Martins Valters: Deep Dive in the Secondary Market of Mintos

What does nearly 1.5 years of secondary market data reveal?

In this post we will analyze data from secondary market transactions for the period from Mintos’ launch in January 2015 through May 2016. At end of this article we also include a detailed list of secondary market transactions for the above-mentioned period.

Some of our investors have expressed concerns about loan flipping – that some investors buy loans on the primary market and then resell them to other investors in the secondary market by charging a premium and thus turning a quick profit. To address these concerns, we will also review the presence of flipping and what effect does it have, if at all.

Goal of secondary market

The reason Mintos implemented a secondary market from day one of its operations was to provide liquidity for investors at Mintos, especially for those investments made in longer-term loans, such as mortgages and car loans. First, this gives the investors an opportunity to invest in loans with a scheduled payback time that might be longer than the acceptable investment horizon for the investor. Second, the secondary market gives investors the opportunity to exit investments faster in case of an unexpected need to withdraw money from these kinds of investments. In the first part of this post, we will analyze various general indicators about how much liquidity the secondary market has provided during first 1.5 years of operations.

General indicators

1. Transactions by loan originators

When analyzing secondary market transactions by loan originators, we see that a majority of transactions are made for loans issued by Hipocredit and Mogo (62% and 27%, respectively, in terms of total secondary market EUR volume, and 37% and 43%, respectively, in terms of the number of transaction). All other loan originators have a materially smaller share of transactions made through the secondary market. This result is in line with expectations, given that the above-mentioned loan originators are issuing loans that have maturity with more than 12 months.

For loans issued by Banknote, Debifo, Creamfinance and Capitalia, all of which provide shorter-term loans, the secondary market for investors may not be as relevant, unless there is urgent need to exit investments. Two other mortgage lenders  — ACEMA and WestKredit — have joined the Mintos platform relatively recently. To date, the loan supply from these loan originators has been smaller, however, these figures are not yet representative of their impact on the secondary market.

Let’s move on to analyze which duration of loans is being traded most frequently.

2. Term of loans traded

In the graph below you can see data for Mogo and Hipocredit about transactions made in the secondary market, arranged based on which term bucket the initial duration of the loan falls in.

Data for Mogo reveal that around half of the trades (both in terms of number and value) have been made for loans that have an initial maturity of 60 months or more. Loans with maturity of three years or more makes up 2/3 of total transactions. The same data for Hipocredit reveal that close to 80% of transactions have been made for loans with a maturity of five years or more, while 90% of all secondary market transactions have been made for loans with a maturity of three years or more. This analysis shows that there are both investors looking to sell these types of loans, but, more importantly, that there is demand for buying longer-term loans.

Next, let’s look at the price levels at which these transactions are made.

3. Premium/discount for the loans traded

As can be seen from the data below, most of transactions are taking relatively close to par value. Discounted loans are sold, on average, at a 1% discount, while loans sold at premium are sold with an average premium of 3%. This represents EUR 17,000 in total profit obtained by sellers, which is not a significant amount of the total value of secondary market transactions.

What can we conclude?

First, secondary market transactions are taking place mostly with Hipocredit and Mogo loans, which are longer-term loans, rather than with loans, which have an initial due date of less than one month.  This is in line with expectations. As the loan supply from other longer-term loans increases, e.g. from mortgage lenders ACEMA and WestKredit, it will be interesting to see if secondary market activity for these loans picks up.

Second, activities in the secondary market for these loans is significantly skewed towards loans with longer maturities (i.e. 60+ months). We are very pleased with these results, which indicates that investors experiencing a change in their investment horizon, are able to sell loans to other investors.

Third, around half of these loans have been sold at par value or a small discount.  This is good news for investors who want to exit their investments, showing it can be done quickly and at little cost. The remaining half of loans are sold at a premium — the average premium is 3%. Given that this primarily affects loans that are for periods of 60+ months, the effect on the expected yield of the loan is relatively small.

Flipping and secondary market

Together, slightly more than 1,100 investors have sold loans on the secondary market, and just shy of 1,700 investors have purchased loans on the secondary market. This is a reasonable amount of investors who have participated in secondary market transactions. Digging into the details, we see that a small number have made significant amount of trades on the secondary market — the 20 largest investors, based on the amount of secondary market transactions, make up 62% of loans sold on the secondary market. Do the largest investors rule the secondary market by flipping loans to other investors? Not necessarily — when looking at gains made, these investors have charged an average premium of 1,2%. Moreover, among the largest 20 investors on the secondary market, a handful have sold loans on average at a discount, which indicates there have been other reasons for entering secondary market. Close to 96% of investors who have dealt in the secondary market are investors whose cumulative transactions in secondary market range from a few euros to EUR 3,000, which is approximately the average investment on the Mintos platform.

A similar tendency can be observed when analyzing investors who have bought loans on the secondary market. The top 20 investors, based on transactions done in the secondary market, have purchased around 47% of all transactions on the secondary market, paying a 1,2% premium on average. In terms of the number of investors, 97% of investors have made purchases in the secondary market ranging from a few euros to EUR 3,000.

Though there are a few “power” investors in the secondary market who take chunk of all transactions, when looking at average premiums charged or paid, they are not significantly different from other transactions taking place in the market. Additionally, large investors are also selling at a discount.

Concluding remarks

We firmly believe that transparency is one of the cornerstones of peer-to-peer lending. Thus, as part of this blog post, we are also making available a detailed transaction list of the secondary market that can be found below. The goal of this is to make any claims in this piece verifiable or challengeable, as well as to invite our investors and other interested parties to analyze these data from different angles. The data are for the period of January 2015 through May 2016. For data protection purposes, investor IDs have been replaced with investor IDs in sequential order.

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Martins Valters is the CFO and Co-Founder of Mintos. He is a strategist, leader and advisor, who blogs about the company’s growth strategy and analysis of the data, that way helping investors understand the cross-sectional functions of the company.


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