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?
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?
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?
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?
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
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
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.