Sunday, May 6, 2012

Prosper's delinquent debt situation

On May 2nd, Doug Fuller provided a Debt Sale Update to lenders, explaining why Prosper delayed their scheduled debt sale. In a nutshell, Prosper believes that, although it has received a record number of bids, the offer price was too low. When asked, Doug suggested that the offer price was ⅓ of the previously offered price.

Prosper lists the results of past debt sales on their website. Now personally, I find that table a little bit confusing. So I used Excel to try and rearrange the data a little bit to see if I could get some clarity:

Hopefully the Dec '06, May '07, Aug '07 and Dec '07 columns are self-explanatory. They are from the Prosper table referenced above. The Current Offer column is extrapolating ⅓ of the previously (Dec '07) offered rates. I then used the Prosper Performance page to get the amounts outstanding in each category that previously had bids.

The amounts are overly optimistic. I found no way to separate out the debt to Texas borrowers that is worth a lot less than any other debt, nor to identify the number of loans in bankruptcy status. For bankrupt loans, lenders will receive absolutely zero, since Prosper cannot sell them and I suspect in most cases Prosper will not recover any funds from bankruptcy proceedings either. Even if the borrower filed bankruptcy too soon after taking out the loan and the loan may thus be exempted from the bankruptcy, Prosper has to file paperwork and it is not in any agreement that I have seen that Prosper will represent lenders at the bankruptcy proceedings - nor has Prosper volunteered that they do.

Leaving this aside, the potential amounts that Prosper can recover money on from the bad debt sale is thus listed in the Amount column.

Next up is the Estimated Recovery column - this is simply the putative offer price multiplied by the outstanding amount. The Max Recovery column reflects the recovery if Prosper gets very, very lucky and debt buyers again offer the same for the debt that they offered in Dec '07. Note however, that in all the preceding sales, the amount offered showed a decline from the previous sale event.

At best, lenders stand to recover between 10.5% and 3.5% of the currently delinquent $6.6 million.