The US labor market posted strong job gains in November with payrolls rising 228,000 and the unemployment rate holding steady at 4.1%. The report suggested that there may have been only residual effects from the hurricanes that hit the US in October, and that job growth is normalizing to its long-term trend. The probability of a 25 bps rate hike next week stands at ~98% per interest rate futures.
In regulatory news, Rep. Patrick McHenry (R-NC) sent a letter to the Cleveland Fed accusing them of using their study on peer-to-peer lending to block bill “Protecting Consumers Access to Credit Act” (H.R. 3299). The bill proposes to overturn a decision in the Madden v. Midland Funding case against the “valid when made” clause which allows sales of legally made loans in one state to parties in other states, even if the loan exceeds the interest rate cap in the state of the borrower.
In securitization news, LendingClub’s CLUB 2017-NP2 deal was rated A-, BBB and BB on tranches A, B and C respectively by KBRA. This is LendingClub’s fourth ratedself-sponsored deal and the second one consisting of near prime unsecured consumer loans. The FICO score distribution on the collateral pool is between 600 and 659 with a weighted average FICO score of 639, identical to that on the CLUB 2017-NP1 deal. The note principal balance on NP2 of $265.8 Mn is slightly lower than that of NP1.
This is LendingClub’s first near prime rated transaction that includes loans that have not made a first payment as of the cutoff date. LendingClub will repurchase or substitute any loan in which the borrower fails to make the first scheduled payment (subject to the same eligibility criteria). The overcollateralization percentage and the credit enhancements of each tranche are lower by roughly 2.5%, with tranche A having a credit enhancement of 49.8%. This deal is expected to price next week.
LendingClub (LC) held an investor day this past Thursday. LendingClub utilized the Investor Day as an opportunity to “reset”. Markets honed in on lower revenue guidance (now between $680 Mn to $705 Mn) and led the stock lower ~15% immediately after the opening bell despite LC’s commitment to 15-20% top-line revenue growth over the next several years. The Investor Deck featured over 100 slides covering strategy, new product innovation, the competitive landscape, and return expectations. We focus this week’s newsletter on some of the highlights.
Positioning and Strategy
LendingClub doubled-down on the capital-light marketplace lending model, and emphasized the role of technology, data & analytics, and the “virtuous cycle of scale.” LendingClub also emphasized the new product innovation on the investor side of its business – notably the Exchange Traded Product (ETP) which we think may have been lost in the immediate reaction to revised guidance.
LC sees an addressable market opportunity of $300-350 Bn in the credit card refinance and debt consolidation spaces, and a $38 Tr pool of addressable capital on the investor side of its marketplace.
LC has a two-pronged strategy to attack these markets and meet EBITDA margin goals:
- 2018: Focus and Invest
- Accelerate personal loans growth while prudently managing credit
- Invest in auto and leverage secured capabilities for personal loans
- Strengthen Investor franchise by expanding securitization and growing new structures
- Address legacy issues
- 2019-2020: Expand and Deepen
- Expand lead in personal loans through further data, analytics, and product and testing efforts
- Expand role in the borrower journey through new products and services
- Expand investor universe to lower cost of funds, improve resiliency, capture more value
Product and Financial Innovation – ETP, CUSIPs, Debt Consolidation
One of the more exciting highlights from LendingClub was the announcement of anExchange-Traded Product. The ETP gives financial advisors, retail and institutional investors access to MPL loans with convenience and liquidity. The product is a more natural way for retail investors to access MPL loans using their existing brokerage accounts.
LendingClub also announced a new debt consolidation product that pays off the borrower’s debt directly to the credit provider. The product makes it easy for borrowers to seamlessly consolidate credit card debt while also lowering costs to the borrower, and is expected to drive better credit performance.
LendingClub previewed an increasing range of new products in the coming years:
Financial innovation – via securitization, bank forward flow agreements, CUSIPs, and RIA friendly products – has allowed LC to broaden its funding mix over time. The resiliency of funding mix to varying economic environments was also a key message during the investor day. LendingClub reported that over 180,000 retail investors and over 180 institutional investors serve as sources of funding to the marketplace. We note that banks are increasingly the dominant source of funding for LendingClub.
Focus on Investor Returns
As seen in the chart below, LendingClub is positioning MPL loans as a new asset class that offers higher risk-adjusted returns as compared to other fixed incomealternatives, while offering lower interest rate risk. LC has delivered historical annualized loss-adjusted returns of 6.7% on its Prime loans portfolio, and 10.9% on its Near-Prime loans portfolio.
The top question on investors’ minds remains the expected performance of MPL loans thru a recessionary scenario in the chart below, LendingClub published estimates of expected annualized charge-offs on Prime loans in a baseline scenario of 5.5%, in a moderate recession scenario of 7.9%, and in a protracted slump scenario of 11.5%.
These estimates, generated together with Moody’s Analytics, show that LendingClub’s Prime loan portfolio generate an expected IRR of 3.4% in a moderate recession. We note that rating agencies like KBRA have estimated base casecumulative losses in the 13.25% – 15.25% on prime loans (in the recent CLUB 2017-P2 transaction.)
Overall, investors reacted swiftly to lower revenue guidance and that appears to have overshadowed the direction and new innovation – particularly the Exchange Traded Product – that LendingClub unveiled during the call. Markets remain in a “shoot first, ask questions later” mode as public lenders jockey for growth and competitive differentiation.
Investors seeking a 3rd party perspective on loss and prepay timings should reach out to PeerIQ to learn more about our out-of-the-box credit models for whole loan and ABS investors.
PeerIQ in the News
- LendingClub Introduces New Certificate Investment Vehicle
- Buying Frenzy and Structure Evolution to Define 2018, Says MPL Panelists (GlobalCapital, 12/2/17)
- Donuts at the CFPB, LC’s Pass-Through Security, Mortgage Delinquency Case Study (PeerIQ), Rated: AAA (LendingTimes, 12/4/17)
- The Grapevine (AB Alert, 12/8/17) PeerIQ has hired Jason Harris as director to help clients use its loan-analytics products.
- Want That House? You’d Better Pay in Cash (WSJ, 12/5/17) The opportunity for FinTech’s to expand responsible access to mortgage credit and drive financial inclusion is as strong as ever.
- How Cross River Bank plans to bring mobile payments to business customers(tearsheet, 12/4/17) CRB has developed payments solutions for faster, more secure, and lower cost transfers.
- U.S. Consumer Credit Increased by $20.52 Billion in October (WSJ, 12/7/17) Fed reports outstanding credit rose at a 6.51% seasonally adjusted annual rate displaying strong growth.
- Recent Origination Milestones in Online Lending (Lend Academy, 12/6/17) Funding Circle, Lending Club, and Kabbage announced major milestones in originations.
- Mortgage Marketplace Lender LendingHome Surpasses $2 Billion in Loan Originations (Crowdfund Insider, 12/4/17) LendingHome announced it has originated more than $2 Bn in mortgage loans for homeowners and real estate investors.
- SOFI to offer cash management account (American Banker, 12/7/17) SoFi will process payments and offer debit card transactions next year.
- Moody’s: US private student loan refi lenders’ ABS collateral will likely continue to perform strongly (Moody’s, 11/16/17) Strong performance of collateral backing US private student loan asset-backed securities largely reflects the strong credit profiles of the underlying borrowers.
- A Gift Guide for the .0001% (Bloomberg, 12/6/17) What to buy the billionaire on your list this holiday season.