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Prosper Shutting Down Prosper Healthcare and Subletting Properties

By Vy Phan

May 1, 2016

Lending Times by  (May 1, 2016 ) An unconfirmed single source has informed us that within days Prosper is shutting down Prosper Healthcare. It appears that over 100 people will be laid off in the process. In addition, it appears that Prosper Marketplace is trying to liquidate or sublet all the properties they purchased or rented last year for growth. Lending Times reached out to Prosper Marketplace 48h ago for comment. Prosper Marketplace did not return our messages so far. While this rumor is unconfirmed it has to be looked at through the prism of the latest information publicly available on Prosper Marketplace. On March 28th, we announced that the yield on a $278 million securitization of Prosper loans which was done by Citigroup Inc. and priced on Thursday, March 24th, was as high as 12.5% for a portion of loans, according to PeerIQ, an online lending data tracker. That was more than 5 percentage points higher than the top 7.3% yield for a prior offering of Prosper loans by Citigroup late 2015. This securitization felt like a canary in a coal mine and led to a seizing of the marketplace lending asset-backed securitization for unsecured personal loans. This seizing is mostly due to concerns that an increase in the default rates of both Prosper and Lending Club loans could be an early sign of a long trend due to a self-selection bias of online borrowers. This increase in defaults was confirmed by Lending Club in their K8 filing with the SEC on April 21st. This securitization concern was exacerbated by a lack of diversity in capital sources forcing loan buyers to sell no matter if the market was ready or not. On the other side , Monja has argued that Moody’s seems to have made a mistake in Prosper’s overpriced securitization. In all cases, Prosper’s marketing of loan offers sent by mail fell by 19%, from 41.4 million to 33.6 million, between December and February 2016, according to Mintel. It has been widely believed that physical mailing of loan offers has been by far the best customer acquisition channel of Lending Club and Prosper. We are only left to speculate why this reduction in the marketing budget of their supposed best channel. Industry leaders and visionaries have since spoken out explaining that it is just a speed bump and in times of uncertainty, managed growth is rewarded more than hyper growth. It is of course expected that solid business models can survive shocks. On the other side, the question arises : “What happens when the cash runs out ?”.  And it turns out that executives of well-funded platforms believe that “cash and equity are precious in this environment so acquisitions don’t make sense.  Even at a zero valuation, [they] said [they]’d be reluctant to take on the challenges of integrating a new team/tech into the mix right now.” Banks could be interested in acquisitions but with a list of conditions that makes it extremely unlikely. A high level executive at a top-20 bank said “he will be willing to consider buying a company if the acquisition were immediately accretive, all competitive banks could be kicked off the platform with no collateral damage, their regulators signed off on the deal, and the tech could easily be unleashed on their core franchise without significant integration.” Then on Monday, April 25th rumors of Goldman possibly targeting Prosper for a buyout have appeared. These rumors could be driven by an aggressive acquirer or a motivated seller seeking new resources in times of difficulty. In this case, they could very likely be driven by Goldman’s interest in building their own marketplace lending. Given Goldman’s timelines, resource, and size-needs in order to be meaningful to the group, purchasing existing large scale originators would be a natural step. These expectations were fully confirmed this same week when Goldman announced the acquisition of the $16 billion in online deposits of GE’s Capital Bank and their expectation of using these deposits for their own marketplace lender labeled Mosaic. Therefore, given this background and history of news, what can we read in this unconfirmed rumor? As usual, it is probably a diversity of things. Prosper is certainly hurting for cash. And in that context, it is actually a healthy action to reduce costs and cut the least profitable arms in order to ensure the survival of the core business. On the other side in the context of a possible acquisition by Goldman, it is not unusual, due to regulatory reasons, for potential acquirers to ask the target to part ways with assets that would be a bigger liability than an asset. On the 3rd side, some people may be tempted to believe that Prosper is closing their healthcare lending division purely because it is not profitable while the company is still flourishing. While it is still unconfirmed, Prosper is also parting ways with properties they purchased or rented last year for growth. This leads us to believe that a larger plan is at stake here. Prosper has been heavily relying on securitizations for their lending capital while Lending Club has not done a single securitization to date. We look forward to Lending Club’s May 9th earnings call which will possibly give us more insights in the market fundamentals while understanding that the companies are affected differently by the seizing of the asset-backed securitization market in unsecured marketplace personal loans. [Original article available here.]