TrustBuddy: Fundamental analysis

About TrustBuddy

TrustBuddy is the world’s first publicly traded peer-to-peer lending company, according to their website. It was founded 2009 in Norway and is listed on NASDAQ OMX First North in Stockholm, Sweden, since 2011. Their business model is to broker loans between private and institutional lenders and private borrowers, and thus, they do not carry any loans in their own books. The borrowers pay interest to the lenders and fees to TrustBuddy.

TBDYlogos

TrustBuddy has three brands; TrustBuddy, Crowdfunding Society, and Geldvoorelkaar. TrustBuddy operates mainly in Sweden, Norway, Denmark, and Finland with Consumer Short-Term Lending, i.e. loans sized between 2 500 – 10 000 SEK, and has also small operations in Spain and Poland. Geldvoorelkaar, which Trustbuddy acquired during 2014, operates in the Netherlands and offer long-term SME loans (Small to Medium-sized Enterprises) to companies, without any upper limit besides what the platform’s lenders can offer. On Geldvoorelkaar, borrowers pay interest to both the platform and the lenders. Both individuals and companies can be lenders.
The third brand, Crowdfunding Society, will offer long-term SME loans like Geldvoorelkaar, but in Sweden, Finland, and Denmark. Although, is has not been announced, we expect Crowdfunding Society will be launched within the next 12 months at latest.

Past Performance

Trustbuddy’s lenders earn interest from the borrowers. Depending on what country and year you look at, the yearly return for the lenders has been between 2 % to 16 %. Trustbuddy has gone from brokering loans worth around 70 MSEK in 2011, worth 260 MSEK in 2012 to 827 MSEK in 2014, clearly indicating they are still in a heavy growth phase. But when something grows fast it usually suffers some growing pains, which is also the case with Trustbuddy. Although they seem to generate satisfying returns to their lenders, lenders have encountered issues when withdrawing their savings from the platform. Several lenders have aired their concerns on different public online forums. The biggest forum thread is now found on the Swedish Flashback Forum, where TrustBuddy has created their own official thread to gather questions and discussions in one place as they have observed, according to their first post, that several threads concerning the company has popped up on that forum in general. You can only withdraw money which is currently not lent to anyone. This means, once you want to withdraw, you must deactivate new lending and then wait a varying number of days as the lent out money is paid back by the borrowers. A loan can be extended to a total time of maximum six months. After that the borrower has to pay back the whole loan. According to a company presentation dated November 2014, a majority of the loans are paid back within 90 days. Some lenders seem not to have realized this when they signed up and has thus led to some annoyance as they expect the money should be possible to withdraw within a few days. This leads us to their next issue, Credit Losses.

In a letter which TrustBuddy sent to their lenders, dated July 8th 2015, they describe what changes the company currently is going through. They are in short; New Board to increase professionalism, operational cost-reduction program, a new credit scoring-engine, and new debt collection routines. This letter mentions that they had loans at that time worth 220 MSEK which had went past due and further on to debt collection. That is close to the brokered loan amount that they performed during the first quarter in 2015 which was 232 MSEK. Worth noting is that this amount of 220 MSEK has aggregated during a longer period. The aggregate brokered amount of loans during 2012 through 2014 was roughly 1,6 BSEK. In that sense, around 15% of the brokered amount has gone bad. Based on the letter and the comments on Flashback, the bad loans have reached a critical level where some lenders have more than half of their savings tied up to non-performing loans, i.e. where the borrower has stopped paying. Those lenders also mention how they have stopped new lending in order to be able to withdraw their savings, but that even though some have done that over a year ago, just a few percentage of their savings have come back. In a pressrelease dated May 7th 2015, TrustBuddy announces their withdrawal from the short-term lending market, i.e. TrustBuddy’s initial core market, to instead focus on SME (Short to Medium sized Enterprises) and long-term consumer lending. One can suppose their experiences from short-term lending has proven it to be too difficult to keep it as a sustainable business model.

Licenses

TrustBuddy applied for a Credit Facilitator License from FI (Finansinspektionen, i.e. the Swedish Financial Supervisory Authority) in March 2013 in order to integrate themselves further into their business chain. According to their pressrelease, this license would make them able to conduct the debt collection themselves instead of outsourcing this to a third party. They were denied their license in June 2014 by FI. Main issues for the decision were; the disclosure and aftermath of the reversed merger of Trustbuddy and TrustBuddy International AB in 2013, the management’s lack of relevant experience from managing a credit institution, TrustBuddy’s way of conducting business in Denmark and Norway without proper licenses, and insufficient operational documentation. Since then, TrustBuddy has nominated and later decided for Simon Nathanson as a new Chairman of the Board as well as three other names as board members, Tove Mette Dramstad, Torsten Örtengren, and Søren Brinkmann. What they have in common is that they all have upper management-level experience from the financial industry according to their LinkedIn-pages. Simon Nathanson from Nordnet Bank, NASDAQ and Mangold Stock Brokerage among others. Tove Mette Dramstad from Jernbanepersonalets Sparebank, Torsten Örtengren from NASDAQ, and Søren Brinkmann from Copenhagen Cooperative Bank together with his seasoned lawyer background. These new board members strengthens TrustBuddy with experience from the financial sector, which FI earlier had proved they were lacking. Between the nomination and the following decision, Eivind Jørundland, former Chairman of the Board, was not elected into the board whereas Søren Brinkmann who got elected into the Board, was not among the nominated named earlier.

It is a negative sign that the Swedish Financial Supervisory Authority has had so many remarks on TrustBuddy’s organisation in relation to the license application. This indicates a lack of professionalism among management. On the other hand, recruiting Simon Nathanson from Nordnet Bank can be seen as a positive sign. He has the experience that the Swedish Financial Supervisory Authority has remarked on earlier. Maybe he envisions a good upside in TrustBuddy as he had the courage to leave Nordnet for this position.

Stakeholders

There are other stakeholders in TrustBuddy than just the owners, lenders and borrowers, that are worth to mention. First you have the Big Lenders. During 2013-2014 TrustBuddy has secured lending capital to offer to the borrowers from institutional investors or similar. They have secured 26 MSEK in November 2013, 270 MSEK in July 2014, and roughly 110 MSEK in October 2014. There is no public information available for how these investments have evolved. It is of interest to know if these investments have the same amount of defaulted loans as the retail lenders have or if these Big Lenders somehow are privileged before the retail lenders in terms of how the borrowers are distributed among all lenders. This demonstrates some lack of transparency, which leads us to the next stakeholder, minority shareholders. A shareholder initiative evolved in May 2015 in order to increase the transparency in TrustBuddy’s business. According to a blog post by Nordic Investor, the share price has been under severe pressure for several months due to one or several sellers flooding the market with TrustBuddy shares, pushing down the share over 80 % during that period.

Competition

This analysis will only cover the listed competitors LendingClub (LC) and On Deck Capital (ONDK), both listed on NYSE. All other competitors will be considered out-of-scope at this time. For the curious one, lists of other p2p-lending sites can be found on, among others, these websites; www.p2pindependentforum.com, www.lendacademy.comwww.lendingmemo.com/.

Both LendingClub (LC) and On Deck Capital (ONDK) are listed on NYSE since December 2014. LC offer loans to consumers, businesses and for medical procedures, which are to be repaid within at most 5 years. The loans are financed by private borrowers and you can loan between 1000 USD to 35 000 USD. As a lender on LC, you have to pick which individuals you want to invest in, i.e. lend to, and this is done with a minimum of $25 or more in each person. This can get quite time-consuming if you want to make sure you diversify well, which is discussed on certain articles and forums. On TrustBuddy’s platform, the borrowers are picked out for you. ONDK targets only small businesses with loans in the range between 5 000 – 250 000 USD over 3 – 24 months. ONDK finances its loans not through ordinary p2p lending from individual investors like TBDY and LC, but by securitizing loans and selling them to institutional investors.

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Source: Yahoo! Finance, 2015-08-06. Picture shows a 5 year graph of TrustBuddy in its Swedish currency SEK.
TBDYcomparison
Source: Yahoo! Finance, 2015-08-06. Picture shows a 1 year graph of TrustBuddy, LendingClub and On Deck and their percental stock performance.

TrustBuddy’s stock had a break-through during 2013 but has since then steadily declined. Looking at its listed American peers, you can see they share the same pattern.

On LendingClub’s website they have a Transparency section so you can see for yourself how well borrowers of different credit classes, graded from A to G, are performing. Playing around with the numbers on an aggregate level, shows us that their default rate on loans issued during 2014 now are up around 2% to date. Loans issued during 2010 have a default rate of around 8,5% to date. ONDK shows Charge-off Rates between 1 % – 9% between 2001 and 2014. These numbers are lower than the previously mentioned close to 15% number for TrustBuddy.

The three companies’ reported quarterly profits during the last three years as follows:

TBDYquarterlyprofits

The numbers above show the companies have yet not established themselves on the positive side of the profit line.

Insider holdings

These insider holding figures are from TrustBuddys own website.
Among the four Board Members, two members hold 75 000 shares and 50 000 shares, and two members hold none. Among the seven in Management, three members hold 28.3 million shares, 2 million shares and 1.3 million shares. The Management’s holdings and transactions give us a more scattered picture. The CEO/CFO bought another 130 000 shares in March 2015, weighing in on a total of 1.3 million shares. The CIO bought his first and only 50 000 shares in July 2014. On the contrary, the founder Jens Glasø, unloaded 1 million shares in April 2015 but he still owns 28 million shares. Two people in management hold no shares.

These insider holdings show no strong signs of a prosperous near future, leaving us to rely on the other fundamentals.

Warrants

In a pressrelease dated December 9th, 2013, TrustBuddy announces a decision from their recent Extraordinary General Meeting, how they will issue new shares to a conglomerate of a few companies, deviating from the shareholders’ preferential rights. It was also decided that the same conglomerate of companies shall be issued close to 41 million warrants without charge. The warrants entitle its holder to subscribe for one new share for 1.20 SEK for each warrant, between October 30th 2015 until December 31st 2015. The reason for the share issue was to ”obtain expansion capital” and the reason for issuing warrants was ”to enable working capital financing to the Company, to provide lending capital to TrustBuddy AB’s credit intermediation, and mitigating the dilutive effects for the great mass of the Company’s total number of shareholders.” There is now less than five months left of this year and until these warrants expire worthless considering the current share price. Supposedly, there is no point for the warrant holders to run up the share price beyond the exercise price from today’s levels, which would not be too hard considering the low daily trading volume in its share, in order the get the warrants in-the-money and then immediately sell, as the stock would immediately surge downwards considering the vast amount of new shares to be offered to the market.

In a pressrelease dated November 17th, 2014, the Extraordinary General Meeting decided to introduce an incentive program for certain senior executives and another incentive program for directors. Current warrant holdings stated on TrustBuddy’s website were all last updated during 2013 and thus it looks like none of these new incentive warrants have been subscribed for by the current management nor directors.

The search for a new CEO

TrustBuddy announced in December 16th 2014 that they have appointed their CFO Linus Lönnroth to be the Acting CEO while they are searching for a new permanent CEO. Mr. Lönnroth will still be the CFO during this search. A new CEO is yet to be announced and once they find that person, we expect it to be a name that will have a positive impact on the share price as that person must fill the experience gap which the Swedish Financial Supervisory Authority previously has had remarks on.

Acquisition of Geldvoorelkaar

The acquisition of the Dutch Geldvoorelkaar was paid for with new TrustBuddy shares in December 2014 and were at the time worth 37 MSEK. These new shares were evenly distributed between the sellers E.J.L Adams Holding B.V. and MHVM Beheer B.V. These particular shares are subject to trading restrictions where 50% of the restriction expires in January 2016 and 50% in January 2017. Today, these shares are worth approximately 8 MSEK, a decline with roughly 78%. These shares could flow the market in January 2016, but if the sellers of Geldvoorelkaar still believe in the business model, they ought to hold them until TrustBuddy’s share price advances beyond the December 2015 share price around 1.20 SEK.

Sensitivity test of the TrustBoddy short-term lending business model

Let us take a look at how sensitive TrustBuddy’s short-term lending model is for its lenders. Below you see three different scenarios in a simplified model with different assumptions. All scenarios assume no debt collection to keep it simple. If there were debt collection and it would appear in full or part into the lenders account, it would take maybe 6, 12, or 24 months after initiated debt collection.

Scenario 1: 10% monthly average interest rate and 5% monthly bad loan rate

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Scenario 2: 10% monthly average interest rate and 10% monthly bad loan rate

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Scenario 3: 10% monthly average interest rate and 15% monthly bad loan rate

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These three scenarios stresses how important it is to keep the Bad Loan/Interest-ratio under control. This is also presumably among the top Key Indicators that analysts should benchmark these companies on. We have not seen this Key Ratio anywhere as of yet but it is certainly a Key Ratio we would like to see more of. It would ease the analysts work on these companies and it would increase the transparency so everyone could easily compare which p2p-lending company has the most sound credit background check routines and best debt collection routines.

Scenario 1 shows it does not take too long, 15 months, before you have doubled your invested money, given that all money is always invested into borrowers. Senario 3 shows how fast the lenders can tie up their money in bad loans given the credit background checks performed by the company are not optimal. In this scenario, 50% of the invested capital is tied up in bad loans in 15 months. This confirms some of the stories in the Flashback-thread.

Discounted Cash Flow Analysis

This DCF is based on our own forecast which is influenced by TrustBuddy’s guidance in their reports. Our view is quite conservative making this a bearish scenario. Thus we believe, TrustBuddy’s business will evolve at least according to these numbers, but quite likely, even better.

TBDY-DCF
Click on the picture for a larger view in a new window.

TBDY-FAIRVALUE

This DCF analysis tells us the TrustBuddy share should currently be trading at 0,53 SEK per share, which equals an upside of 66% as compared to today’s closing price of 0,319 SEK.

TBDYrev

TBDYmargins

TBDYloans

Analysis and conclusion

The peer-to-peer lending business has gained in popularity the past few years. Looking at the growth pace of both TrustBuddy and its peers, shows us there is still plenty of potential market share to conquer. The most imminent challenges for TrustBuddy are operations cost control, credit scoring of new potential borrowers, and efficient debt collection-routines. These three factors are key to their future success. One way to quickly gain the ability of efficient debt collection and credit scoring would be to acquire such a company or companies who are already successful in these areas. This would also help TrustBuddy come out ahead of its competitors in these areas. The case could also be the reversed, that a debt collection agency, bank or other credit institution, would acquire TrustBuddy, in order the expand their business. TrustBuddy better ensure a smooth transition for its current lending customers, from the current short-term lending to the future long-term lending business. Failing in this transition could result in a bad taste for both current and prospect customers, leading to severe trust issues towards TrustBuddy which in turn would slow down their growth. Once TrustBuddy earns a license from the Swedish Financial Supervisory Authority, it will help them build their reputation further as the license will signal a seal-of-approval from a public authority. And once the insiders start to take piece of the action in terms of insider-buying, then we have a strong signal of a prosperous future, considering the current hurdles.

TrustBuddy is scheduled to present their Interim Report Q2 2015 on Wednesday August 19th. Their progress in the aforementioned issues during this quarter will be of critical importance as well as their future guidance in the same areas.

Disclosure: I am long TBDY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. This article should not be regarded as a buy or sell recommendation or investment advice in any way.

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