The Fed raised rates. What does that mean for platforms, borrowers, and investors? That is the 25 basis point question.
Lending Club responded this week with an average of 25 bps increase across its credit curve. It’s a smart move designed to signal that platforms have a business model that is insensitive to rates. A simplified version of this argument is as follows:
- Marketplace lending loans are primarily re-financings of higher-rate credit card debt
- An increase in the Fed Funds rate increases credit card APRs, most of which are variable and linked to the Prime Rate
- An increase in the Lending Club borrower rate implies that the borrower savings is the same before and after the Fed rate increase
- Investors are made whole with an additional 25 bps to compensate for an increase in the risk-free rate
- Therefore, the marketplace business model is insensitive to changes in rates
The borrower argument is reasonable. The investor side is much more fluid. Marketplace lending loans compete in a dynamic market to attract capital. There are no smooth parallel shifts.
For instance in the high yield market, we have seen high yield spreads widen 360 bps since June. There is a lot of carnage. We are observing prominent high yield bond funds undergo forced liquidations.
Although energy sector concerns explain part of this, another driver is the liquidity mismatch in mutual funds that hold relatively illiquid and distressed bonds funded by investors entitled to daily liquidity. It’s a recipe for forced selling and a risk factor we would like to avoid in the P2P industry (see our cautionary comments in Bloomberg this past September and our comments in the WSJ this past week).
As for owners of match-funded non-MtM P2P loans, the lack of liquidity may be a blessing. No margin calls. No price volatility. The rate increase is credit neutral. It’s a good time to clip our coupons. The punch bowl is going away, but there is still plenty of egg nog to go around.
- Online Lenders Pinched by Market Jitters (WSJ, 12/22/15, attached) Notable mention of PeerIQ’s securitization tracker regarding the widening in spreads in marketplace securitizations and credit markets
- Lending Club Raises Interest Rates for New Loans Following Fed Move (WSJ, 12/22/15) Lending Club maintains the same spread between its loans and credit card rates
- Jefferies Sells Rated Bonds Tied to On Deck Small-Business Loans (Bloomberg, 12/23/15) Jefferies sells one of the first rated bonds for OnDeck
- Banks test promise of blockchain as CCP replacement (Risk, 12/22/15, subscription required) Can the Blockchain obviate the need for central clearing?
- Reversing the Speculative Effect of QE Overnight (Hussman Funds, 12/21/15) A critique on the Fed’s method of raising rates via interest on excess reserves and reverse repos
- The Must-Read SlideShares of 2015 (LinkedIn, 12/19/15) A compilation of the most popular pitchbooks in 2015 – spanning entrepreneurship, leadership, technology, blitzscaling, and venture capital