Bondora - Legging out of Late Loans in the Secondary Market

By Sam Griffiths on 14th November 2014

Bondora is a peer-to-peer consumer lending platform based in Estonia with over €26m lent to  almost 12,500 borrowers. Transparency is key to building trust in nascent industries, a factor Bondora clearly appreciates. The Platform has made available a large amount of in depth information about its loanbook – matching, and in some areas perhaps surpassing the transparency efforts of the UK’s leader in data provision – Funding Circle.  At the 2014 AltFi Awards Bondora picked up two awards - Consumer Platform of the Year and Alternative Finance Provider of the Year (EU) reflecting its growth and success over the years.

Bondora - Legging out of Late Loans in the Secondary Market

The average gross rate of interest across the Bondora loan book is almost 27%, noticeably higher than those observed on platforms operating in the UK. Funding Circle, for instance, offers an average gross rate of 8.25%. The differential is partly due to a higher risk appetite within the platform’s credit rating model – an appetite which is reflected in the generally higher default rates. The average default rate calculated across all quarters since the platform’s inception is 7.23%, whereas Funding Circle reports an estimated bad debt rate of 4.4%.

Using an Internal Rate of Return analysis across the whole Bondora loanbook shows a return of 15.25% on an equal time weighted basis. This compares to Funding Circle’s IRR of 5.36%. However returns vary significantly from origination quarter to quarter indicating just how much higher risk the model is.

The Bondora platform has an active secondary market, with 7.9% of originated loans having been traded between lenders since the market was launched in March 2013. Unlike some other secondary markets, loans which are behind in their payments can still be traded. There are also no limitations upon the price at which loans can be sold and loans regularly trade at a big discount or premium to par.

Using the information provided by Bondora’s website, Altfi Data has explored the performance of the loans that Bondora has originated. We focussed on the behaviour of those loans that fall behind in their payments.

We calculated the probability of any given loan getting back on track with its payments after having initially fallen behind schedule (rehabilitating) vs. the probability of that loan defaulting. Our results are summarised in the table below.

Ever late (days)

Probability of Loan Rehabilitating

Probability of Default

1

63%

37%

14

44%

56%

30

39%

61%

60

35%

65%

Once a loan becomes late, there is a 37% chance of default. This default probability increases the longer the loan is late and appears to level off once a loan has been late for 30 days.

There are numerous factors which contribute to defaults and loans rehabilitating including changes in personal circumstances and macro economic factors.

The exciting thing about the Bondora Platform is that once a loan does become late, investors still have the chance to sell the loan out of their portfolio. It appears that many investors do take advantage of this - 38% of transactions on Bondora’s secondary market involve loans that are late when they are first put up for sale. However, the discount at which these trades take place is alarmingly small – just 0.35% on average. Armed with the above analysis and the knowledge that the average recovery rate for a defaulted loan on Bondora is 18%, an investor should be able to make informed and enlightened decisions upon the price at which it makes economical sense to cut their losses and sell a late loan on, or to buy a loan that has fallen behind in its repayments. It is not clear that this is happening at the moment.

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