Daily News Digest Featured News

August 1st 2016, Daily News Digest

News Comments

  • Today’s big news is Lending Club’s 1st securitization. We have a long article from PeerIQ on the subject. Very interesting. To be noted that the analysis is made of bits and pieces, very few of which can be found in the public domain. We wish there was more transparency.
  • In the international section I recommend reading the article about Chinese private banks. A very interesting new trend I was not aware of and which could impact the Chinese economy significantly.

United States

United Kingdom

Mexico

  • The rise of Mexican FinTech. I believe Mexican entrepreneurs are extremely inventive and the Mexican financial market is very different from the US. It is a very interesting market and US companies have no issues finding good talent to cover the Mexican market. I certainly understand why the Mexican fintech market is heating up. Worth a read.

China

 

United States

Lending Club’s first securitization, (PeerIQ), Rated: AAA

This week marks the first securitization of LendingClub near-prime loans. The deal is riding the wake of successful issuance and spread compression as evidenced from SoFi and Marlette. It also marks the appearance of a LendingClub branded shelf—LendingClub Issuance Trust (LCIT), suggesting a broader trend of tapping into the ABS markets and a pattern of repeat issuance among MPL originators.

LCIT 2016-NP1 was not rated (bucking a trend of 10 consecutive rated MPL deals), and thus, raises the diligence requirements for institutional investors. Here, we construct the foregoing analysis with publicly available data.

LCIT 2016-NP1 is sponsored by Jefferies and backed by about $135 million of LendingClub (LC) near-prime loans. Reports indicate that the average credit score of the collateral pool is about 640. The deal collateral has a weighted-average coupon of 28.5%.

The loans in LCIT 2016-NP1 are originated under the LendingClub Near Prime Custom Program. The Custom Program consists of loans that do not satisfy the Standard Program credit policy and are only available to qualified institutional investors. According to LC’s Q1 2016 SEC filing, the Custom Program represents 24% of total origination from LendingClub. The Near-Prime (NP) loans have lower average balance and shorter duration than loans in the Standard Program. We show in Exhibit 1 the differences amongst Super-Prime, Prime, and Near-Prime programs.
Exhibit 1 – Comparing LendingClub Super-Prime, Prime, and Near-Prime Loans
lending club securitization
How does LCIT 2016-NP1 compare to other MPL ABS executed this year?  Neither SoFi nor Prosper deals are a good comparable to LCIT due to their higher average income and credit scores of the collateral pools.  Investors may be tempted to compare LCIT 2016-NP1 with OneMain deals (OMFIT) as LCIT 2016-NP1 has an average credit score of 640.  OneMain has securitized ~$7.3 billion of subprime unsecured consumer loans since 2014. OneMain Financial, affiliated with Springleaf Financial, has over 1,000 physical branches and lends to customers with credit scores between 600 to 650. OneMain is not a marketplace lender according to the definition in our Securitization Tracker.
Given the characteristics of LendingClub NP loans, we suggest that the collateral LCIT 2016-NP1 may be closer to AVNT 2016-B than other personal loan ABS deals. AVNT 2016-B is backed by loans with an average credit score of 660 and has 18.75%-21.00% base case cumulative loss assumption from by Kroll.
Structural Protection
In the case of LCIT 2016-NP1, the A-tranche has 35.5% credit enhancement, the B-tranche has a 23.0% hard OC (Exhibit 2). Moreover, given the short WAL of 0.75 years, the A-tranche holder should expect credit enhancement to improve significantly beyond 35.5% level a year from today. The accelerated deleveraging on A-tranche provides significant credit loss protection for the bondholder. B-tranche holder benefits from excess spread as well as over-collateralization.
Exhibit 2 compares the structure of various deals and it is easy to see the differences in LCIT 2016-NP1 as compared to OMFIT 2016-3.
Exhibit 2 Comparing Capital Structure
lending club securitization 2
Favorable Pricing Indications
As of last Friday, pricing indication was favorable as compared to guidance. On July 27th, Bloomberg reported the initial pricing guidance for A-tranche at 4% and B-tranche at 7%.  By the 29th, the pricing indication was 25 basis points tighter for A-tranche and 50 basis points tighter for B-tranche (Exhibit 2).
The 6.5% coupon on the B-tranche is comparable to the loss-adjusted return of owning Standard Program whole loans. Furthermore, under Basel III risk-weighted asset requirements, unrated securitizations are subject to supervisory formula approach. Dealer financing desks may have difficulty in providing leverage to unrated tranches in LCIT 2016-NP1.
Collateral Performance
We attempt to analyze the prepayment and default speeds for the NP loans in the Custom Program.  Since data on the performance of Custom Program loans is not publicly available, we analyze the 36-month F-grade cohort of the Standard Program as a proxy. LendingClub’s Standard Program originates loans in grades ranging from “A” to “G” in order of increased credit risk.  Exhibit 3 shows that 36-month F-grade loans have lower average credit scores (680) and higher average loan coupons (24%).  The coupon rate on the F-grade loans is double the average LendingClub coupon rate.
Exhibit 3 – LendingClub F-Grade Loans in Standard Programlending club securitization 3
Exhibit 4 compares the 1-month Conditional Prepayment Rate (CPR) for LendingClub borrowers to the Standard Program across loan grades. Riskier credits run almost similar prepayments as compared to the average loan pool in the initial life of the loan. Rapid prepayments early in the pool will pay the A-tranche down very quickly, which has 0.75 year expected WAL. Prepayments reduce as F-grade loans season, and the CPR curve runs below that of A- and B- grade loans.
Exhibit 4 1-Month Conditional Prepayment Rate (CPR) of LendingClub Loans in Standard Program
lending club securitization 4
In Exhibit 5 we show the 1-month Conditional Default Rate (CDR) for all LC borrowers, F-grade, and A- and B-grade loans in the Standard Program. The CDR of F-grade loans tends to ramp up quickly in the early part of loan life or Month-on-Balance (MOB) peaking at ~25%. Since the F-grade loan borrowers are paying an average interest rate of 24%, the weaker credits exit the pool through charge-off in the early part of loan life, leaving strong credit borrowers in the pool. The CDR fully ramps up around MOB 8 and levels off between MOB 9 to 22. In the last year of the loan life, the default rate decreases, reflecting credit burn-out behavior for the F-grade loan borrowers. We expect to see similar behavior in the LCIT 2016-NP1 pool.
Investors should expect a high default rate in early years of the deal. We expect the cumulative losses for 36-month LCIT 2016-NP1 loans will be approximately low to mid-twenties given the mild seasoning and shorter collateral WAL.
Exhibit 5 1-Month Conditional Default Rate (CDR) of LendingClub Loans in Standard Program
We note that the transparency we observe in the whole loan market disappears for private or Rule 144A securitization transactions. In analyzing LCIT 2016-NP1, we have relied on sparse information from news media and on our own expertise and analytics to interpret and synthesize the available information.  We believe that transparency reduces informational asymmetries, promotes price discovery, and improves liquidity.
PeerIQ, along with SFIG [Comment : And along with Lending Times], supports self-regulatory efforts to improve loan transparency and standardization on ABS deals in order to encourage the smooth functioning of the ABS markets.

Kroll Opts Out of Lending Club Gig, (Peer IQ Newsletter), Rated: AAA

Kroll has backed out of an assignement to rate a long-delayed securitization of Lending Club personal loans. While there is no official word on the reasons for Kroll’s withdrawal, one source said it might have wanted more credit enhancement than the issuer wa willing to supply. Bloomerg peggged the enhancement at 35.5%, ahtough it’s unclear what form the cushion takes.

In any case, the move created something of a buzz among industry professionals, who are used to seeing Kroll’s grades on such transactions.

The offering is tthe first from a shelf entity called Lending Club Issuance Trust. It’s unclear if Jefferies bought the underlying loans and is acting as the issuer, as would be typical for a marketplace-loan deal, or if Lending Club itself is pulling the collateral from its own portofolio.

Online Lending: High-Yield Investing for a Low-Yield World, (Orchard Platform), Rated: AAA

In the graphs below, we see the yield on U.S. treasury notes of various duration since 1990, as well as a close-up on yields since the beginning of 2016.  As we can see, we are in the midst of a prolonged low-rate environment, and the events of the past 2 weeks have caused yields to fall even lower.

us-treasury-yield-1

Providers of online consumer loans, LendingClub and Prosper, rates range from a low of above 5% to a high of over 30%, rank-ordering by the risk of the borrower as measured by the originator-assigned credit ratings.

If loans perform as expected, there is ample spread between expected interest income and expected loss.

The Orchard US Consumer Online Lending Index measures the aggregate investor-experienced return of loans originated by major online lenders in the U.S.  The index aims to track the cash-on-cash returns that would be experienced by an investor buying a dollar-weighted slice of all outstanding loans.  As we can see in the graph below, the Orchard Index exhibits solid performance over a multi-year period.  Particularly when compared to traditionally-popular equity and fixed-income indexes, online consumer loans stand out for their ability to achieve solid returns with relatively low volatility.

orchard-vs-indexes

Investments in online lenders fall 44 percent, (Daily Times), Rated: AAA

Equity investments into online lending companies is down about 44 percent, to $2.1 billion from $3.8 billion, for the first half of the year compared to the back half of last year, according to a report out Friday from PitchBook Data Inc, a venture capital database that tracks deals and valuations.

PE Firm’s Rules: Invest in Experience, Be Wary of Online Lenders, (American Banker), Rated: AAA

In evaluating investment opportunities in fintech, the private equity firm GTCR, where Roche is a managing director, has largely steered clear of marketplace lenders because most, he said, have yet to prove themselves.

The firm is also a big believer in experience, so GTCR will only invest in companies that have competent management with proven track records. For instance, last month GTCR announced it was pairing with Scott Happ, a veteran in the mortgage technology industry, to buy Optimal Blue Holdings, a cloud-based product and pricing engine provider that processes nearly a quarter of the mortgages originated in the U.S.

There are vertical opportunities in banking, insurance or what we are doing in the mortgage industry with Optimal Blue. But there are also a lot of horizontal opportunities. Compliance is a big area of focus. People tend to think of compliance as a regulatory issue, but it is so much broader.

We’re a bit skeptical about marketplace lending. Every once in a while there is some hubris out of Silicon Valley that this new thing will change the world and then it blows up. Some of it survives, but there is going to be an adjustment. We are more inclined to wait and see how far it falls and then look to invest once the business models prove themselves, have more discipline and rigor and are more time-tested.

4 charts that show how banking customers are changing, (Tradestreaming), Rated: AAA

value brought by banks advice from robos value of branch switch last 12 months

Kabbage’s New Mobile App Reinforces Transition From Fintech To ‘Techfin’, (Forbes), Rated: A

Kabbage had an app for portions of lending management before, this is the first time they have enabled the entire process from application through qualification and funding in the app. And, Frohwein claims the entire process can lead to funding in just minutes.

When asked how this app is different from other online lending companies like OnDeck Capital and LendingTree, he points out that only Kabbage handles everything—including origination and underwriting or approvals—in an automated fashion. Kabbage competitors have a human intervene at some stage in the approval…and that’s where the waiting comes in. This is where the promise of speed pays off for Kabbage and entrepreneurs.

United Kingdom

 Wealthy investors to reduce UK exposure following Brexit vote, (Press Release), Rated: A

69 per cent of high net worth individuals are now looking to ‘rebalance and diversify’ their investment portfolios in order to reduce their exposure to UK-based assets in the wake of the Brexit vote, a global poll reveals.

770 people with investable assets of 1.3m USD or more from countries including the U.S., the UK, Australia, the United Arab Emirates, Qatar, Hong Kong, South Africa and Switzerland were surveyed in July 2016.

New platform offers repayment “guarantee”, (Alt Fi News), Rated: AAA

Orchard Lending Club (OLC) has been spun out of the AIM-listed Orchard Funding Group PLC, which has a market cap of £22.74m. The relationship between the two entities is instrumental to the P2P offering. The parent company will act to “guarantee” the repayment of investor capital, even in the instance of borrower default. OLC sees this as a key selling point for the platform, stating that “no other peer-to-peer lender in the world offers a similar guarantee”.

A company spokesperson tells AltFi that every defaulted loan will be bought back at par, meaning that investors will not lose principal, although they may miss out on interest payments.

OLC says that it specialises in “heavily-regulated” industries that are historically “unlikely” to default.

Ravi Takhar (pictured above), CEO of Orchard Funding plc, offered his take: “Professional practice and schools financing is a historically safe lending market. In the last 16 years, our group has lent over £600 million to professional practices, schools and their clients and has had zero defaults. We are hoping that this, coupled with the potential returns and ease of access will make this an attractive prospect for investors.”

Investors in the platform are able to choose between receiving interest in monthly instalments or on maturity. The minimum investment amount is £100, with terms of 1-5 years available. Interest rates vary by term, from 4% over 12 months to 7.08% over 5 years. OLC will spread investor funds across the entire loan book, meaning that investors are not required to pick and choose between loans.

Mexico

The rise and rise of Mexican fintech, (Tech Crunch), Rated: A

Since the start of the Mexican tech wave in 2012, a new breed of experienced, tech-savvy and take-no-prisoners founders have emerged and are changing the face of the entrepreneurial ecosystem.

Fintech, in particular, has attracted some of the best; from entrepreneurs with experience in Silicon Valley tech companies such as Adolfo Babatz (PayClip) from PayPal or Adalberto Flores (Kueski) from Ooyala, to others bringing in relevant sector expertise like quant jockDavid Arana (Konfio), P2P pioneer Gerardo Obregon (Prestadero), legal juggernaut Marc Segura (Play Business) and adtech star Pablo Hernandez O’Hagan (Pago Facil), to the ones who have started or scaled financial services businesses, such as hedge fund intrapreneur Fernando Ramos (Briq), and microfinance entrepreneurs Fernando de Obeso (Salud Fácil) and Vicente Fenoll (Kubo) and pawn shop impresario Luis Creel (Cohete).

To complement homegrown talent, Mexico is lucky to welcome entrepreneurs like former AMEX executive Alejandro Constantino (Afluenta) from Argentina, former PlaNet Finance COO Christian Sinobas (KiWi) from Switzerland, serial tech entrepreneurs Ruben Sanchez Souza (Visor) from Brazil and Fernando Cabello from Spain (Aplazame) and former financial sector regulator Daniel Rojas (Rocket) from Colombia.

Mexico represents one of the largest consumer markets in the world, with an emerging middle-class paired with a growing service and manufacturing economy. Against this backdrop, the financial services industry is full of contrasts: Large, nimble banks and financial institutions thrive in a country with abysmal credit penetration, low financial inclusion and scary fraud levels.

Any fintech development relies on a network of pipes, connectors, valves and adapters for data and money to move through an economy. Mexican government, banks and financial companies have been investing in technology and infrastructure since the 1990s. Companies such as BBVA, Citibank, BlackRock, American Express, VISA and Western Union have dynamic Mexican divisions with broad coverage. Today, more than half of internet users bank online and microcredit institutions have fostered a better environment for financial inclusion by creating a culture of credit in micro-business owners.

Despite all the progress in the Mexican entrepreneurial ecosystem, angel investing is still badly lacking. However, a rare bright spot is in the financial services sectors. For example, angel investors have carried most of the financial burden for launching Resuelve tu Deuda,KiWi, Prestadero, Cohete and OpenPay. Indeed, seasoned former and current financiers are participating as angel investors, including Augusto Alvarez, Fernando Padilla, Jorge Ortiz, Fernando Lelo de Larrea and Javier Creel.

top LatAm investors in FintechBut not everything in the garden is rosy. Mexico’s financial regulation was not designed for fast-paced innovation. Despite all the goodwill shown by the government, the money is still not in the bank when it comes to regulation.

China

Aspiring private banks have focus on fintech, (China Daily), Rated: AAA

China will soon kick off the second round of awarding licenses for private banks. Five privatebanks had opened for business in 2015.

Regulators have completed their feasibility study for setting up a private bank in Fujian, aprovince on the southeast coast of China, according to the China Banking RegulatoryCommission’s Fujian Office.

With a registered capital of 3 billion yuan ($450 million), the bank will position itself as a financialtechnology company and seek to build the core business framework around financial technology,innovative payment solutions and supply chain finance.

Twelve private banks are half way through the process of obtaining the necessary approvals. Theregulator’s decision is awaited.

Xiao Ying, deputy director-general of the CBRC’s Beijing Office, said in June, “Regulators aresteadily pushing forward … a private bank in Zhongguancun, a technology hub in Beijing. Morethan 10 private companies have been initially confirmed as sponsors of the bank.”

Ant’s Alipay challenges China Unionpay’s dominance, (Financial Times), Rated: A

Alipay, the online payments unit of Ant Financial, bypasses Unionpay’s network when processing mobile payments to offline merchants like supermarkets, restaurants, and taxis, Eric Jing told the Financial Times in an interview. That means Alipay is effectively diverting billions in fees away from Unionpay, which processes debit and credit card payments.

Merchant fees in China range from 1.5 per cent to 2.5 per cent, compared with between 2.5 per cent and 3.5 per cent in the US, according to Mr Jing.

“We think merchant fees in the US payments market are too high, and it’s not normal. Running a business isn’t easy [for merchants]. The fees are too high,” said Mr Jing. “The situation in the Chinese market is more normal. Merchant fees are reasonable. Competition between different [payment] market actors is a good thing. It allows service recipients to enjoy better service.

Foreign payment processors like Visa and MasterCard have struggled to gain a foothold in China due to the dominance of Unionpay.

But Alipay, which was spun off from online retailer Alibaba Group in a controversial transaction in 2011, now has powerful backers of its own. In April, Ant Financial raised $4.5bn from an investor group including sovereign-wealth fund China Investment Corp, the national social security fund, and China Construction Bank, the country’s second-largest lender.

Author:

George Popescu
George Popescu

About the author

George Popescu

Serial entrepreneur.

George sold and exited his most successful company, Boston Technologies (BT) group, in 2014. BT was a technology, market maker, high-frequency trading and inter-broker broker-dealer in the FX Spot, precious metals and CFDs space company. George was the Founder and CEO and he boot-strapped from $0 to a $20+ million in revenue without any equity investment. BT has been #1 fastest growing company in Boston in 2011 according to the Boston Business Journal and the only company being in top 10 fastest in 2012-13 as it was #5 in 2012. BT has been on the Inc. 500/5000 list of fastest growing companies in the US for 4 years in a row ( #143, #373, #897 and #1270). After the company sale in July 2014 until February 2015 George was Head-of-Strategy for Currency Mountain ( www.currencymountain.com ), a USD 100 million+ holding company focused on retail and medium institutional currencies, precious metals, stocks, fixed income and commodities businesses.

• Over the last 10 years, George founded 10 companies in online lending, craft beer brewery, exotic sports car rental space, hedge funds, peer-reviewed scientific journal ( Journal of Cellular and Molecular medicine…) and more. George advised 30+ early stage start-ups in different fields. George was also a mentor at MIT’s Venture Mentoring Services and Techstar Fintech in NY.

• Previously George obtained 3 Master's Degrees: a Master's of Science from MIT working on 3D printing, a Master’s in Electrical Engineering and Computer Science from Supelec, France and a Master's in Nanosciences from Paris XI University. Previously he worked as a visiting scientist at MIT in Bio-engineering for 2 years. George had 3 undergrad majors: Maths, Physics and Chemistry. His scientific career led to about 10 publications and patents.

• On the business side, Boston Business Journal has named me in the top 40 under 40 in 2012 in recognition of his business achievements.

• George is originally from Romania and grew up in Paris, France.

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