What's going on at Mintos right now?
Mintos has announced that it is issuing a notice of default against one of its lenders – Rapido. The background to this is that Rapido had run out of cash and stopped making the cash remittances to Mintos investors that it was legally required to. The notice of default is a legal procedure but essentially the result of this will be most likely that Rapido is forced to either pay all the funds due immediately, or be forced into insolvency. Based on all the information we are aware of, it seems very likely that Rapido will be made insolvent and will then be liquidated. Prior to these issues arising the Mintos rating was B- and our rating was 16/100. Thankfully, the remaining amount of loans on Mintos from Rapido is very small – less than €0.5m
Over the last few months Mintos has also made several announcements in respect of another lender – Aforti Finance. This is another lender that has effectively defaulted by not passing on all the payments that were due to investors. Again the size of the problem is relatively small – around €2m of total exposure, or 0.3% of outstanding loans.
Today, a further announcement was made about Metrokredit which to us suggests a high future risk of default on that lender.
The size of these defaults so far is not large - but smart P2P investors can still learn from them
We should say up-front that we continue to be fans of the Mintos platform. Smart investors can find excellent quality loans at decent returns. Our Mintos lender ratings and Mintos loan scanner pages are some of the most popular on our site. But, as these latest defaults show, there is risk involved, and some lenders are much better than others. Below are 5 observations we have made following all the recent events:
#1 - Picking strong lenders is much more important than picking individual loans
The Aforti situation demonstrates this very well. Aforti appears to have had significant liquidity issues, which mean that it was unable to fulfil the buyback guarantee commitments, and it failed to pass on all of the borrower payments that it had received. This creates a very complicated position for Mintos, which sits between the investors and the lenders. The end result is that because the lender has failed to pass on all the payments, many Mintos investors who purchased loans where the borrower has made all the payments due are at risk of loss. This is because it did not have enough cash to pay Mintos the full amount it was required to. Rather than a claim against the borrower, these investors now need to rely on Mintos to litigate on their behalf to recover the funds due, or to find an alternative solution.
In the case of Eurocent, which similarly ran into similar issues in 2017, investors have not received a single cent almost in respect of their claims against the company almost two years later.
In our view, this means that P2P investors who purchase buyback loans on Mintos have almost zero benefit from trying to select better quality loans offered by a single lender. If a lender defaults, it is very unclear how the funds will be allocated between investors and it will inevitably take a long time to sort out. It is much more important to try and avoid lenders at high risk of default in the first place.
#2 - The Mintos ratings seem to be 'reactive' rather than 'predictive'
We were very pleased when Mintos introduced their own ratings last year because we thought that they provide investors with a useful, well informed data-point to cross-check against our own ratings system. The team at Mintos would also get access to extensive non-public information. So far, we have been surprised that the ratings have not changed as often as we would have expected. Particularly when new alarming financial data is published. There have been many times when a lender has published weak or alarming financial data without any impact on their Mintos rating.
In the case of Rapido we noticed that the ratings were downgraded only one day before the public disclosure of very serious liquidity issues at the company, and a suspension on the secondary market. Mintos must have been aware of severe liquidity issues, but an alternative reason was given for the downgrade.The rating fell from B- to C to D (default) in a few weeks.
#3 - Investor statements may not 100% reflect what has happened (yet)
The biggest controversy that surrounds the Aforti default has been the disclosure by Mintos that it has been crediting investor accounts before they have received the funds. Mintos has been settling the cash balances with lenders days after investors have been credited their payments. As long as each lender fulfils these settlement commitments these arrangements are fine. But what happens when Mintos have credited a customer and the loan originator does not then pay them? This is the position they have been left in with Aforti. It is a very big, complicated mess. Mintos credited a large amount of payments that it did not end up receiving. They are now using all the payments it is receiving to cover the shortfall. Many Mintos lenders rightfully have a lot of questions about the legal basis for this approach and we still have not seen any satisfactory responses.
This seems like a situation that frankly did not need to happen – instead Mintos should only credit the accounts of their investors once all payments have been actually received from the loan originators. Rather than make this simple change, they have announced plans to introduce a new payment status called ‘pending payment’.
We have asked Mintos to confirm whether the amount of cash they hold on deposit in trust for investors is at all times at least equal to the sum of all cash balances credits on the Mintos platform. We have been assured this is the case. However we have remaining concerns that if investors are credited ahead of Mintos receiving funds, there’s an opportunity for a mismatch/shortfall to take place.
#4 - Some Mintos investors 'accidentally' invested in loans that defaulted
When Mintos launched their automatic investment products (now called ‘Invest & Access’), we published a post saying that we didn’t think they were a good option for investors. Why? Because there was a big risk that Mintos would allocate to investors loans from the less popular, lowest quality loan originators. We thought that investors could construct much better diversified portfolios fairly easily using the auto-invest tool. Following the recent defaults, we’ve seen many investors come out to express their surprise and disappointment that they are going to lose money on these defaulted loans, as they were not aware that they had invested in loans from these companies. We continue to think that Mintos investors can generate better long term returns, and significantly reduce their risk, by constructing their own portfolios of loans from the better lenders.
#5 - More defaults are coming
Until recently, Mintos had a very good track record on loan originator defaults. One loan originator defaulted in 2017, and none in 2018. However a look at some of our lender rating scores shows that many low quality/high risk lenders have joined the platform in the last two years. The recent loan originator defaults, and potential defaults were expected. Lending to small, loss making lenders with negative equity balances, and no track record is clearly high risk.
What is our outlook for 2020? We think more defaults will come. Most of them will be not be too surprising to readers of our research, but there is always the possibility that a higher rated lender could also fail. That is mainly because the financial reports provided by loan originators can be poor quality, be too infrequent, and often are unaudited. It is also because lending companies take risks as part of their business model – more loans can default than expected, and funding lines can be lost quickly.
We still think that Mintos investors can construct investment portfolios that offer a good balance of risk and return. However this requires careful selection of lenders, and ongoing monitoring of their performance and risk profile.