lithuania

Heavyfinance Farm Loans Pay Proceeds from Carbon Credits Sales Instead of Interest

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Heavyfinance* is a P2P platform where investors can lend to farmers, often secured by farm machinery. Recently, Heavyfinance* launched a new type of loan, which they have named “Green Loans“. The idea is that farmers cultivate their fields using climate-friendly methods (‘carbon farming‘). In the process, carbon emissions are reduced so that they receive carbon credits. Investors can invest specifically in loans that contribute to climate protection (‘carbon investing‘).

Unlike in ‘normal’ loans, the investor does not receive any interest, but in addition to the repayment of the loan, receives a share from the proceeds from the sale of the CO² certificates.

heavy finance green loan
Illustration: Example of a cash flow plan for a green loan.

As the picture of the example loan illustrates, this is a very long-term investment. Although the loan amount is repaid within 3 years, the proceeds from the certificate sale are paid till the 10th year. Heavyfinance* forecasts an annual yield of 17% to 56%, depending on the price of the carbon credits.

Pros for investing in Green Loans:

  • Support for climate-friendly measures
  • High return, if everything works out as Heavyfinance predicts.

Cons for investing in Green Loans:

  • No fixed interest rate, there is a risk that Heavyfinance’s forecasts are too optimistic
  • Very long-term investment, though loans can be traded on the secondary market
  • New model, no track-record so far

Incidentally, the farmer has a vested interest in the carbon certificates being issued and marketed, because he also participates. In the first 7 years he receives 60% of the proceeds (the investor 40%) and in years 7-10 80% of the proceeds (the investor 20%).

I asked Heavyfinance* how they deal with the risk that the farmer does not implement the climate measures after receiving the loan and thus no certificates can be marketed. In that case, the farmer has to pay penalty interest (10-13%) as agreed in the contract between Heavyfinance and him.

The certificates are not traded on a stock exchange. Heavyfinance* told me on request that they plan to sell them to carbon certificate traders who already trade in large volumes of carbon certificates. Another possibility is direct sales to selected large companies.

I will follow with great interest how the green loans at Heavyfinance* develop and what certificate proceeds are actually achieved.

The green loans are marked with a green background on the project overview page at Heavyfinance* and are therefore easy to see in the overview.

Heavyfinance launches platform for loans backed by heavy machinery

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Startup Heavyfinance* has launched a platform for lor loans backed by heavy machinery, the first of this kind in the p2p environment as far as we know. The loans are backed by machinery in Lithuania (currently, the company plans to add Latvia, Portugal, Spain and Bulgaria and other EU countries), but the platform is open to investors internationally.

CEO and co-founder Laimonas Noreika told P2P-Banking: “First of all, every farmer, lumberjack and construction company has some heavy-duty vehicles that usually are not taken into account when traditional financial institutions evaluate their risk level. Consequently, those small and medium businesses cannot get loans, even though they have many assets to use as collateral in case of a default. Furthermore, prices of heavy equipment are extremely stable due to the nature of this highly international market. Used combine harvesters, tractors, excavators and other heavy-duty vehicles can easily be exported to foreign countries and transportation costs are relatively low compared to the size of the transaction. ”

Lainmonas has a lot of experience in the p2p environment as he co-founded Finbee* in 2015, a Lithuanian platform for consumer and business loans.

Main parameters of the loans on Heavyfinance* are:

  • Interest rates from 9% to  14%
  • minimum investment 100 EUR
  • loan terms usually between 4 months and 3 years
  • no fees for investors
  • secondary market
  • machinery is insured and serves as security for the loans

Investors can choose to invest in loans depending on the risk they are willing to take. Risk levels are indicated by letters A (lower risk), B (medium risk) and C (higher risk). Consequently, while you could earn up to 14% interest rate by investing in C risk level loan, A risk level loan would bring you around 10-12% interest rate depending on the amount you’ll invest.

Talking about the risk assessment in more detail, these are the main criterias the platform looks at:

  • Financial statement for past 2 years;
  • Balance sheet;
  • Cash flow statement;
  • Reputation of business owner;
  • Loan-to-value ratio

Regarding the COVID-19 pandemic situation Laimonas stated: “It is safe to say that the agricultural sector was one of the least negatively affected. One of the challenges we noted was a limited supply of heavy-duty vehicles and farm equipment parts due to the shutdown of some production facilities and the disruption of supply chains. …”

HeavyFinance is supervised by The Central Bank of Lithuania under the track of crowdfunding platform operators.

heavyfinance founders
Heavyfinance founders

 

Finbee Experiences – My Portfolio Review

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A year has passed since I last wrote about the portfolio I built on Finbee. For a detailed description of this Lithuanian p2p lending marketplace see my earlier review. As described there, I invested mostly in the highest risk grade loans (‘D’ loans). Currently I have invested 1,027 Euro in 35 loans. 32 are current (965 Euro), 2 are late (23 Euro) and one is in default (38 Euro), but rates for this loan are paid to me by Finbee’s compensation fund. The average interest rate of my loan parts is 31%. Interim I had grown my portfolio to up to 3,000 Euro invested, but interest rates have decreased due to high investor demand that was not met by comparable growth on the borrower side, so I have withdrawn 2,604 Euro meanwhile.

My results so far

My self calculated yield (XIRR) is 31.5%. This is the highest I achieved on any p2p lending marketplace over a longer duration of time. This includes the 110 Euro capital gain caused by sales of loans on the secondary market with premiums (see my article on trading on Finbee’s secondary market). Calculating the result again, this time with assuming a full write-off of the defaulted loan gives a yield of 29.4%.

Finbee Portfolio
Screenshot of my Finbee dashboard – click to enlarge

There are 19,930 Euro (as of March 13th) in the Finbee Compensation Fund. Current estimate is that the fund is paying about 9,000 Euro per month on defaulted loans and has decreased about 2,000 Euro from February to March. To grow the amount in the Compensation Fund Finbee will need to increase the volume of new loan originations. I looked into the list of open loan requests this morning and there are currently only 3 consumer loans and 2 business loans open for funding.

Finbee recently added business loans to SMEs, but I have not invested in any of these.

Finbee Adds Business Loans

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finbee logoP2P lending marketplace Finbee has so far offered consumer loans only. Now Finbee is extending the product range to SME loans. Finbee sources the applying companies through a separate website and will focus on small loans up to 15K EUR and a term of 12 months. For most business loans rates will be fixed without an auction (which Finbee uses to set interest rates for consumer loans). Different to consumer loans, investments into business loans will not be covered by the Finbee compensation fund (CSF), if the loan defaults. Each loan application will be individually assessed, by assigning risk grade from A+ to D, where A+ is a low risk loan, D – high risk loan, based on reputation of the management (20% of risk grade), financial sustainability (60% of risk grade), market situation (20% of risk grade).

Audrius Griskevicius, head of SME lending, told P2P-Banking: ‘SMEs in Lithuania have very limited access to financing. As result of this, the government issued a law, allowing p2p lenders to issue loans for small business. Finbee took an active role in development of necessary regulation and we are very proud to be the first one to receive a license of p2p lending to SMEs.’

The first business loan listing is online. Magava wants to borrow 10K EUR working capital for 12 months at 15% interest rate. Investors have to complete a self assessment survey before they can invest into business loans.

Interview with Arturas Stukalo, CMO of Lenndy

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What is Lenndy about?

Lenndy is the first lending marketplace in Lithuania that connects loan originators with individual and institutional investors. At Lenndy, investors can invest in asset-backed loans and get a 12-15% return.

What are the three main advantages for investors?

  • Loans are secured by buyback guarantee and collateral as well as personal guarantees.
  • 12-15% annual return.
  • No investment amount limits and no platform fees for investors;

What are the three main advantages for loan originators?

  • Easy and transparent opportunity to obtain working capital by selling part of their existing loan contracts to investors (like Mintos).
  • Advanced IT integration with credit management systems capabilities.
  • Ability to grow reputation and brand awareness internationally.

What ROI can investors expect?

Currently, investors at Lenndy earn 12.53% average annual interest. Earnings usually depend on investment strategy and risk awareness. That is, when investors chooses to invest only in loans secured with buyback guarantee and collateral, they can expect to earn around 12% return. When investors seek 13-15 % annual return, they should consider adding invoice financing and business loans to their portfolio.

Is the technical platform self-developed?

Lenndy IT system is self-developed from scratch. IT development company was hired to complement in-house developers. It is very dynamic in order to react to market changes, adapt to multiple financing models and investors’ needs and comply with all legal requirements.

How reliable is the credit rating / credit history data available?

Loan originators collect information about borrowers from reliable credit agencies as well as public registers. We do not use standardized credit rating yet but we already have a developed model for it that will be introduced in the near future.

Arturas Stukalo LenndyHow is the company financed?

Company was founded in late 2015 and secured seed investment from an angel investor. Currently, Lenndy is negotiating with several angel investors and venture capital companies for another financing round that will be used to expansion and further product development.

What was the greatest challenge so far in the course of launching Lenndy?

Our goal was to create an investment instrument that would be attractive to investors, which would be liquid and would supplement any investment portfolio for great diversification. Loans market is massive, but only a fraction of it was available for investors. We know we have a great tool and we are looking forward to reaching individual and institutional investors across the whole Europe and beyond.

What is the current state of regulation in Lithuania?

Parliament of the Republic of Lithuania passed the Law on Crowdfunding, which was created by the Bank of Lithuania and the Ministry of Finance. The Law also describes Lending Marketplace as a crowdfunding model and Lenndy had already started the procedures of involvement in a list of crowdfunding operators.

Which marketing channels do you use to attract investors and borrowers?

Lenndy uses gentle digital marketing to attract investors from Europe and already has about 1000 investors who funded around 90 loans. Lenndy is growing very fast, even though we do not engage in heavy marketing. We believe it is a result of trustful model and word-of-mouth marketing. The word is spreading quickly in Lithuania, therefore we are preparing for international growth.

Is Lenndy open to international investors?

Yes, Lenndy rolled out English language and we have already started working on German and other languages.

Where do you see Lenndy in 3 years?

Lenndy has a target of at least 10 loan originators across Europe to improve portfolio diversification for our investors. In the following years we are planning to introduce portfolio buyout functionality which would allow investors sell their whole portfolio at once, secondary loans market where investors could buy and sell individual loan claim rights and many other features. We see Lenndy as transparent, innovative and trustworthy international lending marketplace.

P2P-Banking.com thanks Arturas Stukalo for the interview.

Trading Insights on the Finbee Secondary Market

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Finbee is a small p2p lending marketplace for consumer loans in Lithuania (see earlier coverage). I have been using it as an investor for a little over a year now. My strategy on Finbee is different than on other marketplaces. I invest loans mainly with the purpose of trading in mind, that means on Finbee I don’t plan to hold the loan parts to maturity

Finbee secondary market basics

  • Loans can be offered at a discount, par or premium
  • Seller pays 1% fee upon successful transaction
  • Only loans with at least one repayment can be offered. This means I cannot sell loans directly after acquiring them on the primary market (no flipping). I have to hold each loan for at least 30 days.
  • Late loans and loans in arrears can be offered. Loans that are 60+ days overdue cannot be listed for sale.
  • Maximum listing duration is 20 days; thereafter seller can relist
  • Buyers can buy instantly at ‘buy now’ price or make a bid, hoping that no other buyer overbids them in the remaining listing duration (or pays buy now price)

Finbee sell form
Finbee parameter UI for selling loan parts on secondary market

How I select loans on the primary market

I mostly invest in ‘D’ loans (that is the most risky rating) with long loan durations (>36 months) and high interest rates. The average interest rate in my portfolio is 32%, the maximum 35%. My reasoning for this choice is that these loans allow high markups and still offer an attractive buyer yield (XIRR value). The longer the remaining loan term is, the lower will be the impact of the markup on the calculated yield for the buyer. I mostly buy 40 Euro loan parts, sometimes multiple in the same loan. I selected this amount because larger parts might not appeal to as many buyers, as some investors only invest small amounts.

Why I select different values for the reserve price and the buy now price

Since the XIRR that is displayed to the buyer depends solely on the buynow markup, it would seem logical to set same markup prices for the reserve price and the buy now price, doesn’t it. If in the example above I would set the price to 8.4% for both than I would get 8.4% markup if the sale takes place. With 8% and 8.4% values, I most likely get only 8% (at these markups there are very rarely multiple bidders competing). So why would I forego 0.4% gain? The reason is simple. With buynow the sale takes place instantly. But if I get the buyer to make a bid, the transaction takes place at the end of the listing duration, and all interest accrued during this duration is mine. Note that the buyer can NOT back out. He is commited and the sale will take place if he made a bid. In the above case the 20 days on a 39 Euro loan part at 32% mean I earn an extra 0,68 Euro (39€*32%/365 days*20 days) interest. So in effect if someone bid 8% on this loan my gain is 8%+1.74% accrued interest = 9.74% gain (which is much better than the 8.4% buy now). Of course I have to deduct the 1% seller fee.

BTW, I wondered how Finbee manages the sales with the accrued interest. When the buyer makes the bid, as said he cannot back out. But it is not clear if he will win (another buyer could overbid him) or how much interest will accrue for I as the seller have the right to accept the bid anytime early (which would only make sense if my cash is zero and I urgently want to bid on a new loan with a much better interest rate). But Finbee can’t wait until the time of sale because at that time, there could possibly be not sufficient cash in the buyer’s account. I couldn’t figure it out, therefore I asked Finbee. The answer is Finbee reserves the maximum possible price (principal+premium+maximum possible accrued interest) at time of the bid in the buyer account. Once the sale takes place, if the actual accrued interest is lower than the reserved maximum accrued interest, part of the amount is freed up. Continue reading →