Assetz Capital’s 4thWay PLUS Ratings Down & Upgrades – Nov 2017

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By on 30 November, 2017 | Read more by this author

https://www.4thway.co.uk/?p=14133

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.

Reserve funds

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.

More:

Read 4thWay's Assetz Capital Quick Expert Review.

Visit Assetz Capital*.

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.

Experts, journalists and bloggers who conduct research and write articles for 4thWay are subject to 4thWay's Editorial Code of Practice. For more, please see 4thWay's terms and conditions.

*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.

3 responses to “Assetz Capital’s 4thWay PLUS Ratings Down & Upgrades – Nov 2017”

  1. Brian Lomas says:

    Hi Neil,
    The QAA rating change from 5/5 to unrated is, to say the least, unnerving. Are you able to provide more detail behind the reasons for such a significant reversal. Now that I realise such drastic re-ratings are possible, I will have less faith in 4th Way ratings going forward.
    Brian

  2. Kevin innes says:

    Hi, This is a very valid point, still no reply?

    • Neil Faulkner says:

      Hi Kevin and Brian

      Kevin, there was no reply to Brian, because we are unable to monitor readers’ comments routinely, sorry.

      We are only automatically alerted to comments being written by readers if our program detects a risk of spam. Some time this year we’ll test having a button at the bottom of each page that will allow readers to contact us about it.

      KEY AREA OF IMPROVEMENT
      Hi Brian, as Kevin says, you do indeed raise a valid point, although far from insurmountable. It is related to a ratings feature that we’re working hard on to release in the next few weeks, but here’s a brief summary.

      You’ll have noticed that most platforms/products are either unrated by 4thWay or they have four or five PLUSES (out of a top score of five in our PLUS Ratings system).

      The biggest reason for this is that most platforms do not (or cannot) provide enough information to assess the risks using the international (Basel) banking standards (or any equivalent standards), so they go unrated, and because those that do provide enough details tend to be very high quality. (I think it is natural that the best platforms are the ones that are most willing to share more information with us or the public.)

      What’s been steadily happening recently though is that the platforms that are high-quality have been seeing the risk-reward balance shrink.

      This is totally natural. When the industry started (only 13 years ago), and when a new peer-to-peer lending platform is launched, lenders were understandably very wary and were slow to put their money in. The platforms found it a lot easier to attract borrowers, so some of them were able to be highly selective: they could select the cream of the cream – the primest prime borrowers – to lower the risks for lenders more than it would ever be necessary.

      In addition, the platforms could be so selective that most of them could select the least price conscious of the best borrowers.

      This means those borrowers who signed up were willing to pay higher interest rates to lenders, despite being excellent borrowers. Indeed, the rates borrowers were paying were far higher than they should be, and lenders were earning far more than they deserved.

      With lenders now lending more money and becoming more comfortable with the risks, this has reduced the risk-reward balance. Because platforms can no longer be over-selective.

      In doing so, this reduction in the spread of risk and reward has revealed an area of improvement in our ratings methodology that wasn’t really relevant before, as the situation hadn’t arisen.

      The ratings are currently based on how many years it might take to recover bad debts in a very severe recession (similar to or perhaps worse than Great Recession of 2008) and a property crash leading to distressed property-sale prices of up to -55%:

      5/5 PLUS Rating: Lenders expected to recover losses, if any, within two years (on average).
      4/5: Recovered within three years.
      3/5: Within four years.
      2/5: Within five years.
      1/5: Within six years (or the life of the loans if longer).
      The ratings assume you spread your money across plenty of loans with the same PLUS Rating. (Re-lending repayments before, during and after a recession lowers the risks further.)

      The area for improvement is not in the method of calculating the risks, but rather down to the way the ratings are split, as shown above.

      This is because most of the interest earned on a typical portfolio of loans is usually earned in the first couple of years – even if the loans are supposed to last five years.

      So, if a platform fails to get a 5/5, it has a reduced chance of getting 4/5, and considerably lower chance of earning a rating of 1-3.

      This area of improvement is only now becoming apparent due to the risk-reward balance shrinking. It is one of those improvements where, with hindsight, it seems so blindingly obvious. That has happened to us before and it will happen again as we improve the ratings, and the steps in the ratings, further.

      OUR IMPROVEMENT TO OUR METHODOLOGY
      So that leads me to how we’re going to improve this aspect of our ratings.

      We are maintaining the top grade as being at least as difficult to achieve as it currently is.

      However we are adjusting the lower grades over the next few weeks by allowing platforms to earn ratings, even if the lenders might not expect to recover losses in a severe recession.

      Instead, the platforms will need to show that lenders, on average*, should survive a weaker recession or survive normal times with positive returns.

      In other words, any platform that should offer positive returns on average in a typical year or three (if not at extreme times, like a severe recession) will still earn some level of rating.

      (Assetz’ QAA account will easily earn a rating on this basis.)

      OTHER IMPROVEMENTS
      We make improvements to our methodology whenever we see a clear and demonstrable way to do so.

      Mostly the changes are too small to make a big deal out of them.

      But we announce any major changes to our users, so we’ll let you know precisely how they’ve changed when the new ratings are released in a few weeks.

      As we have explained before when announcing changes to the methodology, we’re rating a brand new asset class here, so it is no surprise, to us at least, that the adjustments we make to our ratings method at present are bigger than, say, Morningstar, TrustNet or Moody’s make to their ratings method over a typical 12-month period. (They have been rating traditional asset classes that have been around for a very long time, and for which there is an awful lot of public data to do so.)

      We have made it clear in our pages about our ratings, and elsewhere on the 4thWay site, that rating any investment is always a work-in-progress that never ends, and that the biggest improvements should be coming at the beginning if we’re doing it right.

      CONSERVATIVE/CAUTIOUSNESS ABOVE ALL
      Moody’s and ratings agencies in general have made big errors by being fast-and-loose in giving away ratings, leaving investors understandably wondering if they can be trusted.

      We are looking at ways to iron out the harshness of going from 4 or 5 out of 5 to zero, but without at the same time weakening our standards. Investors must be protected and confident that the high ratings really mean the platform looks very strong based on sensible credit-risk modelling methods.

      In other words, while improvements can and will always be made, and while we will not be able to prevent all mistakes, I think very strongly that you should feel confident that our ratings do not understate the risks. We err strongly on the side of caution.

      Unlike traditional ratings agencies that rate traditional asset classes or investment funds, what we don’t do is rate platforms willy-nilly with the idea of making a load of money or free advertising from them. Otherwise, we’d have just gone and rated them all. Instead, we rate them entirely with our view to helping the small lender (the small investor). In particular, we do them with the perspective of a cautious private investor in mind – one who sensibly wants to invest with a large margin of safety.

      That’s why we use the toughest possible version of the international Basel stress tests that you will find anywhere.

      WE FOCUS ON TRUST ABOVE ALL ELSE
      You’ve raised good queries and so I hope that you continue to trust us, because I guarantee you will never find a bunch of experts from various backgrounds, as well as skilled journalists, who are all so single-mindedly focused on candid, honest, high-quality peer-to-peer lending information and research than at 4thWay.

      I hope also that you will have patience with the fact that ratings methodology is always being improved (and always will be improved). And I hope that you will continue to point out anything that bothers you, so that we can learn and improve all aspects of our service even faster.

      Thanks,

      Neil

      *If you’re looking for a measure of which platforms/products might offer more variable returns – meaning that more lenders might do far better or far worse than the average – use the 4thWay Risk Scores instead. The closer to 10 that score is, the more variable the returns (and the greater the number of loans you need to lend in to contain the risks).

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Important information before you visit Wellesley & Co.

Wellesley & Co. is primarily a P2P lending website.

But, when you visit the Wellesley website, you’ll see that it also offers two “bonds”, one of which is available as an ISA.

Unlike its P2P lending service, neither of these bonds allows you to lend directly to 100+ borrowers.

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This is because we calculate Wellesley’s interest rates the same way most other P2P lending websites do. We do this so that you can compare the rates more easily and so that they show a more accurate picture of what you’ll earn.

Important information before you visit Wellesley & Co.

Wellesley & Co. is primarily a P2P lending website.

But, when you visit the Wellesley website, you’ll see that it also offers “bonds”. Unlike its P2P lending service, its bonds don’t allow you to lend directly to 100+ borrowers.

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