Recent market jitters are starting to hit online consumer lenders.
As in other credit markets, funding for consumer loans has felt the effects of investor uncertainty as the U.S. begins to shift to higher interest rates and many corporate junk bonds struggle.
While the consumer-lending moves have been modest compared with the pain in other parts of the bond market, there are early signs of damage, including delayed deals, higher funding costs and declining prices for securities backed by the loans.
In a sign that more borrowers will also have to pay higher borrowing costs, LendingClub Corp. said Tuesday it would raise interest rates charged to new borrowers by 0.25 percentage points, matching the earlier move by the Federal Reserve to increase its target short-term rate.
Fast-growing online platforms such as Lending Club and Prosper Marketplace Inc. find borrowers and sell their loans to investors, collecting a fee in the process. The platforms rely on being able to offer borrowers better terms than traditional banks, in part because they have lower costs and because some of the investors, such as listed funds and those buying securitized loans, have relatively low yield expectations.
That may be changing. Citigroup Inc., which since August has sold more than $1 billion of securitized loans from online platform Prosper, has had to offer progressively higher yields on each deal to entice investors, according to PeerIQ, a data firm tracking marketplace, or “peer-to-peer,” lending.
The bank priced the first package of loans in August with an average-weighted yield of about two percentage points above the benchmark London interbank offered rate, according to PeerIQ. It priced the second package in October at 2.5 percentage points higher than Libor and the third—completed in mid-December—nearly three percentage points higher than Libor.
The higher yields could lead to rising borrowing costs or slimmer margins for the banks and lending platforms.
“You’re seeing spreads [above benchmarks] widen across credit markets, and that’s also true for marketplace lending securitizations,” said Ram Ahluwalia, chief executive of PeerIQ.
The next deal to watch: Deutsche Bank is running a sale of roughly $1 billion in personal loans bought earlier by Santander Consumer USA Holdings Inc. through Lending Club, according to people familiar with the matter. It isn’t yet clear whether the sale, which started in November, will take place at a discount to face value. If it does, that could signal that buyers are requiring higher yields on the loans, or they are growing more worried about the ability to resell the loans.
Share prices for London-listed funds that buy marketplace loans have also been declining. VPC Specialty Lending Investments PLC has fallen 9.2% since the beginning of October. VPC is managed by Victory Park Capital, a Chicago-based asset-management firm that has invested more than $1.7 billion in online marketplace lending deals from 2010 to earlier this year.
Ranger Direct Lending Fund PLC, which raised $200 million in a May listing in London, last month withdrew a planned additional share offering of its fund. Its shares are down 2.6% since the beginning of October.
Bill Kassul, a partner at the fund, said the attempted offering was affected by the collapse of a European lending platform, the poor stock performance of U.S.-listed platforms such as Lending Club and investors dialing back new bets in general.
“Investors said they’ve allocated enough for 2015, and that it would be a [challenge] for them to have to sell other funds,” he said. If markets improve, he said, the offering could return next year.
The volume of loans made by Lending Club, Prosper and other similar platforms has been surging over the past few years. Investment vehicles that buy those loans have grown alongside the market, including listed retail funds.
Funds focused on marketplace loans raised more than $8 billion in 2015, more than six times the amount raised last year, according to figures from PeerIQ and a Wall Street Journal analysis of securities filings. That includes more than $1.5 billion worth of investment trusts launched on the London Stock Exchange to take advantage of U.K. rules to buy loans and sell the shares to retail investors.
Now, industry experts are fretting about whether the growth will continue, especially in light of the pullback of credit that forced a high-yield mutual fund at Third Avenue Management LLC and others to close or halt redemptions.
“Markets have been tougher in the past three months,” said Al Goldstein, chief executive and founder of Avant Inc., an online lender which this year began securitizing some of its loans. Avant is aiming to do more securitization deals next year, Mr. Goldstein said.
Still, with unemployment and household-debt levels low, he expects strong growth as consumers continue to seek, and repay, online loans. “I’m optimistic it’s a bit of a blip,” Mr. Goldstein said.
Available here: https://www.wsj.com/articles/online-lenders-pinched-by-market-jitters-1450808091