Author Topic: Changes to Interest Rate and Expected Return  (Read 17802 times)

Lloigor

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Changes to Interest Rate and Expected Return
« on: June 20, 2013, 02:27:30 PM »
This week LC adjusted the interest rates on various grades.  I think A is unchanged, some in the B-D range were lowered, but the ones on the "junk" side of the spectrum got higher.  And when purchasing new notes in the D-G range their "expected default" rates are significantly higher.  It has moved my "expected return" numbers offered by LC from around 13% to around 10%, despite the higher rates.  Anyone know how they come up with those numbers and if I should care?

joshh

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Re: Changes to Interest Rate and Expected Return
« Reply #1 on: June 20, 2013, 04:15:22 PM »
Yes, I noticed changes to the expected default rate, but not to the charged interest rates.  It started late 6-18 or early 6-19.  I archive off the browseNotes.csv files and these are the differences I'm seeing in expected default rate:

--Credit Grade-- --Old Expected Default Rate-- --New Expected Default Rate--
A10.750.85
A20.951.05
A31.351.40
A41.551.70
A51.752.00
B12.302.45
B22.82.85
B33.23.3
B43.53.6
B53.73.9
C13.854.25
C24.154.7
C34.45.2
C44.75.7
C54.956.3
D15.36.95
D25.557.6
D35.78.15
D45.98.8
D55.99.4
E16.759.8
E2710.1
E37.3510.25
E47.610.55
F18.2511.4
F28.5111.8
F38.7912.1
F48.912.4
F58.9512.6
G19.6512.8
G29.7512.85
G39.9112.95
G410.113.0
G510.213.05

I'd expect LC to constantly be refining these expected default rates, but the amount of the increase does surprise me. 
« Last Edit: June 20, 2013, 04:25:39 PM by joshh »

LonghornSF

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Re: Changes to Interest Rate and Expected Return
« Reply #2 on: June 20, 2013, 05:35:44 PM »
As long as LC has investors throwing money at them and not enough borrowers, you should expect interest rates on a risk-adjusted basis to continue decreasing.

berniemadeoff

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Re: Changes to Interest Rate and Expected Return
« Reply #3 on: June 20, 2013, 06:06:44 PM »
As long as LC has investors throwing money at them and not enough borrowers, you should expect interest rates on a risk-adjusted basis to continue decreasing.

Don't bet on it.  At the pace that interest rates are rising, smart investors (institutions) will look for better yield elsewhere.

Rob L

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Re: Changes to Interest Rate and Expected Return
« Reply #4 on: June 20, 2013, 06:16:50 PM »
+1 Treasury yields have been screaming upwards. 10Y has gone from 1.68% to 2.42% in less than 8 weeks. 30Y from 2.8% to 3.5% same time frame.

Cries

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Re: Changes to Interest Rate and Expected Return
« Reply #5 on: June 20, 2013, 07:09:11 PM »
+1 Treasury yields have been screaming upwards. 10Y has gone from 1.68% to 2.42% in less than 8 weeks. 30Y from 2.8% to 3.5% same time frame.
this.  however, I would love to hear from a LC representative on the topic of how they are adjusting yields on notes to reflect changing treasury yields.

berniemadeoff

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Re: Changes to Interest Rate and Expected Return
« Reply #6 on: June 20, 2013, 07:51:09 PM »
+1 Treasury yields have been screaming upwards. 10Y has gone from 1.68% to 2.42% in less than 8 weeks. 30Y from 2.8% to 3.5% same time frame.
this.  however, I would love to hear from a LC representative on the topic of how they are adjusting yields on notes to reflect changing treasury yields.

Well they shouldn't act too hastily, imo.  There's probably some overreaction and to be fair, we should probably be comparing to a benchmark with lower duration, whose yields haven't moved as much. More importantly, it seems as though money is piling out of these fixed income assets into cash... and next move is into equities I'm guessing.  It will be interesting to see appetite for p2p loans in such an environment.   

Ignoring the overall impact of interest rates, I think LC may need to adjust rates to reflect the much higher default rates posted above.  If returns prove to be much lower than the average~ 8% as advertised, they will be forced to make changes to the model or face angry investors...
« Last Edit: June 20, 2013, 08:04:28 PM by berniemadeoff »

LonghornSF

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Re: Changes to Interest Rate and Expected Return
« Reply #7 on: June 20, 2013, 07:53:47 PM »
As long as LC has investors throwing money at them and not enough borrowers, you should expect interest rates on a risk-adjusted basis to continue decreasing.

Don't bet on it.  At the pace that interest rates are rising, smart investors (institutions) will look for better yield elsewhere.

I'd love to know what fixed income investments you can find that yield 10%+ after credit losses. Even if interest rates on bonds go up another 300bps the risk-adjusted return on LC loans is still excellent. That's why institutional money is beating down the door.
« Last Edit: June 20, 2013, 07:59:12 PM by LonghornSF »

berniemadeoff

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Re: Changes to Interest Rate and Expected Return
« Reply #8 on: June 20, 2013, 08:03:57 PM »
As long as LC has investors throwing money at them and not enough borrowers, you should expect interest rates on a risk-adjusted basis to continue decreasing.

Don't bet on it.  At the pace that interest rates are rising, smart investors (institutions) will look for better yield elsewhere.

I'd love to know what fixed income investments you can find that yield 10%+ after credit losses. Even if interest rates on bonds go up another 300bps the risk-adjusted return on LC loans is still excellent. That's what institutional money is beating down the door.

Do we even know how to measure the risk of these loans... apparently LC doesn't with the changes they're making to expected default rates.  There are other areas of the credit markets that do offer these kinds of yields (small business loans, consumer credit, certain tranches of structured products), but have been around a lot longer and get rated by ratings agencies. 

viking

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Re: Changes to Interest Rate and Expected Return
« Reply #9 on: June 20, 2013, 09:24:56 PM »
Have Lending Club published how they calculate the Expected Default Rate?

Cries

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Re: Changes to Interest Rate and Expected Return
« Reply #10 on: June 20, 2013, 11:28:57 PM »
Can someone post a link to the lending club yields by note grade?  Having trouble finding it :(

viking

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Re: Changes to Interest Rate and Expected Return
« Reply #11 on: June 21, 2013, 12:21:05 AM »
Can someone post a link to the lending club yields by note grade?  Having trouble finding it :(
https://www.lendingclub.com/public/how-we-set-interest-rates.action

rawraw

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Re: Changes to Interest Rate and Expected Return
« Reply #12 on: June 21, 2013, 03:55:19 AM »
As long as LC has investors throwing money at them and not enough borrowers, you should expect interest rates on a risk-adjusted basis to continue decreasing.

Don't bet on it.  At the pace that interest rates are rising, smart investors (institutions) will look for better yield elsewhere.

I'd love to know what fixed income investments you can find that yield 10%+ after credit losses. Even if interest rates on bonds go up another 300bps the risk-adjusted return on LC loans is still excellent. That's why institutional money is beating down the door.
What I've noticed in my life is we as people get greedy.  Whether it be investments or reward credit cards -- we want things to just pay the most possible and never ever change.  But I agree with you Longhorn -- while there are areas that could have 10% yields, the risk profiles will still be different.  But there will be more competition at least.


Randawl

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Re: Changes to Interest Rate and Expected Return
« Reply #14 on: June 21, 2013, 05:30:28 PM »
Can someone post a link to the lending club yields by note grade?  Having trouble finding it :(

Here is a link to the trends of reported yields over the last 5 months:

http://www.lendacademy.com/forum/index.php?topic=845.msg4790#msg4790