P2P Global’s board say that “2016 was a year of significant challenges, both for the company and its markets. The Board of the company has announced a review of its investment management arrangements, following a year of disappointing performance both on dividend yield and share price. The Board expects to update shareholders on the outcome of this review in due course.”
The fund delivered a NAV return of 4.1% and paid 44.5p per ordinary share in relation to the 2016 calendar year. However, during 2016, the dividend payment was not fully covered by earnings in the final quarter. The share price total return over the period was -15.97% and the shares have traded at discounts to NAV of between -0.13% and -27.71%.
The manager maintained a large cash position to protect the portfolio from the effects of large FX movements. The combination of these events resulted in lower loan income than planned. Cash balances peaked at around 20% of NAV in June.
Gross yields across the portfolio remained relatively stable in 2016. Whilst there was a small increase in US consumer loan gross yields, the prime segment of UK consumer credit saw slight downward pressure. They say that Loans are generally subject to a seasoning effect which is effectively the aging profile of a loan portfolio. Loans have a higher tendency to turn delinquent around the middle of their term.
Looking at the portfolio:
- US Consumer (55.4% of NAV) – Loan vintages from late 2015 and early 2016 marginally underperformed the Investment Manager’s expectations. However, adjustments to the platforms’ credit scorecards and small increases in interest rates helped newer vintages deliver more attractive total returns.
- European Consumer (15.6% of NAV) – Vintage by vintage, loan losses remained stable and within the Investment Manager’s expectations. There were gradual improvements in newer vintages of the riskier credit grades, driven by the continued development and implementation of scorecards. At the same time the prime segment saw yield pressure in the region of 20 to 30bps per annum. This was due to increased competition from traditional lenders.
- Cash balances and liquid bonds accounted for 12.4% of the Company’s portfolio at 31 December 2016.
- European Real Estate (5.1% of NAV) – The Company’s portfolio in this asset class had and currently has no delinquent loans. New issuance is attracting similar yields. The Investment Manager intends to increase allocation to this asset class over time.
- European SME (3.1% of NAV) – The Company’s European SME portfolio performance remained within the Investment Manager’s expectations. For certain older vintages, recoveries are contributing to an improvement in total return expectations.
At the end of 2016, the ordinary share class had a net debt to equity ratio of 82%. The Investment Manager currently has a target gearing ratio between 90% and 110% (net debt to equity) which it expects to achieve over the course of 2017. The Investment Manager further broadened the company’s funding options by entering into a number of new debt facilities in 2016 including the first UK consumer loan securitisation of marketplace lending loans in September 2016 which resulted in a cheaper cost of funding.
P2P : P2P Global management review ongoing