The Mintos CEO answered some excellent questions from investors
On Friday the Minto CEO Martins Sulte hosted a ‘ask me anything’ interactive webinar. If you missed it, a playback of the webinar is available. We think this was an excellent idea in the current uncertain environment. Mr Sulte answered every question put to him, including some which were clearly difficult or sensitive. We hope that he continues to host events like this.
For Mintos investors, many of the answers were extremely interesting. Many things were disclosed for the first time about Mintos and various loan originators. We realise that many of you do not have the time right now to spend 2 hours watching a webinar, so we have listed below some highlights, and our thoughts on how it could affect you.
How is the COVID-19 crisis impacting Mintos?
- Operating costs cut by 40%
- No bonuses for new investors
- 'Zero based' budgeting approach
- Management questioned "every assumption" about the business
- 45 staff terminated
Martins Sulte and his team appear to have reacted very quickly to the change in situation resulting from COVID-19. Mintos had hired 140 new staff in the last year. These hires were made on an assumption that strong growth was likely to continue. Mintos has acted very quickly now that it is clear that this growth will not continue in the near future. Mr Sulte disclosed that their current revenue ‘run rate’ is €10m to €12m, and they have cash reserves of €3.6m. This is estimated to give Mintos 15-18 months ‘runway’ (the period before new capital or debt funding would be needed to be found).
We think that taking these early, sensible actions is very positive for Mintos and its investors. In any case we don’t see much risk that Mintos would be unable to raise new capital if they need it during the next 12 months. We still think the ‘platform risk’ is low. Why? Firstly because Mintos has significant value, being the largest European P2P site, and it would not be difficult to find investors to inject equity, even if it was experiencing some short term issues. Secondly, the funding that Mintos provides has very large strategic value to many of the loan originators (‘LO’s’) that list loans on the site. Many would be willing to invest new funds into the business if it was required. In addition, there is overlap between the shareholders of Mintos and the shareholders of many of the LO’s.
How are LO's responding to COVID-19?
- Protect safety of staff
- Reducing lending
- Plan to cut costs
- Tightening credit criteria
- Proactive engagement with borrowers
- Some will be more impacted than others
- Reduced marketing spend
Martins Sulte was asked many questions about the impact of COVID-19 on the loan originators. The actions he listed were those we were expecting to hear, and sensible. When times are uncertain, lenders need to be much more conservative with their lending decisions, and cut their own operating costs. It is inevitable that funding will be more expensive and scarce. Lenders will increase their interest rates, and reduce their overall lending. An interesting point Mr Sulte made was that funding costs were only around 20% of the total costs for many of the Mintos LO’s. That means that they can afford to pay more to Mintos lenders and still have a viable commercial model.
What was the bad news?
- "Delusional to think that COVID-19 will not cause problems for loan originators"
- "Some LO's will go out of business"
- LO's that use branches to issue and collect loans at most risk of being impacted
- FX movements (such as Ruble devaluation) could affect some LO's
- Poor quality and irregular financial reporting by LO's is not going to be solved any time soon
Martins Sulte was impressively honest in his outlook relating to the impact that COVID-19 could have. He acknowledged that it will of course cause problems, and likely lead to some LO’s going out of business. In particular, we got the feeling that the LO’s most at risk were those that used less technology (particularly branch based lending and collections), particularly if these countries also experience lock-down quarantine restrictions.
One investor noted that there had been a devaluation of the Russian ruble recently, and asked whether this could cause problems for lenders in this country. Here the answer was less convincing to us. Mr Sulte said that some lenders hedged their currency exposures, but that some may be affected by this. Currency risk is something we have highlighted in our country risk ratings, particularly because none of the LO’s disclose whether they are hedging the currency risk they run from borrowing in euro and lending in foreign currencies.
What was the good news?
- Rating system to be improved
- More options to be added to the Invest & Access product
- Mintos still plans to get their Electronic Money Institution licence
- Most lenders are "well positioned" to deal with the COVID-19 impact
Mr Sulte provided several updates on improvements that are planned for 2020. This includes a new rating system that will consider three different aspects – operational quality, financial strength, and “quality of loan supply”. The Invest & Access product will give people more options surrounding target yield, rating levels and diversification. He confirmed that Mintos still planned to get its EMI licence, which will allow people to deposit funds into virtual bank accounts that are held in their name (increasing the security of investor deposits).
Many investors were concerned about pending payments
- Steps are being taken to reduce 'pending payment' levels, including introduction of late payment penalties
- Lenders have to pay penalties to Mintos if they are late in submitting funds
- Increase in pending payments linked to outstanding balance of loans falling
- Target is to reduce average pending payment duration to 3-5 days, rather than 6.
Many questions focused on the increase in ‘pending payment’ levels. Pending payments are payments received by the loan originator and not yet forwarded to Mintos. Investors were concerned that higher pending payment levels were a sign of financial distress of certain LO’s. The explanation provided for this trend made sense to us. Mr Sulte noted that because many LO’s now have less loans outstanding than a few weeks ago, they are in a position where they need to remit funds back to Mintos. When their portfolios were growing this does not need to happen. For various operational reasons many LO’s can only remit to Mintos on a weekly basis. There was also an increase in overall pending payments because one LO (Finko) made an error in their reporting of loan status, which led to a high level of reported pending payments. We think it’s a positive step that Mintos investors now receive 1.2x the loan interest for pending payments submitted later than 7 days. It is clear that Mintos management are aware of how sensitive this topic is for Mintos investors.
There was some discussion about individual LO's
- Akulaku relies on physical branches and is at risk of disruption if COVID-19 becomes a major problem
- Monego liquidators should make their first distribution in April
- Finko has no liquidity issues and reported good results for 2019
- ID Finance is an online lending business and should have less interruptions than others from COVID-19
- Sun Finance had a strong 2019. It is cutting costs and looking to grow market share
- Peachy administrator has collected £700k, and Mintos is working towards recovering funds
We have summarised opposite the key points coming out of the discussions about individual loan originators. Many of the comments were similar for each loan originator, in that they were able to continue operations even during quarantine conditions, and that 2019 had been a strong year. Conversely Akulaku was provided as an example of an LO that might face challenges, as it relied on face to face operations at branch locations. We think this is something that investors have not paid much attention to so far, and we would not be surprised if investors favoured online lending businesses over those with a heavy reliance on physical locations and operations.
We hope more P2P sites do these types of event
We thought that the webinar was a useful event for investors. Mr Sulte did not skip any questions and provided some interesting new information and insights. If you have a large position in Mintos we encourage you to watch the replay. Transparency and communication becomes particularly important during volatile markets and situations. Hopefully the management teams of other sites will host similar events in coming weeks. We think it is a very cheap and effective way of building trust and confidence.
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And now let’s be objective and forensic, and keep our common sense. It’s nice to hear all the reassurances and speeches from both LO and Mintos, but the irrefutable fact remains:
1 / n are loans purchased after more than 60 days maturity and the volume of these loans in this item grows day by day
2 / loans in pending payments are not purchased and this volume has increased by about 6 times in the last days
3 / Mintos unilaterally stops the secondary market and loan offers from some originators
Thus, everything in point 1-3 demonstrates real problems both on the part of the originators and on the Mintos side. All the items in points 1-3, if I am not mistaken, prove a breach of contractual terms, whether between the originator and the investor, there between Mintos and the investor.
Talking about how agents cannot pay for this or that for Covid 19, or how loans have increased in pending payments at Finitery for IT error are just a reassurance and falsehood to investors. Finitera has recently divided its companies, precisely to separate the risky part, which suddenly does not pay back. If the originators want to tell us that they do not pay for slow money transfers, it is again a reassurance and untruth, because nothing prevents them from electronically transfer money within 1-3 days in the framework of bank transfer, so the fact remains that they can not or even do not want to pay He transfers his obligations and risk to investors and, under various pretexts, postpones the fact of paying his obligations!
I suggest you elaborate on ” what happened after next? “. While most investors were worried about Finko, he confirmed that there is no issue in payments, they are solid on business. We hear 4 days after that Finko’s operations were stopped in Armenia (60% of business). So it was not an error of submission or IT glitch. Indeed there was a problem with Finko since Dec’19. While during this time Mintos promoted Finko with cashback and forward flow loans. Not cool to have CEO covering up this especially in a call like this.
Hi Oscar,
What are your thoughts about mintos, now that Varks.am is dead in the water, seems pretty bad times for P2P.
No big concerns about Mintos. They will easily be able to raise more capital if they need to, as their business is now quite valuable. As for Varks – see our comments on our Mintos lender ratings page.
Great initiative! And great post as well, thank you!
Thank you very much for your posting. As always a pleasure to follow you.
May I ask a question concerning Finko´s “Forward Flow ” loans.
I think the idea is good but I have heard noch much about it. Can you share your thoughts on this?
Thank you and stay healthy,
Gabriel
Hi Gabriel. This type of structure is actually pretty common for institutional investors. This is one of the first times we have seen it for individual investors. There are some benefits to forward flows such as higher rates you receive, and keeping your money invested. The downside is that your money is locked up with that LO, so if rates increase, or you want to take your money away from that LO, there is a delay in being able to do it. Overall if you are comfortable with that LO it can be a good option.
Thank you very much Hans for tjis detailed call review.
All in all, do you still consider that Mintos is a platform where we should continue to invest in (taking the precautions lists in your article of last week : type of loan, risk rating + ExplorerP2P score, etc…) ? I.e. : should we leave our auto-invest active and running ?
Or do you think we should pause it temporarily for several weeks, waiting to see how the situation evolves ?
As always, thank you for your wise advices 🙂
Centrino
Hi, thanks for the feedback. Do we still think Mintos is a good platform and will survive the challenges ahead? Yes. We can’t really say if it is the correct thing for you to keep investing in as an individual because we can’t provide financial advice. One tip though – if you choose to invest, it may make sense if you have some spare time to use the secondary market. You will probably find better opportunities there in the coming weeks than the primary market. Always remember that LO’s can buy your loans back at zero premium whenever they want. So if you want to lock in the currently high returns, you are better off buying loans at a discount, than buying loans at par on the primary market. If your loan gets bought back, you will earn the discount, plus the interest. Hope this makes sense.