As earnings season unfolds, platforms are displaying flexibility in their funding models:
- Lending Club has renewed its emphasis on retail sources of funding.
- SoFi is reportedly courting sovereign wealth funds and selling conforming mortgages to a ready buyer in Fannie Mae.
- OnDeck announced a significant shift from marketplace whole loan sales towards securitization.
OnDeck: A Funding Story, Not a Credit Story
OnDeck originated $570MM in Q1 representing a 37% increase YOY in growth. The rapid growth is paired with firming credit quality, improvements in the delinquency rate, and a lowering of charge-off ratio.
OnDeck has multiple sources of funding; warehouse lines, securitization programs, and whole loan sales via the OnDeck marketplace. Marketplace sales offer the highest velocity of capital. However, the channel also experiences greater earnings volatility due to uncertainty in whole loan premiums. Gains on sales associated with the OnDeck marketplace contracted from 9% in Q4, to 5.7% in Q1.
OnDeck is shifting to balance sheet securitization programs, which offer more visibility, less volatility than whole loan sales, and greater interest income over the life of the loan. The trade-off is that warehouse lines are capital consumptive.
Why the volatility? Equity analysts are backing out what balance-sheet and warehouse capacity is necessary in order to fund OnDeck’s origination objectives. Although flexibility in funding sources is a virtue, it makes the job of managing analyst expectations much more challenging.
We like OnDeck’s move. We believe the key for OnDeck and many other platforms is to demonstrate frictionless capital access.
Impediments to Institutional Adoption
Accessing efficient capital from the ABS market is especially challenging for emerging issuers. Platforms and institutions struggle to develop a consensus view on net returns or cumulative losses.
A striking example here is the sharp difference in ratings—ranging from junk-bond to investment grade—on the inaugural securitization of Funding Circle loans (SBOLT 2016-1):
Uncertainty Creates Opportunity
Sophisticated institutional investors and platforms are putting aside the headline noise, using data and analytics to price the risk, and earning attractive returns by doing so.
We tune in for Lending Club’s earnings on Monday, and look forward to the US Treasury white paper next week providing “research and recommendations” for marketplace lending.
- CEO, Ram Ahluwalia, will join a panel discussion entitled, “Alternative Lending Securitization and Similar Capital Sources,” on June 9th in New York—RSVP here.
- PeerIQ will speak at SCI’s 2nd Annual Marketplace Lending Securitisation Seminar on June 28 in New York.
- PeerIQ will be in Miami for the ABS East Conference in Miami September 16-18.
- From the People, For the People (The Economist, 5/9/15) Benign credit conditions fostered growth of P2P industry, but how will the industry fare in a downturn?
- A Wave of Regulation is Coming for Fintech (CNBC, 5/6/16) The Treasury Department will release a white paper next week outlining “research and recommendations” related to marketplace lending.
- OnDeck Losses Grow as Lender Sells Fewer Loans (WSJ, 5/2/16) OnDeck shifts funding mix from marketplace to balance sheet in response to reduced premiums on whole loan sales.
- Marketplace Lender SoFi Gets Fannie Mae Approval (National Mortgage News, 5/4/16) SoFi receives approval from FNM to originate conforming mortgages.
- Funding Circle Shouldn’t Set the Tone for Deals that Follow (Global Capital, 5/3/16) DB finalizes securitization of Funding Circle deal, SBOLT 2016-1.
- Fed’s Dudley Acknowledges Link Between Regulations and Liquidity Problems (American Banker, 5/2/16) Post-crisis regulations directly linked to liquidity problems.
- One of the Hottest Financial Startups Is Cutting Jobs and Foregoing Its CEO’s Pay (Fortune, 5/4/16) Prosper re-focuses on core consumer business given tightness in capital markets.
- SoFi Offers Equity to Tempt New Partners (FT, 5/2/16) SoFi to offer institutional investors equity in an attempt to secure new sources of funding.
- Old Hands in New Market (Euromoney, 5/6/16) Euromoney notes the value major names in MPL investing offer, having traded through the 2008 subprime crisis.
- Prosper Shutting Down Prosper Healthcare and Subletting Properties (Lending Times, 5/1/16)