Analyzing the Public Loan Book of MarketInvoice
As we’ve mentioned before, one of the most powerful benefits of the growing marketplace lending industry is the trend towards greater levels of informational transparency in the credit investing space. The ability to analyze loan-level data from originators across the industry has offered investors unprecedented clarity into their investments. Recently MarketInvoice, an invoice financing company, released their loan book for public consumption, and in this post we’ll be presenting a high level overview of the invoice financing market as well as an exploratory analysis of MarketInvoice’s originations.
Invoice financing is a type of short-term financing for businesses that allows them to access funds from their sales prior to their having collected payments from those sales. In August, we published a primer on the invoice factoring market, one form of invoice financing. Today, we’re going to explore a separate sector of the invoice finance market, and the one in which MarketInvoice operates, invoice discounting.
With invoice discounting, a merchant sells a subset of its current outstanding invoices at a discount to an invoice discounting company. As payments are received on those invoices, they go directly to the invoice discounting company, who receives the full amount of the invoices as payment. The spread between the discount amount paid for the invoice and the full amount received offers an investment return to the invoice discounting company. While the discounts are generally small (approximately 0.75% to 1.25%), the payment periods are usually short (approximately 25 to 50 days), so investors can still see very attractive yields on an annualized basis. Now that we’ve briefly discussed the structure of invoice discounting, let’s explore the MarketInvoice loan book in more detail.
MarketInvoice is a UK-based invoice financing company that launched in 2011 and has funded over £450M to date. They have positioned themselves as an alternative to traditional invoice factoring, with the stated benefits of quicker access to funds, understandable fee structures, and no long-term contracts. The analysis below is based upon public data from the MarketInvoice loan book updated through 10/28/2015.
First let’s take a look at the monthly originations of MarketInvoice. We can see from the graph below that they began to strongly ramp up their financing in mid-2013, and their 5 most recent months have all topped £20MM. As of 10/28/2015, we’ve seen October originations in excess of £27MM, MarketInvoice’s largest month thus far.
While MarketInvoice is a UK-based lender, they also finance invoices in Euros and Dollars in addition to Pounds. Looking at the same chart as above segmented by currency, we see strong growth in non-Pound originations in the last 12 months as well. Their originations are still dominated by GBP, but it will be interesting to monitor the growth of other currencies on the platform.
Next, let’s take a look at some loan performance metrics by grade. MarketInvoice uses a proprietary underwriting model to group their loans into ten risk-based price grades. Below, we plot the delinquency rates for the product across these ten price grades. MarketInvoice defines loans as delinquent when invoices go unpaid for 45 days past the due date or when the seller/debtor has gone into arbitration. In the graph below, we see a notable positive trend, with the higher-grade riskier loans showing higher rates of delinquency (grade 10 tops out at 6.8%) and the lower-grade conservative loans showing low or zero delinquency rates.
Note on Grading Methodology: As mentioned above, MarketInvoice groups their loans into 10 risk-based price grades. For additional clarity in the following analyses, we’ve combined loans from these 10 grades into 3 broader grade groupings. MarketInvoice risk grades 1, 2, 3, and 4 were mapped to group A; grades 5, 6, and 7 were mapped to group B; grades 8, 9, and 10 were mapped to group C. Unclassified grades, which correspond to loans that do not fit closely with other loans based on MarketInvoice’s credit criteria, are excluded from the analyses below. Note that unassigned grades were a larger percentage of the portfolio in 2012, but in recent months only made up 2% – 4% of the MarketInvoice loan book.
In the graph below, we plot the distribution of advance rates by grade group. The advance rate corresponds to the percentage of an outstanding invoice that the invoice discounting company is willing to finance. Higher advance rates allow the merchant to receive more money up front, but they offer the invoice financing company less protection against losses in the event that the invoice goes unpaid. As we might expect, we see lower average advance rates for the riskier grades, indicating that market invoice demands higher levels of protection on their riskier invoices.
Finally, let’s take a look at the annualized gross yield across our grade groupings. As mentioned above, the annualized gross yield is impacted by the size of the purchase discount by MarketInvoice and by the time to receive payment on the invoice. In the graph below we demonstrate that the annualized gross yield is largest for the higher-risk grades, indicating that MarketInvoice demands a higher return via a steeper discount on their riskier loans.
As the marketplace lending industry has continued to grow, we’ve been thrilled with the continued commitment to openness and transparency of data across the industry, and MarketInvoice is a great example of the commitment.