Bloomberg by Matt Scully (March 30, 2016)
LendingClub Corp., a company that lends to consumers over the Internet, has hired Guggenheim Securities to help it set up a program for bundling its loans into bonds, three people with knowledge of the matter said. The company hopes the program will cut its funding costs and boost profits, but it does not plan for the bonds to become its main source of outside financing. LendingClub finances itself now mainly by selling loans to individual and institutional investors through its website. Company spokesman Steve Swasey declined to comment, as did Guggenheim spokesman Anthony Lacavaro. Companies like LendingClub and Prosper Marketplace Inc. originally aimed to use technology to make lending cheaper and more efficient. Consumers and small businesses would borrow directly from individual investors online. Speaking on Bloomberg television in 2014, the year the company went public, LendingClub Chief Executive Officer Renaud Laplanche said the company was trying “to transform the entire banking system.” Over time, the web-based lenders have come to look a little more like traditional consumer credit companies. LendingClub said in a presentation last month that 46 percent of its funding comes from banks, pension funds and other institutional investors.
Growing Pains
This sort of consumer debt has been securitized before, after Citigroup Inc., BlackRock Inc., and Jefferies LLC and others bought loans from companies like Prosper and LendingClub and packaged them into bonds. LendingClub is now aiming to issue such securitizations itself, which it hopes will allow it to routinely tap bond markets, the way an auto finance company might. The company expects the securities to be graded by credit rating firms. While the market for these bonds is getting bigger, it’s encountered some growing pains. Moody’s Investors Service said in February that Prosper’s loans were performing worse than it expected and that it may downgrade a handful of securitizations backed by the debt. Investors have since forced issuers to pay out bigger yield premiums for new bond deals.
Risk-Averse
Last week, Citigroup sold $278 million of bonds backed by Prosper loans it had purchased. Investors in that deal demanded a yield premium roughly twice as large as a similar transaction that Citi sold in December, according to people familiar with the matter, who weren’t authorized to speak publicly and asked not to be identified. Financing costs for online lenders have increased as investors across many markets have become more risk-averse, said Ram Ahluwalia, chief executive officer of loan data firm PeerIQ. LendingClub is under pressure to show it can fend off mounting competition from rival startups and continue growing. The firm soared to a market valuation of more than $10 billion following its initial public offering and has since tumbled to $3.1 billion. From 2007, the year LendingClub started operations, through December 31, the company made about $16 billion of loans. Its average borrowers have a minimum credit score of 699, on a scale of 300 to 850. Levels above 620 are usually considered to be “prime.” Its borrowers on average earn around $75,000, above the U.S. median household income of around $54,000. The company expects net losses for its 36-month loan to range between 1.9 percent to 17.64 percent, according to slides from a presentation to investors obtained by Bloomberg. Rates currently range from 5.3 percent to 28.9 percent, according to its website.