Alternative Lending. Presentation prepared for Merrill Lynch. Risk Analysis

Transcription

1 Alternative Lending Presentatin prepared fr Merrill Lynch Risk Analysis

2 Intrductin December 30, 2015 Characterizing urselves as risk-averse, cnservative, chickenhearted, and wrry-warts is quite accurate. Hwever, we still seek a return n ur investments. This yin-yang balance is what has made us believers in alternative lending as an investment, but nly by way f a diversified apprach. While the prjected 8 10% yield is attractive, we hpe the attached summary slides, which explicate ur views n default risk in five lan/investment segments will give yu cmfrt with this space. Presentatin prepared fr Merrill Lynch Cpyright 2015 Shinnecck Partners L.P. All rights reserved. Fr exclusive use by clients f Shinnecck Partners. Shinnecck Partners

3 Table f Cntents Cnsumer Lending (unsecured).. Cnsumer Lending (secured) Small Business Lending... 6 Real Estate Lending Trade Finance... 8 Life Settlements Presentatin prepared fr Merrill Lynch Appendices..... Cpyright 2015 Shinnecck Partners L.P. All rights reserved. Fr exclusive use by clients f Shinnecck Partners. Shinnecck Partners

4 Cnsumer Lending - Unsecured Crrelatin t Ecnmic Cycles Highly crrelated t unemplyment rate Analgus t credit card lending Lan Default Risk and/r Cllateral Impairment Risk f rising defaults if lwer credit brrwers becme unemplyed Sub-Manager Mitigating Factrs Investment r Lan structure: big data analytics are used t evaluate brrwer credit wrthiness. Lending platfrm lans are f higher credit quality than credit card lans Hedging: bservably undertaken by increasing average credit quality (frm cash flw turnver) as unemplyment rises Return vs. default risk: rising defaults buffered by high interest rates charged t brrwer Sectr Histrical Experience: see appendix A fr sectr experience using credit card debt as a prxy Presentatin prepared fr Merrill Lynch Sub-Manager Histrical Experience: Lending Club lans riginated in 2008 and 2009 delivered psitive net returns f 2.3% and 5.3% respectively, ntwithstanding unemplyment spiking Cpyright 2015 Shinnecck Partners L.P. All rights reserved. Fr exclusive use by clients f Shinnecck Partners. Shinnecck Partners 4

5 Cnsumer Lending - Secured Crrelatin t Ecnmic Cycles Uncrrelated t unemplyment Mild crrelatin t macr factrs given idisyncratic nature f the lans and brrwer prfiles Lan Default Risk and/r Cllateral Impairment Lw risk f default due t tangible asset cllateralizatin Cllateral value may depreciate in ecnmic dwnturn Sub-Manager Mitigating Factrs Investment r Lan structure: Lw LTVs f 15% - 40% t cver 60% - 85% asset depreciatin Lender maintains pssessin f cllateral when pssible Hedging: cnservative cllateral valuatins Return vs. default risk: lw default risk allws fr mdest leverage t increase returns Sectr Histrical Experience: varies by niche, generally lw defaults due t high cllateralizatin Presentatin prepared fr Merrill Lynch Sub-Manager Histrical Experience: n defaults, lwer base yields than unsecured cnsumer lans Cpyright 2015 Shinnecck Partners L.P. All rights reserved. Fr exclusive use by clients f Shinnecck Partners. Shinnecck Partners 5

6 Small Business Crrelatin t Ecnmic Cycles Small business lans are highly crrelated t ecnmic cycles due t decreased cash flws as demand falls and sales decrease Smaller brrwers have superir perfrmance ver larger brrwers Lan Default Risk and/r Cllateral Impairment Lw risk f default: defensive lan structuring Mdest risk f asset impairment: cllateral varies frm hard assets t cmpany equity Sub-Manager Mitigating Factrs Investment r Lan structure: Typically structured t put lender in a senir secured psitin with negative cvenants t priritize brrwer payments, cash cntrls, and ften a persnal guarantee. Negative cvenants include additinal equity upside in the case f late payments Hedging: shrt duratin f six 18 mnths Return vs. default risk: high returns with a lw default rate Presentatin prepared fr Merrill Lynch Sectr Histrical Experience: see appendix B fr third party data n histrical default rates Sub-Manager Histrical Experience: generally lw default rates thrugh careful mnitring and restructuring f defaulted lans. On an asset-weighted basis, mst defaults in small business prtflis have had 100%+ recveries Cpyright 2015 Shinnecck Partners L.P. All rights reserved. Fr exclusive use by clients f Shinnecck Partners. Shinnecck Partners 6

7 Real Estate Crrelatin t Ecnmic Cycles Residential lans are crrelated t unemplyment Treasury-rate sensitive Lan Default Risk and/r Cllateral Impairment Lw risk f default: highly cllateralized Risk f cllateral impairment: real estate values can be cyclical Sub-Manager Mitigating Factrs Investment r Lan Structure: 40% - 60% LTVs Third-party valuatin f underlying prperty Hedging: shrt duratin f ne t three years Return vs. default risk: mderate returns with a lw default rate allws fr mdest leverage Sectr Histrical Experience: see appendix C fr sectr default data Presentatin prepared fr Merrill Lynch Sub-Manager Histrical Experience: Favrable actual data: 0.84% average mnthly return frm 2008 t 2009 N defaults during the recessin Cpyright 2015 Shinnecck Partners L.P. All rights reserved. Fr exclusive use by clients f Shinnecck Partners. Shinnecck Partners 7

8 Trade Finance Crrelatin t Ecnmic Cycles Uncrrelated market size expands and cntracts as glbal trade des, but individual lans are nly mdestly affected Lan Default Risk and/r Cllateral Impairment Lw risk f default due t transactin necessity Mderate risk f crss-brder buyer defaults Sub-Manager Mitigating Factrs Investment r Lan Structure: 75% average LTV Hedging: Very shrt duratin f three t nine mnths Futures cntracts can lck in cllateral value, prtecting against cllateral impairment shuld buyer default Return vs. Default Risk: mderate return with a lw default rate allws fr mdest leverage Presentatin prepared fr Merrill Lynch Sectr Histrical Experience: see appendix D fr histric trade data Sub-Manager Histrical Experience: Favrable actual data: 0.75% average mnthly return frm 2008 t 2009 N defaults during the recessin Cpyright 2015 Shinnecck Partners L.P. All rights reserved. Fr exclusive use by clients f Shinnecck Partners. Shinnecck Partners 8

9 Life Settlements Crrelatin t Ecnmic Cycles Mrtality f insured unrelated t ecnmic activity Crrelated t life expectancies rising lngevities increases transactin csts (i.e., mre mnthly premium payments) Lan Default Risk and/r Cllateral Impairment N risk f default Mderate risk f inslvency investr must cntinue paying premiums t maintain the plicy Small risk f flawed plicy purchases given re-regulatin f industry Presentatin prepared fr Merrill Lynch Cpyright 2015 Shinnecck Partners L.P. All rights reserved. Fr exclusive use by clients f Shinnecck Partners. Shinnecck Partners 9

10 Life Settlements (cnt.) Sub-Manager Mitigating Factrs Investment r Lan Structure: Strategy des nt use leverage, which wuld increase cash flw risk Average insured is 85 years ld, with a 65-mnth life expectancy All plicies purchased after tw-year perid f insurance cmpany cntestability has ended Next-f-kin agreement dcuments that the plicy seller was aware f his r her actins decreases risk f inheritance litigatin Guaranteed buyback by sub-manager f any flawed plicy purchases, backed by significant prprietary capital Third-party quality actuarial analysis & prtfli valuatin Hedging: Credit facility and cash reserves allwing fr 18 mnths f premium payments withut new capital inflws r realized death benefits Nearly 1,000 plicies in the prtfli diversificatin allwing applicatin f the law f large numbers Return Presentatin vs. Default Risk: high prepared return with cntrlled fr Merrill risk f inslvency, Lynch plicy cntestatin r litigatin Cpyright 2015 Shinnecck Partners L.P. All rights reserved. Fr exclusive use by clients f Shinnecck Partners. Shinnecck Partners 10

11 Life Settlements (cnt.) Sectr Histrical Experience: Between late 2008 and early 2009 sme life expectancy prviders revised their life expectancy estimates upwards by 25% - 30%, reflecting the grwth in experiential data available t underwriters. Tday, adjustments are mre frequent, aviding substantial mves Persistent high unemplyment after 2008 increased the number f plicyhlders cnsidering life settlements. Investr capital was unable t meet the rise in demand. Rising unemplyment leads t the need fr alternative incme, including the sale f life plicies, increasing cnsumer demand Sub-Manager Histrical Experience: Sub-manager Mnte Carl simulatins n actual hldings after a 20% life expectancy extensin shwed an estimated annualized net return f 6.0% with 1.8% annualized standard deviatin and a 20% life expectancy extensin 97% f simulatins shwed net annualized returns in the range f 4.7% t 11.9%, with zer simulatins shwing negative grss returns Presentatin prepared fr Merrill Lynch Histrical annual net returns have ranged frm 7.6% t 11.3%, with nly fur dwn mnths ttaling (1.7%) Cpyright 2015 Shinnecck Partners L.P. All rights reserved. Fr exclusive use by clients f Shinnecck Partners. Shinnecck Partners 11

12 Appendix A: Cnsumer Unsecured Debt Histry f Psitive Returns Marketplace-riginated cnsumer debt is similar t credit card debt, but with higher average credit scres Credit card debt has been prfitable ver multiple credit cycles, including 2008 and 2009 Presentatin prepared fr Merrill Lynch Surce: Federal Reserve G.19 Cnsumer Credit Reprt, February 2015 Cpyright 2015 Shinnecck Partners L.P. All rights reserved. Fr exclusive use by clients f Shinnecck Partners. Shinnecck Partners 12

13 Appendix B: Small Business Defaults in 2008 and 2009 Small business defaults rse t 5% - 6% between 2008 and Grss yields f 10% - 22% at the sub-manager level can absrb increased defaults withut principal impairment. Presentatin prepared fr Merrill Lynch Surce: PayNet 2014Q1 Small Business Ecnmic Outlk PayNet maintains the largest database f small business lans, leases, and lines f credit, encmpassing ver 23 millin cntracts and mre than $1.3 trillin in bligatins Cpyright 2015 Shinnecck Partners L.P. All rights reserved. Fr exclusive use by clients f Shinnecck Partners. Shinnecck Partners 13

14 Appendix C: Lng-term histry f cmmercial real estate lending Cmmercial real estate lans experience a rapid increase in delinquencies in the great recessin, but charge-ffs (the percent f principal impairment) remained relatively lw due t high recveries frm cllateral sales, despite weak husing markets Niche mney managers with purpse built rganizatins can hedge the risk f rising chargeff rates thrugh lwer lan-t-value ratis and third-party valuatins Presentatin prepared fr Merrill Lynch Cpyright 2015 Shinnecck Partners L.P. All rights reserved. Fr exclusive use by clients f Shinnecck Partners. Shinnecck Partners 14

15 Appendix D: Trade Finance Recessinary Capacity Thugh the Great Recessin did nt impact individual trade finance lans, exprt markets cntracted leading t a dearth f pprtunities t deply capital Niche managers with lwer target lan sizes can perate at a smaller scale than large banks that need t deply large amunts f capital per lan t be prfitable. Presentatin prepared fr Merrill Lynch Cpyright 2015 Shinnecck Partners L.P. All rights reserved. Fr exclusive use by clients f Shinnecck Partners. Shinnecck Partners 15