in the fund to do so.
Prepare for the reserve fund to be completely depleted in tougher economic times, such as a major recession, which is normal. However, we still expect most lenders to make enough interest to cover any losses.
Assetz's manual lending account has no reserve fund, but it pays higher interest rates which look likely to cover bad debts even in a tough recession. You should be spreading your money across lots of loans to massively reduce the chances of losing money due to bad luck on one or two poor results.
All the other accounts have reserve funds and look to spread your money automatically across lots of loans.
Assetz Capital's short-term accounts downgraded
It's not quite all good news for Assetz Capital and its lenders, if you are using its shorter-term lending accounts.
Previously 5/5 rated, the Quick Access Account is now unrated.
The 30-Day Access Account's PLUS Rating is reduced from 5/5 to 3/5 PLUS Rating.
A 3/5 rating means that, based on our standard modelling using international banking techniques, lenders should still on average expect to make positive returns when lending through a deep recession and property crash, but it might take a couple of years longer to earn enough interest to do so.
RateSetter and other peer-to-peer lending sites have lost PLUS Ratings on some of their shorter-term accounts over the course of this year.
Both of these Assetz accounts pay relatively low interest rates, especially considering the number of loans that Assetz Capital is classing as being in “recovery”, i.e. Assetz Capital is taking action to recover the debt. The 30-Day Account pays 4.33% and the Quick Acess Account, 3.82%**.
Note that with both of these Assetz accounts you could decrease your lending risks substantially by committing to re-lending all your interest and loan repayments before, during and after any recession. I believe the risk of suffering permanent losses with either account are reduced if you do this, even for the unrated Quick Access Account.
Therefore, I see no reason to de-recommend any Assetz Capital* account at this stage.
How does Assetz earn our ratings?
Assetz Capital remains one of the few P2P lending sites to have some – indeed most – of its lending accounts pass our very tough versions of the international banking (Basel) tests that calculate how its loans might perform during a severe recession and a very large property crash, after allowing for bad-debt recoveries, reserve fund payouts, interest earned and any other defences against losses.
Our PLUS Ratings are based on these tests. Read more about them here.
Over time, Assetz could regain better ratings for its to shorter-term accounts if it proves to be particularly adept at recovering even more of the outstanding bad debts.
After a lot of direct contact with Assetz Capital and its representatives, I get the feeling it keeps a number of things to itself if it believes that it would lead to fewer lenders signing up. And yet it provides us with more detailed data than just about any other P2P lending site, and its experienced head of credit is clearly passionate about preventing unrecoverable bad debts.
As it stands, I still like Assetz Capital* and think it is the best business loans P2P lending site that secures the loans you make against the borrowers' real physical assets. This is largely because it properly makes an effort to value the business' assets and has already shown the value of this in past recoveries. Most peer-to-peer lending sites calling their loans “secured” business lending take a fast-and-loose definition of “security”.
Why does a focus on recovering bad debt matter to lenders?
If you recall from my introduction, I wanted to tell you about how to think about this more bad debts/better lender security combo.
In terms of pure lending returns, it makes no difference if the proportion of loans that go bad is low or if recovery of bad debt is high.
But lenders require great confidence when the focus is on bad-debt recovery, especially during recessions when bad debts rise and reserve funds are worn down.
This is because of the wait to recover bad debts that I have already mentioned.
But also because you can easily shoot yourself in the foot. It is quite possible that a chunk of lenders would panic and simultaneously try and sell before the bad debts are recovered.
Assetz Capital warns you that you are not usually able to sell bad debt and this is probably a good thing, protecting you from yourself. (In these difficult times you might be prepared to sell bad loans that have a high chance of recovery for less than they are worth.) But you'll still be panicking – probably even more so if you can't get your money back right away.
You don't want to be either locked into an investment that you didn't understand, or selling at a discount for the same reason.
The bottom line is the same bottom line for all investments: don't invest (lend) unless you are genuinely confident about the opportunity – to the extent that a crash or panic will not perturb you. That goes for all peer-to-peer lending sites and P2P lending products.
The opinions expressed are those of the author and not held by 4thWay. 4thWay is not regulated by the FSMA and does not provide personalised advice. The material is for general information and education purposes only and not intended to incite you to lend.
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*Commission and impartial research: our service is free to you. We already show dozens of P2P lending companies in our accurate comparison tables and we keep adding more as soon as they provide us with enough details. We receive compensation from Assetz Capital and other P2P lending companies not mentioned above when you click through from our website and open accounts with them. We vigorously ensure that this doesn't affect our editorial independence. Read How we earn money fairly with your help.
**We adjust Assetz Capital's interest rates so that they are calculated the way that most P2P lending sites (and other investments) are calculated - which makes much more sense. That's why rates here look slightly higher than on Assetz's own website.