WSJ by Peter Rudegeair and Telis Demos (April 26, 2016)
LendingClub Corp. is planning its first sales of bonds backed by its unsecured loans, as the largest U.S. online lender looks for new funding sources in a challenging market. The San Francisco firm has been working with Goldman Sachs Group Inc. and Jefferies Group on the offerings, which are slated to be discussed with potential investors as early as this week, people familiar with the matter said. It would be an important test of investor appetite for the kinds of consumer loans that investors have grown more discerning of for much of the year.
LendingClub, which started in 2006 as an online peer-to-peer marketplace where individual investors lend money to individual borrowers, is one of the only large online lenders that hasn’t actively pursued securitization deals as a means to ramp up growth.
But the firm has failed to win over investors since a much-anticipated 2014 initial public stock offering. LendingClub shares lost a third of their value since the start of 2016 and 60% over the past 12 months, before rallying 1% in trading Tuesday.
The company led by CEO Renaud Laplanche would be particularly hard hit if investor demand for its loans were to wane. It derives the majority of its revenue from fees it charges borrowers, as opposed to interest collected over the life of the loans, and the company projected in February that 2016 revenue would be 72% greater than it was a year earlier.
In the past, LendingClub loans have been securitized indirectly. Other financial firms, such as the hedge fund Eaglewood Capital Management, have resold LendingClub loans via securitizations without the company’s participation.
“It’s a key part of diversifying funding sources,” said James Gutierrez, chief executive of Insikt, an online lending and securitization platform. Insikt in November independently placed a $46 million securitization, backed by loans it bought from LendingClub, with wealthy individual investors.
He said it would be smart for LendingClub to be closely involved with the structuring of the offering, rather than remain on the sidelines. “They can customize [the deal] in a way they think works best for investors,” he said.
But the online lender is looking to embrace securitization at a time when the overall industry is dialing back new issuance. In the first quarter, $1.5 billion worth of securitizations backed by online loan pools were sold to investors, down 21% from the $1.9 billion sold in the fourth quarter of 2015, according to PeerIQ, an online lending data and analysis firm.
Other lending companies including Prosper Marketplace Inc. and Social Finance Inc. have looked for alternatives to securitizations to expand investor appetite for their loans.
Some details of the potential LendingClub arrangement, such as the exact structure and number of potential transactions, couldn’t be determined. Goldman Sachs was expected to advise on the packaging of LendingClub loans to borrowers with better credit scores, and Jefferies, a unit of Leucadia National Corp., was expected to do the same for the loans to less creditworthy borrowers, these people said.
Recent securitization transactions that have been sold to investors were largely done at much higher yields, reflecting concerns about the creditworthiness of borrowers and the economy. Buyers of a March bond offering based on Prosper Marketplace Inc. loans demanded yields as much as five percentage points higher than a similar deal late in 2015.
LendingClub’s Mr. Laplanche previously has touted the company’s relative independence from the whims of bond investors in securitization markets as a selling point.
“We have a big competitive advantage over some of the newer platforms that, for the most part, have no retail investors and considerable concentration in investor base or strong reliance on the securitization markets,” Mr. Laplanche said on a conference call with analysts in October.
In securitization deals, banks bundle loans made by originators such as Lending Club or Ford Motor Credit Co. into segments that are rated and then sold to investors based on their desired return and tolerance for risk. A spokesman for LendingClub declined to comment.
LendingClub has used other tactics, such as raising interest rates on new borrowers, to boost investors’ returns and keep them interested in buying its loans. The company said in a securities filing last week it was charging borrowers 0.23 percentage point more on average to partially offset an uptick in projected loan losses, the third time it raised rates in less than six months.
[Original article available here.]