This article first appeared in Personal Wealth, The Edge Malaysia Weekly on June 8, 2020 - June 14, 2020
As someone who has spent more than a decade structuring investments for institutional clients, Vincent Soh is used to looking for relatively safe asset classes that still provide a good yield. It also helps that Soh is a risk-averse investor who likes to make carefully informed investment decisions.
During that period in his career, Soh realised there were few safe options other than fixed deposits for his clients, which were mostly cash-rich listed companies.
“These corporate clients could not go into high-risk investments. So, we helped them source for banks that could give them the best fixed deposit rates. But these clients always asked, ‘Can you find any other investments that yield more than 3.5%?’ They have to pay 6% to 8% a year for their bank loans. So, they want better-yielding investments that are also safe,” says Soh, a former institutional client portfolio manager for Eastspring Investments Bhd and Kenanga Investors Bhd between 2004 and 2017. Prior to that, he spent almost 20 years as a business consultant for several multinational firms.
These clients preferred not to buy the bonds or shares of other listed companies since they did not want to assume the risks of another company, he added. This was when Soh realised the potential in peer-to-peer (P2P) financing, especially for invoice financing. In 2018, he set up MoneySave (M) Sdn Bhd, a P2P financing platform that focuses on trade invoice financing to capitalise on this opportunity.
Invoice financing is a method for suppliers to borrow money against the amount due from their clients, also known as buyers. In this process, investors can step in and lend money to the suppliers, who will return to the investors their capital plus interest once the buyer repays the invoice amount. In some cases, buyers who are large companies also act as the investor by lending money to those in their own supply chain.
“These big, cash-rich companies can ask their 30 contractors to sell their invoices. The companies can then use their cash to invest in the invoices and earn a higher return than leaving their cash in the bank,” says Soh.
Trade invoice financing is considered relatively safe because the invoice is regarded as collateral. It is also more secure because the invoices are paid by the buyer, which could be reliable paymasters such as large companies or the government.
“There are also quite a few conglomerates that have a credit arm or a banking arm [which provides invoice financing]. They encourage the contractors in their supply chain to obtain financing from the credit arm, charging them interest rates of between 8% and 11%. These companies will then use their cash to provide financing and earn from the interest,” says Soh.
What about retail investors and companies that cannot set up their own credit arm? This is where MoneySave steps in to provide invoice financing investing opportunities for these parties. Soh aims to attract retail investors, corporate investors and, eventually, institutional investors to the platform.
While MoneySave is not the only P2P player to focus on invoice financing, it is the first to offer insured invoice financing notes, present multiple risk reduction strategies to investors and have the lowest minimum investment amount of RM5 per note, according to Soh.
The company is among the second batch of P2P players to be approved by the Securities Commission in the middle of last year. In early May, it became the latest P2P player to launch its platform. Since then, it has issued nine notes, five of which were fully funded as at June 2.
Reducing risks for investors
The idea of Soh’s starting a P2P platform might sound counterintuitive, since P2P financing is a relatively risky asset class. But he has brought his investment philosophy into MoneySave by focusing on the trade invoice financing and introducing multiple risk reduction strategies.
“That is our unique proposition. We’re probably the first P2P platform in the world to offer multi-risk reduction strategies. For example, investors can choose notes with higher credit rating, insured notes or notes where the buyer has more than RM50 million in cash. We are very transparent with this information and give investors the choice of reducing risk,” he says.
As is the case with some P2P players, MoneySave’s investors will get to see a factsheet of information on not just the issuer, but also the issuer’s buyer.
“We do not reveal the buyer’s name. But, for example, we will reveal that the buyer is a Bursa Malaysia-listed civil engineering company with a paid-up capital of RM300 million, revenue of RM650 million and profits of RM70 million. The buyer has been in business for 27 years and has been doing business with the contractor [issuer] for five years. This is invaluable information,” says Soh.
There are eight risk reduction strategies or incentives on the platform. If the issuer opts or qualifies for the incentives, it will get a risk reduction incentive rate. All this information will be available on the factsheet.
For instance, one of the risk reduction incentives is that the buyer will pay the invoice directly to MoneySave instead of the issuer. This is more secure, since investors do not have to bear the risk of the issuer’s failure to repay investors after receiving the invoice amount.
If the issuer opts for this strategy, the risk reduction incentive is 1.5%. This means the issuer will be assigned a lower interest rate and investors will get a lower effective return for the note in exchange for the added security.
Other risk reduction incentives include insured notes against bad debt or delayed payment, invoice notes of which the buyer is the government or government-linked companies, and the buyer has more than RM50 million in cash or a net worth of more than RM10 million (see table). In the latter two cases, the buyer is unlikely or less likely to default. The maximum risk reduction incentive for each note is 7%.
Soh provides another example. Say an issuer with a credit rating of B has to pay an interest rate of 12.5%. The buyer of the invoice is the government, the note is guaranteed by the key director and the invoice is validated by the buyer’s finance department. Therefore, the total incentive rate that the issuer qualifies for is 4%. That brings the interest rate or effective rate down to 8.5%.
“By being transparent about our risk reduction incentives, MoneySave is offering investors the control to invest in something they want. It is tied back to my investment philosophy. I’m risk-averse, so I want to invest only in notes in which I have control and I know what’s going on,” says Soh.
The effective returns for notes on MoneySave will range between 7% and 16%. According to Soh’s estimates, the potential yield is between 7% and 10% for insured trade invoice notes, between 8% and 12% for invoices issued by government contractors, and between 10% and 16% for uninsured invoices.
Banking on transparency
Each issuer’s factsheet states its background, financial summary, bank statement analysis and other facts about the company. If the issuer is not new to the platform, there will be information about its past notes and repayment behaviour. Investors can also see the buyer’s business background and basic financial information.
“Compiling this information takes up a lot of our time. But institutional players and fund managers will need this information to make investment decisions,” says Soh.
Will this level of transparency deter issuers from coming to MoneySave? Soh does not believe so, since potential issuers have to provide this information to other P2P operators as well. The only difference lies in the amount of information each P2P operator makes available to investors.
“Good-quality companies will come to our platform because they have nothing to hide and would enjoy lower financing costs,” says Soh.
He is sourcing for issuers from the network of clients under Magnisave Group Sdn Bhd, a financial advisory company he also owns, that advises around 40 large listed corporate clients on trade credit insurance, liquidity and risk management.
Soh started Magnisave in 2017 after leaving Kenanga. Other than helping his institutional clients manage cash investments, he also offers them financial risk management solutions such as trade credit insurance.
“We advise our corporate clients on how they can insure themselves against bad debts and delayed payments. For example, we recently successfully assisted our client, a construction materials supplier, to claim RM3 million in bad debts from the insurer,” says Soh.
The financing term of trade invoice notes on MoneySave is between 30 days and 36 months. Investors have to pay a service fee of 10% on the interest of each note.
MoneySave will also host other types of financing notes, including insurance financing, dealer financing and franchise financing. “We are working out a deal with a very large franchisor so they can give instalment plans to their franchisees instead of requiring a lump sum of franchise fees. But we will focus on trade invoice financing because it is safer,” he says.
As with other P2P platforms, investors can carry out the entire onboarding process online. Issuers can also complete most of the listing process online, but a site visit is a pre-condition to being approved. Despite the current poor economic conditions as a result of the coronavirus pandemic, Soh says the company already has 30 applications from potential issuers.
Investors should consider this asset class now, he adds. P2P notes could provide higher returns than fixed deposits, and it is not as volatile as nor related to equity market movements.
“We have eight safety nets for you to choose from. Do you trust the government to pay its invoices? Do you trust a buyer that is cash-rich? Or do you trust a buyer who will pay the invoice directly to the platform? We will also validate invoices to make sure they are not fictitious,” says Soh.
First player to provide insured trade invoices
A unique feature that MoneySave (M) Sdn Bhd offers investors is insured trade invoices. It is currently the only P2P player to do so. It is offered as one of the eight risk reduction strategies that will give issuers a discount on their interest rates and provide security to investors in case the buyer fails to pay the invoice.
How does it work? MoneySave founder and CEO Vincent Soh provides an example.
“Let’s say an IT specialist company issues an invoice worth a million ringgit to Hypermarket X. The IT company can insure the note to protect itself in case Hypermarket X goes bankrupt. In that case, the IT company can claim 90% of the bad debt. If Hypermarket X does not pay in time, the IT company can also make a claim,” says Soh.
The insurer will then chase Hypermarket X for a payment. After a period of time, if the invoice is still unpaid, the insurer will pay 90% of the insured amount to MoneySave and continue with the legal action against Hypermarket X.
The IT company’s obligation is to repay the investors’ capital and interest first before receiving the claim from the insurer, Soh emphasises. If the IT company is unable to do so, MoneySave can sue the company upon instruction from investors. Of course, MoneySave can also arrange for a staggered payment schedule for the IT company. In the worst-case scenario, investors of insured notes will still receive at least 90% of their capital back.
MoneySave will refer the issuers who want to insure their notes to Magnisave Group Sdn Bhd, which is also owned by Soh. Magnisave, which has a financial advisory licence, has a working relationship with insurers such as Allianz, RHB Insurance and Lonpac, which provide trade credit insurance.
But not every issuer who wants the insurance can qualify for it. “They need to let us know who their top 10 buyers are and how much they want to insure. Magnisave, which is licensed to do trade credit insurance, will help source and negotiate for the right insurance policy,” says Soh.
The insurance typically costs 0.1% to 0.5% per invoice, according to Soh. The cost depends on the coverage amount and risk of the buyer. If the issuer insures their notes, the risk reduction discount that MoneySave offers is 2.5% a year.
“So, if your cost of insurance is 0.2% for a two-month invoice note, then it’s 0.1% for each month. When you annualise the insurance cost, it’s 1.2% per annum for you. With the 2.5% discount, you are basically getting a lower cost of financing and free insurance. The insurance cost is paid indirectly because of the lower cost of financing,” he says.
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