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#TrustBuddy: Cleaning for the future


Sweden listed P2P lending provider TrustBuddy reported its Q2 2015 results this morning.

Sales in the second quarter were SEK 21.9 million amounting to SEK -11.3 million EBITDA, and SEK 48.7 million and SEK -27.1 million EBITDA respectively for the first six months of the year.

It has been an extremely eventful second quarter for TrustBuddy, not least with the recently announced  rights issue plans and the appointed of Philip Mikal as new CEO. Departing CEO Linus Lönnroth states that both these events mark the conclusion of an important stage in the life of the company, and the start of a new one. In the report he comments:

I would like to say that despite the company’s short life so far, it is easy to identify three clear phases: the building phase, the clearing out phase and finally the reloading, or the New TrustBuddy, that starts now.

The company started with a building phase that accelerated and reached its peak in 2014. During this period our focus was on gaining market share as fast as possible despite high costs. Everything went quickly, the company grew strongly, but naturally some mistakes were made. Back then, our young market was unregulated, in some cases opaque, and what we know today about credit policies and collection procedures was not as well known at the time. This meant that older elements of the loan portfolio did not meet the same standards as newer parts of the portfolio. Halfway through 2014, Finansinspektionen’s, the Swedish Financial Supervisory Authority, regulatory plans started to become known, although it wasn’t before we were into 2015 that details of how the agency would regulate the P2P segment became clear. In the company’s dialog with Finansinspektionen, several areas for improvement were identified, including Finansinspektionen’s view that the company’s board was too inexperienced to manage a credit product company, for example. Consequently, in November 2014, the entire board was replaced with experienced board members able to meet the requirements placed on a modern financial company.

At the start of 2014 TrustBuddy is the largest provider of small consumer loans in the P2P segment in Europe, and with its acquisition of the Netherlands-based Geldvoorelkaar, continental Europe’s largest player in P2P company loans, what we call SME loans or crowdfunding. A new, strong and experienced board now leads the country, and the undersigned steps in as acting CEO and the search for a new, permanent CEO gets underway. In other words, everything is in place for the roll out of Geldvoorelkaar’s successful model in the Nordics, as well as extending the consumer loan product with larger loans similar to those in the US. But first, however, the company needs a clear out. This process has been more comprehensive and time consuming than we initially realized and was carried out during the first half of 2015. The company’s cost base was virtually out of control, the loan portfolio contained too much non-performing debt, operational management consisted of too many costly manual routines that were also conducted from too many mar-kets rather than being centralized. The new board is focusing all its energies on this process. At the same time, newly acquired Geldvoorelkaar will be integrated into the company and Finansinspektionen will announce its new regulatory framework for the P2P segment. As previously announced to the market, the company is implementing a cost reduction program. This will reduce our cost base by at least SEK 4 million per month when it is fully implemented in 4Q15. The main areas that we are tackling are the centralization of our support function to Estonia, as well as the automation of our cash management function that previously required too great a degree of manual input. These measures alone will result in a reduction of our payroll by 15 employees. The company’s premises requirements are being adjusted in all markets, generating considerable savings once fully implemented. Furthermore, we are planning cuts in the company’s IT development outlay and legal support. The former is a natural result of a large improvement program nearing its conclusion, the latter a natural consequence of major company transactions and permit applications being wound down. We are also temporarily reducing expenditure on marketing considerably and will analyze the effectiveness of various marketing initiatives. The cost reduction program already started delivering results in June, the cost cutting effects of which we expect to clearly see in the 3Q report.

During the clear out period, the consumer loan portfolio was also thoroughly reviewed, whereby it is now clear that the speed with which loans are referred to collection agencies for recovery exceeds the amounts these agencies are able to recover. The consequence of this is that the proportion of non-performing debt held by debt collection agencies amounted to sums of more than SEK 220 million, equivalent to approximately 10% of those sums on loan. This is entirely naturally explained to a large extent by the company’s extremely rapid growth, but it is also clear that the company’s credit policies needed to be changed. During the first half-year clear out period, not only were the company’s new credit policies implemented, our own credit scoring engine, developed in-house, was also implemented in all markets. We have immediately been able to note an improvement in the quality of the loan portfolio, and the necessary conditions to give our investors favorable risk- adjusted terms are improving markedly. At the same time, a strategy for the reduction of non-performing debt in the old portfolio must be put in place. In operational terms, the quarter played out broadly as expected. Revenues from consumer loans fell on the same quarter last year. This was neither the result of a lack of capital from investors, nor softer demand from borrowers. Rather, it was the result of tighter credit policies, for example our allowing only repeat customers to borrow the maximum amount. It was also the result of the new credit-scoring engine requiring a degree of running in and fine-tuning for a number of months. Finally, the temporary reduction of marketing has impacted revenues negatively. Revenues from consumer loans are expected to normalize in the third quarter as marketing increases and credit scoring is optimized.

Company loans, which are administered by the wholly owned subsidiary Geldvoorelkaar in the Netherlands, continue to grow. Revenues for the quarter were up 12.9% compared to the same period last year. Today, Geldvoorelkaar is the largest crowdfunding business in the Netherlands and has experienced phenomenal growth for an extended period. Naturally, this growth will not continue forever in the Netherlands. We see competitors emerging, partly in the shape of new P2P providers, and also as other financial solutions for small and mid-size companies that are returning to the market – provided partly by traditional banks returning after an absence from the segment, and partly other types of risk capital funds which are growing on the Dutch market. To ensure that the building of new markets is thought-through and controlled without being affected by spiraling costs, the company’s strategy involves growing organically in new markets, initially in Belgium and a Scandinavian market before the end of 2015. Thereafter, new markets will be added gra-dually with the goal of maintaining Geldvoorelkaar’s monthly growth throughout 2016 underpinned by the new markets.

The company is now set to acquire capital to launch the third phase in the company’s brief history. This capital will be used to repay the bridging loan taken out to finance the capital retrieval in the fall of 2014. Further, the acquisition of Geldvoorelkaar will be completed, whose previous owners are yet to receive their final settlement. Finally, operational capital is needed for on-going operations and, even more importantly, to continue our comprehensive IT development of the next generation of consumer and company loan products. The board and management of the company are delighted to have recruited Philip Mikal as our new CEO, see separate press release for details. With his background from Klarna and other payment solutions companies, we firmly believe that he is the right person to lead TrustBuddy. The strategy currently incorporates three product areas: (i) the existing consumer product for mini-loans, (ii) the new consumer product, and (iii) the company product (SME) through the Geldvoorelkaar subsidiary. The existing consumer product for mini-loans was a great way for TrustBuddy to rapidly establish itself and build-up a significant business, which today is listed on the Nasdaq First North. However, it is clear that new product areas such as company loans and larger consumer loans have much greater potential, even if, as expected, competition intensifies in the years ahead. With TrustBuddy’s and Geldvoorelkaar’s five-year history and hundreds of thousands of transactions in the IT system we developed ourselves, I believe that we have an excellent opportunity to develop and lead the young P2P segment in Northern Europe. After six months’ clearing out we now have the organization under control, costs under control, our loan portfolio under control, our IT system under control and a robust business plan in place. I welcome you all to participate in TrustBuddy’s new rights issue and I handover to our new CEO wishing him all the best for the future.

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