We are watching how COVID-19 impacts credit performance, liquidity, operations and solvency of P2P loan originators
Creditstar is a European loan originator that operates in 8 countries. Their loans are available to P2P investors at Mintos, and also its new P2P subsidiary Lendermarket. Creditstar has been operating for 14 years and has been consistently profitable. It has long been one of the higher rated LO’s in our Mintos ratings on the basis of its strong profits, long track record and balance sheet strength. Last month we ran a stress scenario to get a feeling for what the impact could be on Creditstar of the COVID-19 crisis. However we realise there is a limit to how much insight one can get from this type of analysis without access to important company information that is not publicly available, such as liquidity outlook, and insights into how borrowers are behaving right now.
Since then Creditstar has also had to deal with the introduction of new COVID-19 related rules in countries like Poland, which allows borrowers to extend their loans. Loan extensions have led to problems for many loan originators relating to how the loan status has been reported to P2P platforms, including Creditstar (as this had not been envisaged happening previously).
To help investors get a better understanding of the current position of Creditstar, we asked the CEO of Creditstar, Mr Aaro Sosaar to provide responses to questions that we thought were most important for investors in Creditstar loans right now, including some from our readers. He kindly agreed to this, and we publish his answers below.
Interview with Aaro Sosaar, CEO of Creditstar
Hi Aaro. You have a bond coming to maturity in June. How are you planning to repay that bond? Do you need to try and issue a new bond in April or May to do so?
Creditstar has been issuing bonds since 2007. We have a large bond program (since 2016) and within the program, we have different tranches with different maturities. Tranches are usually maturing every 6 months. We plan to renew a large part of the bond, repay some part and also attract new investments.
OK. Is there any risk it will not be possible to do the ‘partial renewal’ you talk about of the bond before June? How close are you to raising the funds needed?
We are confident and we do not currently see a risk of renewal. We already have positive feedback from the bond investors and the bond tranche is not significant in size.
How comfortable are you with the liquidity position of Creditstar over the next 9-12 months? What risks do you face?
Creditstar is in a very good position as we have the experience of how to deal with our loan portfolio clients during the time of crisis, as we successfully came through the financial crisis of 2008. Our experience is that being proactive with clients and offering reasonable flexibility results in a win-win situation for both our business in terms of loan portfolio quality and customers in terms of paying their loans on time. That being said, we are of course being more selective when it comes to issuing credit to new clients given the economic circumstances with COVID-19 lockdowns and its effects to the economy and certain business sectors.
Poland have announced plans to give borrowers forbearance due to the COVID-19 disruptions. How will that impact Creditstar? Will P2P investors be impacted too?
In Poland there is a new temporary cap on consumer loans costs, reducing the price that lender can charge for one year. For us it means adjusting product configuration on short term loans. We don’t expect a significant impact to the business or to investors from these temporary measures.
Some investors have seen very high levels of late loans in their Lendermarket portfolios. It has been explained that this is because Mintos and Lendermarket are not able to take into account situations where you have voluntarily extended loans. But some investors seen 100% of their loans shown as late on Lendermarket. Surely not every customer would have requested a loan extension?
We at Creditstar understand that these can be challenging times for our clients and we are providing our customers with solutions such as discounts on extensions, restructured and better-suited repayment schedules. We are doing all of these initiatives to strengthen our client relationships and to help our clients through these difficult times.
How we are helping our clients:
- favourable terms (discounts) on grace periods and extensions
- discounts on fees
- flexibility with modifying repayment schedules to make smaller monthly instalments
- we have extended the soft (in-house) collection period in order to postpone hard collection in most cases during the crisis
- free grace periods offering to frontline health-care workers who are responding to coronavirus
As we are now in an unprecedented crisis and many of these changes were done very quickly by Creditstar to help our customers, we are now working on finalising updating Lendermarket platform to more accurately reflect the real status with the customer. Currently the statuses on the platform might not reflect the actual status with the loan, which could be extended or with a modified schedule. During these weeks, our IT team has been working around the clock to repair this information exchange issue and expect this to be solved very soon.
The terms of Buyback Guarantee still continue to apply to all loans on the platform. Along with continuous accrual of interest during any state of the loan.
What can you tell us about how the portfolio is performing over the last month? How much has your non-performing loan (NPL) rate increased?
Currently, we are monitoring daily the performance of our loan portfolio and so far, the loan portfolio performance remains at the usual levels, so NPLs have not increased. But we are expecting some delays in repayments in the upcoming periods given the current situation in the economy, where we already see people’s employment suspensions, lay-offs, etc. That being said, our experience from the 2008 crisis was that although payment amounts decrease, there are loan schedule extensions etc. but most loans are recoverable, as the loan amounts are small and the average customer is a relatively young person in their early or mid 30’s, who, even if in the short run have some liquidity issues though losing their job, will be re-engaged and can take care of their liabilities. We also consider government stimulus measures will have a positive impact to our customers who will have problems with repayment.
How much have you reduced new lending by? What can you tell us about how you have tightened your lending criteria?
We have reduced our growth in new lending in April and the underwriting policy and credit scoring model (lending criteria) has been set in a way that we reduce risk of the customers segments that are employed in the business sectors that we consider risky (most hit by the lockdowns).
Some of the loans being placed on Lendermarket are from your Denmark subsidiary. How will you be impacted by the new rules being introduced there to limit interest rates to 35%? It seems that Creditstar’s loans have much higher interest rates than this….
Creditstar has been operating 14 years since 2006 and we have seen many different legislation proposals and changes being introduced in different countries. We have different products in our product portfolio. Some with lower interest rates and some with higher, that we can offer our clients depending on a market conditions, giving our business the necessary flexibility to adjust to any changes, legislation or otherwise, in the markets we are operating in. Denmark is the newest market for Creditstar. We started approximately one year ago, and our strategy is to launch with the short standard loan product and gradually introduce other, more flexible and longer-term products to the market.
It is our understanding that the regulation in Denmark has not been passed yet, so there is still uncertainty around the exact new regulation, caps, timelines, etc. But if necessary, we would have no problem operating profitably even with an interest rate cap of 35% (we do similarly in Sweden). The overall strategy of the company is to introduce longer-term instalment products and credit line products in all markets in due course.
Do you have potential sources of capital available (potential equity partners) if the company needs to strengthen its capital base in the next year?
Yes, the company has thousands of P2P investors, many hundreds of bond investors and is well positioned to tap into new capital sources if necessary.
So if the company needs more equity capital you are confident in being able to raise it?
All P2P lenders face some challenges right now
COVID-19 has obviously introduced extra complexity and risk for all lenders. Governments around the world have been changing the rules and regulations. Some borrowers have seen unexpected reductions to incomes. Economies are contracting. No one really knows how long this disruption will last, and what the impact will be. And for the first time since 2008/09 there is a renewed focus on liquidity.
All of these factors apply to Creditstar too. Creditstar loans are more risky today than they were in February. However the returns paid to investors have gone up too. Investors need to make their own decisions on what to do. We are keen to see Creditstar improve and fix their loan status reporting, particularly at Lendermarket. And we look forward to them making an announcement soon on their next bond issue.
However even acknowledging these challenges, this is still a company that has come through the last financial crisis, has a profitable business model, diversified funding sources, and €25 million of equity. Not many other loan originators on Mintos can say the same thing.