Funding Circle Holdings PLC (lon:fch)
Funding Circle – Reports More Losses


ItemCurrent PeriodPrevious Period
Period6 Months6 Months
Adjusted Earnings
Adjusted EBITDA(£84m)(£20m)
Statutory Profit
Adjusted Profit
Total Debt
Net Debt
Title: Funding Circle – Reports More Losses
Company: FCH - Funding Circle Holdings PLC
Share Price Then: 76.28p
Author: Ian Smith
Date: Tue 29 Sep 2020
Comments: It’s not a surprise that a business that specialise in loans to higher risk businesses has suffered recently but the recent H1 report is actually quite confusing.

The Group made a total comprehensive loss of £106.5 million during the six months to 30 June 2020 (30 June 2019: loss of £30.0 million). which includes £96m of Fair Value losses.

This fair value loss is at the moment only theoretical, but it turns the business from breaking even to massive loss making and for me makes the report of limited use, effectively saying as it contains so much uncertainty.

What surprises me is that only 10% in the UK and 20% in the US are reported as not making full repayments, a small portion of these are flagged making partial payment (2% both UK and USA) the rest as either on a payment holiday (1.5%UK/10% USA) or not paying (5% UK/7% USA).

Given that most of 2020 lending was only CBILS/PPP (UK/USA government backed loans) it is not clear if the percentage flagged as full payment are those making payments or includes the COVID loans which have no payments due yet.

So we are waiting to see the results of the fundamental business change, lending only to businesses affected by COVID as well as pretty unclear picture of how the longer established loans are really performing.

This uncertainty is further enhanced with a really weird metric within the report, Borrowers missing payments for the first time. This shows a spike during March to May/June, but what is this telling us? A borrower can only miss payments for the first time once. It also has an odd scale, a multiplier (peaking at 12) comparing with Jan 2020. I always get worried when data is presented in a way that can appear to mean one thing but possibly means something else or even nothing at all.

The company now has £3.72bn of loans up from £3.54bn with new loans pretty much the same as last year, new loans would be expected to have been affected by COVID so not much can be gained from this.

The company boasts, 40% loans processed by instant decision lending technology, 6 minute average application time, 9 seconds on average to make an instant decision.

But is this really a positive?

All in all I am left with the unchanged view that the company has been around for long enough to be delivering profits and it doesn’t seem to be doing so.

There is so much turnover and new lending funds raising that the business can carry on but my worry is that one day the market will decide that time is up and share holder will be left with nothing.

Remember that the company floated at 440p in Sep 2018 and had crashed to around 120p within a year.
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Previous Commentaries On Funding Circle Holdings PLC
Date Share Price Author Commentary
Fri 17 Apr 2020114pIan Smith

Funding Circle – Have They Shafted Their Loyal Supporters?

Funding Circle have shown a 100% increase in share price over the last couple of days, from around 50p to 100p or a bit under the average price over the last year or so.

I’ve been negative on Funding Circle recently as they did not seem to be generating the profits that I would have been expecting as it is now an established business.

This recent price increase seems to be related to the business now being able to offer loans under both the UK and US Government Covid schemes.

As a result, we will pause all non-CBILS lending from retail and institutional investors to concentrate on supporting the Government's SME stimulus programme. For investors that are unable (retail investors do not qualify for CBILS)......

So if you are a private investor and have put money into Funding Circle to be lent out, well tough, we are no longer interested in lending it.

Whether this also means that the company will divert all resources to making new loans and let debt collection slip is not clear, but abandoning the retail market as a source of funds to lend is a pretty big step.

In the UK the Government’s CBIL scheme guarantees 80% of the loan amount and this seems very attractive, but it is inherent that many applicants will be struggling businesses.

We also don’t know how the Government will apply the criteria has a borrowing proposal which the lender would consider viable, if not for the coronavirus pandemic if and when the Government is required to honour the guarantee.

Surely any business asking for a loan to meet ongoing costs such as rent, wages or equipment leases would be turned down under normal circumstances.

So buying today on the response to this news could easily see you locked in to a 50% or more loss if the CBIL loans turn out badly or perform typically for the current loan book.

If you have used FCH as a source of funds to be lend out then there have been a lot of reports of it being hard to get your money back early as this was never the focus of the platform. But if we now see a lot of annoyed retail funders, getting it out may be even harder.

To me abandoning non CBIL loans seems like “wow, I can see a great short term opportunity and to hell with the long term consequences and our partners”.

Taking this attitude usually ends badly.
Thu 19 Mar 202025.2pIan Smith

Funding Circle – Lots Of New Business Or Lots Of Bad Debt?

In the past I have been quite negative about Funding Circle as they keep reporting losses.

Loss for the year 2019 - £84.7m, 2018 - £49.5m and 2017 £35.7m.

In 2019 they had revenue of £167m, staff costs of £90m and marketing costs of £66.5m and to be fair part of the £84m loss was a non-cash exceptional charge of £34.3m for goodwill/ intangible assets related to the Developing Markets.

So the above suggests that if 2020 were to be a normal year the company could make a profit, but COVID-19 has made 2020 an abnormal year.

Given that FCH targets borrowers that the banks have generally turned down there has to be a big worry that loan defaults are going to massively increase. In some cases this could be avoided by extending the loan amount or loan period.

But I would expect that many more cases will simply show the business now to be unviable as it has had to borrow more to cover costs with no revenue. For example, gyms often have a membership list that is far greater than the number of active members, the last thing the gym wants is to remind their non using members that they are still paying.

Deciding whether to make these extensions to the huge volume of loans will also depend upon FCH’s ability to process these requests, something that seems difficult because of a lack of people.

Equally many viable businesses may find reserves used up or loans wanted to avoid using reserves, in other words a whole new stream of business.

Again does FCH have the staffing to be able to process such a volume?

If you are only in it for the short term you can make a strong case for a 100p share price and little drop from the current 50p, but are there shares out there in any quantity, I know there didn’t seem to be at 25p.
Wed 21 Aug 2019112pIan Smith

Funding Circle – Looking At Reviews

I still see promise in Funding Circle but I am concerned that at the end of the day they are a newish business lending money and continuing to expand the amount that they have to lend with suggestions that they do not have bad debt under control.

Although newish the business is established so the continuing big loses worry me as does the difficulty in understanding what the true quality of the loan book is.

There are a lot of caveats to this but I went to Trustpilot to look for negative comments and to try and see if there is more information. There seem to be two basic complaints

  1. Once you have made loans you can’t get your money back

  2. More recently bad debt plus fees is getting close to interest received

One very frequent complaint is that some investors want to be able to sell their part of a loan and apparently this used to be possible very quickly but now is taking up to three months.

If you lend money on this platform it is currently taking at least 88 days to get your money out by queuing up to sell to other lenders.

The worst part is that it will not sell all loan parts as some are defaulted. I am trying to understand the thinking here given that the lender has put his money in a lending platform and expects to be able to sell bad debt.

At first glance I had sympathy with the FC rep who was the source of I contacted customer service who are pretty blunt and rude - telling me I shouldn't be using it like a bank current account as it does appear that there are retail investors who are not looking to make loans for the full term of the loan and haven’t understood the risks involved in getting out of the loan that they made.

Then I looked at the web site and it is pretty clear that the site is telling retail investors that they can do this and it is one of the two options for getting their money out, the other option is to turn off automatic reinvestment and your interest payments can be withdrawn as they are received.

So this inability to fulfil a withdrawal method which I would take from the web site to be a fairly simple process may be a worrying sign, after all who wouldn’t want to buy a loan with a good repayment history?

Even more worrying is the number of comments similar to …Over the past months the rates of return earned have dropped sharply as the rate of defaults have increased. In July (just ending) my defaults exceed interest earned..

I did well in this company for a few years then they changed the way they did there all went down hill from there

One thing that is clear to me is that posters feel that the business is moving away from P2P lending either intentionally as they get more corporate backing or because they have lost touch with want the P2P community wants.

Now I have no problem with the idea that company may lose most of its P2P lenders and replaces their funds with funds from mainstream investors. So although I believe the negative posts about an illiquid secondary market and that it might be a platform no longer suited to many retail investors I do not take that to mean that the platform itself is in trouble.

I am troubled by the bad debt comments as the company is already losing a lot of money, basically it needs to cancel all of its marketing spend to show break even over the last couple of years.

So how does it get to profit? By making more loans at a lower cost seems to be the answer.

As it is not company money being lent loses may not matter to the Funding Circles accounts but it will matter to the source of these funds.

As the company has expanded it seems to have ended up as being just another money lender with a very high cost of customer acquisition model.
Thu 08 Aug 2019108pIan Smith

Funding Circle Holdings - A Floatation Failure, But Is It A Business Failure?

Funding Circle floated in Sept 2018 at 440p, they are now at around 105p after following a fairly consistent downward slope.

A share that is at 25% of its floatation amount in less than a year is clearly a failure, but what about the underlying business?

Funding Circle specialises in lending to SMEs and are partially a peer to peer lender but they have a lot of funding from corporate sources.

The website is still quite strong on the Peer to Peer aspect of the business, but the trading update say Deep and diverse investor base: In H1 2019, approximately £210 million of new lending commitments were secured from pension funds, insurance companies, government entities and banks. In h1 36% of funding was from retail investors so it is still a big part.

Bypassing all the hype they are a “bank” (they aren’t a bank legally) lending to small businesses, everything else is just froth.

The big difference between Funding Circle and a traditional bank is that Funding Circle is based around lending to customers that they often have no previous relationship with. Whereas traditional banks generally expect to know the business asking for the loan.

Added to this the Funding Circle name is not well known and they have no branches so finding customers is expensive think TV adverts, Email marketing and other ways of targeting every business because they don’t know who wants a loan.

At first glance 46% of Group revenue from existing customers, up from 41% in H1 2018. Net Promoter Scores between 80-90 in UK and US sounds like good news, but is it? It could mean that they are lending to businesses that are just getting by and are a serious risk of closing and not repaying the latest loan. Or it could mean that they have a pool of expanding businesses which may mean that the latest loan is also the largest.

When asked about who they would go to first for a loan in future, 82% of borrowers say they would choose Funding Circle rather than their bank sounds good but it is self selective and how many of the 82% are customers because their bank sorry you’re too big a risk.

Looking at their website; 52,000 UK businesses have financed their goals by borrowing £5.4 billion through Funding Circle. so there is some substance to the business, but for the first 6 months of 2019 the income and people (£45m)/marketing expenses (£35m) just about balanced out at £80 million leaving the rest of the expenses making up a loss.

Funding Circle are not restricted to the UK only although the UK is the largest region at moment, lending is broken down as
UK Revenue - £53m
UK Revenue - £21m
Other (Germany/Netherlands) - £6.5m

Despite the length of the report there is a distinct lack of information on bad debt and for me this makes it very high risk investment. There are a few sentences that say the high risk loans are performing worse than expected but most or okay and that the average investor is receiving around 4%-8% returns.

Lending money is easy, and is losing it.