- Today’s news pour some cold water on P2P SME lending : SME securitizations and SME yield performance seem to be less than expected. See 1st article in US section and 1st article in UK section.
- Finova raised $52.5 mil , Mosaic $220 mil.
- And today’s the day : Lending Club and OnDeck release their Q2 data after the closing bell.
- And last but not least: Colorado seems to pull a Madden vs Midland move as well.
- A very important article pointing out a few issues with the SME defaults in Funding Circle’s US operation and OnDeck’s MPLT 2015-OD3 securitization breaching triggers in June 2016. MPLT 2015-OD1 had also breached triggers. On one side Funding Circle took 2 years to adjust their underwriting in the UK when they started as well (see chart in article). On the other side having 2 securitizations breach triggers for OnDeck is unexpected. We should carefully monitor how the situation evolves. A must read.
- FTC announces FinTech forum on October 26th 2016.
- BNY Mellon sees P2P lending focusing on the collateral secured market moving forward and offers an interesting report, which is very technical on different products and services they offer to enable such businesses.
- A very interesting article summarizing the bond yield by country with tenors, how UK banks offer high interest accounts seeking capital. And in this context pointing out how P2P lenders are raising capital using REITs or public funds like VPC.
- Finova raises $52.5 mil , probably most of it as lending capital, in vehicle line of credit for the underbanked.
- Solar Lender Mosaic raises $220 mil as equity investment (sic !) into Mosaic for a small majority of the firm. We therefore also get a $400mil or so valuation for Mosaic, post deal.
- A very important piece of news that flew a little under the radar : Colorado regulator is pulling a Madden vs Midland move and inquires into Avant’s lending policies and rates in the state. It forces Avant to pull Colorado loans from securitization. Who said Madden vs Midland had no impact ?
- A great analysis on how CommonBond is planning to offer student debt financing as a company benefit. And how CommonBond is testing the program on their own employees who apparently love it.
- Reminder: Lending Club and OnDeck will release Q2 results today, after closing bell. Watch tomorrow for a long Lending Times for sure.
- We covered this last week, but a good reminder : Jefferies has closed Lending Club’s bond sale. Goldman is preparing the next one.
- MPOWER , a student lender focused on international clients, hires from SoFi and brings new fintech servicer FUTR.
- An article from Credible.com for borrowers.
- And a fun list of 27 fintech unicorns from around the world. Some of them I had never heard of. Do you know them all ?
- Q2 report from VPC specialty lending investments. A treasure of data, information and updates. A must read. It pours a lot of cold water on Avant and Funding Circle’s US data as seen in the 1st article in the US section.
- The letter exchange between the government and the FCA continues in the UK. The take away : a great chart of the Liberum Alt Fi index.
- Assetz Capital also expect post Brexit volume growth. We would like to see the numbers,please.
- United States
- Funding Circle, and other online lenders, falter in America, (Financial Times), Rated: AAA
- FTC Announces FinTech Forum on Crowdfunding, Peer-to-Peer Payments, (JD Supra Business Advisor), Rated: AAA
- BNY Mellon sees possible rise of P2P collateral lending, (Global Custodian), Rated: A
- Income: any Fintech to fill-in the supply shortage?, ( Daily Fintech), Rated: AAA
- Finova Financial Raises $ 52.5 M First Round For Car Equity Loans, (Wall Street Journal), Rated: A
- Warburg Pincus Leads $ 220 Million Round for Solar Lender Mosaic, ( Wall Street Journal), Rated : A
- Colorado Inquiry Prompts Avant to Rejig Bonds, Kroll Says, (PeerIQ), Rated: AAA
- Inside CommonBond’s 401(k) platform for student loan debt, (Tradestreaming), Rated: AAA
- Online Lenders Have a Tough Job Ahead, (Wall Street Journal), Rated: AAA
- Jefferies closes Lending Club bonds sale, (Financial Times), Rated: A
- MPOWER Brings on SoFi and Student-Lending Veteran Renee Suryan as Director of University Relations, (PR Web), Rated: A
- MPOWER Partners with FUTR to Support Domestic and International Student Loans, (PR Web), Rated: B
- The Time To Start Thinking About Repaying Student Loans Is When You Take Them Out, (Forbes), Rated: B
- The 27 fintech unicorns from around the world, ranked by value, (Business Insider), Rated: AAA
- United Kingdom
- VPC Specialty Lending Investments PLC, (VPC Specialty Lending), Rated: AAA
- Understanding of risk remains a central issue for P2P industry, (Alt Fi), Rated: A
- Assetz Capital Reports: Peer-to-Peer Lending Expected to Thrive As Bank of England Slashes Interest Rates, (Crowdfunding Insider), Rated: A
- Fintech B2B small business lending marketplace Bigstone raises $3 million, (Financial Review), Rated: A
Funding Circle, and other online lenders, falter in America, (Financial Times), Rated: AAA
“Our portfolio of Funding Circle US loans has continued to substantially underperform our expectations, a trend which continued during the quarter and created a drag on the overall portfolio. We stopped purchasing new Funding Circle US loans late in 2015 so the portfolio continues to amortize down.” [ Comment: see the complete VPC Q2 2016 letter in the UK section below].
That’s from VPC Specialty Lending (VSL) Investments’ second quarter letter, released earlier this week (mea culpa, we didn’t spot it at first).
VSL’s disclosure forced Funding Circle’s listed fund to issue its own filing to the market yesterday, sort of but not outright rejecting the suggestion that loans were underperforming:
The Company’s US Credit Assets are projected to return in excess of 8% per annum on a net unlevered basis – consistent with historic performance observed on the Funding Circle US marketplace.
But that might be downplaying the historic performance a little. When Funding Circle floated its fund last year, this is the US loan performance it revealed in its November prospectus (note the numbers didn’t include expected future losses and showed the to-date performance at that time):
Sachin Patel, Funding Circle’s global co-head of capital markets, said that loans originated in the first half of 2015 had underperformed and are expected to return 7.25 per cent to its large, accredited investors, rather than the 8 per cent or more that it targets.
Funding Circle launched in the US in late 2013 and is run out of San Francisco by Sam Hodges. According to the 2015 prospectus for Funding Circle’s fund, US loans originated in early 2014 also “experienced higher than expected annualised loss rates”.
Similar missteps were seen in Funding Circle’s first years of operation in the UK too:
But Funding Circle isn’t the only online lender to small businesses in the US that is disappointing investors. According to a Morgan Stanley note last month, a second securitisation of loans originated by OnDeck, which is listed, breached its loss trigger in June:
MPLT 2015-OD3 from OnDeck breached triggers in June, joining the 3 deals we had previously highlighted – MPLT 2015- CB1 (Circleback), MPLT 2015-OD1 (OnDeck) and GLCII 2014-A (Lending Club).
That makes four online lending securitisation deals that have hit their loss trigger, meaning that cashflows are diverted to senior bondholders at the expense of the lower tranche investors. Three of those four deals, as far as we can tell, were arranged by Jefferies.
It’s also worth keeping an eye on securitisations of loans from Avant, a US consumer lender that also gets a dishonourable mention in VSL’s letter (note that Victory Park is an equity investor in Avant):
We also saw a reduction in the value of three residual interests in securitizations of Avant loans that are held at fair market value. These markdowns, which flow through capital, reflect loss curves coming in slightly higher than in the first quarter. While the capital markets have recently begun to re-open for marketplace lending loans, we have no current plans to pursue additional securitizations.
FTC Announces FinTech Forum on Crowdfunding, Peer-to-Peer Payments, (JD Supra Business Advisor), Rated: AAA
The FTC announced it will be hosting the next event in the FinTech Forum series on October 26, 2016.
BNY Mellon sees possible rise of P2P collateral lending, (Global Custodian), Rated: A
Peer-to-peer lending among buy-siders could emerge due to a challenging regulatory environment for sourcing and optimising collateral, according to BNY Mellon.
In the report, BNY Mellon states that institutional investors may also find further opportunities in a peer-to-peer relationship, where buy-side firms are both the collateral provider and receiver.
Income: any Fintech to fill-in the supply shortage?, ( Daily Fintech), Rated: AAA
The world still needs current [Comment: I believe most people use the word fixed instead of current] income for a variety of reasons: wage stagnation, tax overburdening, and the usual cash flows needs that are not at all well managed.
Source: Pension Partners
Challenger banks in the UK have been offering bonds (3yrs or less) to entice customers to sign up on their platforms.
There are two Alternative finance options that can generate income, much like high yield bonds or publicly traded REITS have been doing in normal conditions.
Investors in the UK can invest in the LE listed Funding Circle Small Business fund (FCIF) which, however, can trade below NAV and therefore, eat into the cash flow distributions.
The other alternative-finance option doesn’t require that much involvement but is less liquid because it is not publicly traded. It is the private and direct investment version of a publicly traded REIT. Essentially, the investor buys ownership into a portfolio of real estate investments (direct, no intermediary) that offer a cap rate that generates income (a long time favorite of savers). Fundrise, is a US online platform offering eREITs with a $1,000 minimum. Their Income eREIT is the one that can be considered as an option for income generation.
Income sources remain with banks (fixed term deposits or notes; loans or real estate). Bank debt, Challenger bank discounted offers, are no innovation. P2P loan portfolios and Income eREITs, from Fintechs are an innovation, which requires a more involved investor and a more developed secondary market.
Finova Financial Raises $ 52.5 M First Round For Car Equity Loans, (Wall Street Journal), Rated: A
Finova Financial has raised $52.5 million in its first institutional funding—much of it in the form of debt—for its consumer lending service that provides car owners with a line of credit.
The funding was led by MHS Capital, with participation from Refactor Capital; CoVenture; Metamorphic Ventures; 500 Startups; Funding Circle co-founder Sam Hodges; NerdWallet co-founder Jake Gibson; and Al Hamra Group, a company owned by a ruling family in the United Arab Emirates.
A “large percentage” of the round was the credit facility, the company said, but declined to give specifics.
Founded in January 2015, Finova provides loans in exchange for liens on consumers’ cars, which the company calls a “car-equity line of credit,” which resembles a home equity credit line. Its loans are typically $1,500 to $1,700.
Finova charges about 70% less than the industry average, according to Mr. Keough said.
In contrast to typical paper applications, with Finova people can apply on a website or mobile device by providing information about their cars and driver’s licenses and receive decisions quickly, Mr. Keough said. About 65% of customers apply via phones.
The car equity loan is Finova’s first product, and the company intends to launch other products for “unbanked” consumers, as the company describes its target market.
“My investment thesis is: financial services for the rest of us,” said Sheel Mohnot, the partner at 500 Startups who leads the firm’s fintech investments. “There could not be a better fit (than Finova) for working with a population who is unbanked.”
Warburg Pincus Leads $ 220 Million Round for Solar Lender Mosaic, ( Wall Street Journal), Rated : A
Private-equity firm Warburg Pincus is leading a $220 million equity investment in energy-financing startup Solar Mosaic Inc., according to two people familiar with the situation. The company, known as Mosaic, provides loans for solar installations for homeowners. It is starting to finance other energy-efficiency upgrades that are meant to reduce utility bills.
Warburg Pincus will have a slight majority control of Mosaic through its $200 million investment, one person said. Other investors in the round include financial technology venture firm Core Innovation Capital and Obvious Ventures, a firm, co-founded by Ev Williams, that seeks to invest in startups that offer a positive social impact. Andrew Beebe, managing director at Obvious Ventures, has had a long career in solar energy.
Mosaic has said that it plans to originate about $1 billion in residential-solar loans in the coming 12 months. It secured $200 million in credit from DZ Bank as the lead lender earlier this year. NY Green Bank also participated.
The company’s business model is built around allowing people to own their own solar systems. That contrasts against the predominant model of financing residential solar under lease programs in which homeowners rent the solar power their properties generate.
Privately held GreenSky LLC and Spruce Finance Inc., backed by Kleiner Perkins Caufield & Byers, also operate in the category. Earlier Mosaic investors include Spring Ventures, Serious Change, Blue Haven Initiative and Bronze Investments.
Colorado Inquiry Prompts Avant to Rejig Bonds, Kroll Says, (PeerIQ), Rated: AAA
Avant Inc., the online lending marketplace, removed unsecured consumer loans made to Colorado residents from a securitization deal after a state regulator sought information about its lending policies, according to Kroll Bond Rating Agency. Colorado concluded that loans mad to its residents must comply with its lending statutes, even if the debts originate through partner banks in another state, as Avant does in Utah, Kroll said in an Aug. 2 report. Such statutes include usury laws and restrictions on late fees and other charges, Kroll said in its evaluation of an upcoming $200 million securitization to be sold by Avant. “In light of the letters from the Colorado regulator, Avant has removed all loans made to Colorado residents,” Kroll said. Carolyn Blackman Gasbarra, a spokeswoman for Chicago-based Avant, declined via e-mail to comment while the deal is pending. Kroll said Avant is “proactively addressing any regulator concerns.” Sheila Bair, the former head of the Federal Deposit Insurance Corp. and a frequent proponent of tougher regulation, was added to the company’s board earlier this year.
Inside CommonBond’s 401(k) platform for student loan debt, (Tradestreaming), Rated: AAA
In July 2016, student loan platform CommonBond acquired online loan repayment advisor Gradible. The acquisition of Gradible, which uses an algorithm to recommend what the best repayment options are for student loan borrowers, has enabled CommonBond to roll out a new platform that it’s calling the 401(k) for student loans.
The 401(k) platform will enable employers to contribute to their employees student loans just as they contribute to their employees’ retirement. “What the acquisition of Gradible allows us to do is to marry up certain technologies that they’ve built with technologies that we’ve already built to accelerate the platform,” said David Klein, co-founder and CEO of CommonBond.
Gradible’s merger with CommonBond was two years in the works. A personal connection lead CommonBond to partner with the software company, becoming one of the refinance options Gradible offered on its platform. Eventually, CommonBond’s desire to expand its reach together with Gradible’s intention to accelerate its vision led to the merger.
Klein believes that bringing Gradible in-house will enable CommonBond to reach and meaningfully impact every one of the over 40 million Americans saddled with student debt, and to a certain extent this is true. As a student loan reassessment tool, Gradible can help students discover alternative ways to manage their debt, such as income-based repayment and public service loan forgiveness.
But the 401(k) will ultimately serve the “top talent”, who are the most likely to make it out of student debt in the first place.
CommonBond had one company ask it to implement the platform for them, and Klein has also piloted the 401(k) at CommonBond itself – much to its employees’ delight.
While the CommonBond-Gradible marriage can’t fix what’s broken with the student loan industry at large, its 401(k) product is opening up the traditional closed lender-borrower relationship to employers. So far, this threesome has benefited the entire loan ecosystem: lenders are getting repaid faster, employees are happier, and employers are meaningfully participating in their employees’ financial lives.
Online Lenders Have a Tough Job Ahead, (Wall Street Journal), Rated: AAA
LendingClub Corp. and OnDeck Capital Inc. have suffered through growing pains this year.
They each report second-quarter results Monday [Comment: today].
Jefferies closes Lending Club bonds sale, (Financial Times), Rated: A
Comment: our readers are familiar with this information from last week’s Monday Lending Times. I believe a reminder is a good idea though.
Jefferies has closed a private sale of bonds backed by personal loans originated by Lending Club, marking a step in the rehabilitation of the scandal-hit online lender ahead of its second-quarter earnings. Meanwhile, the Jefferies-led deal is “very positive” for the online-lending industry, said James Gutierrez, chief executive of Insikt, a platform that has sold bundles of Lending Club and Prosper loans to wealthy individuals.
Three months on, Jefferies has sold $105m of bonds backed by Lending Club loans, offering yields of 3.75 to 6.5 per cent.
Offers of unsecured personal loans sent out in the mail dropped 19 per cent in the second quarter from the first quarter, to 507m, according to Mintel Comperemedia, a market intelligence agency. All told, the industry has sent out 4.44bn loan offers to consumers over the past two years, peaking at 749m in the fourth quarter last year.
Goldman Sachs, which had been preparing a securitisation of prime loans from Lending Club before the scandal blew up in May, is prepared to bide its time, according to a person briefed on the bank’s plans.
MPOWER Brings on SoFi and Student-Lending Veteran Renee Suryan as Director of University Relations, (PR Web), Rated: A
MPOWER Financing is pleased to formally announce the addition of Renee Suryan to its team. With more than 20 years of experience in student lending, including 10 years as a financial aid administrator, she joins MPOWER as Director of University Relations. Currently growing at a rate of 40 percent month-over-month in loan volume, MPOWER projects it will have more than 200 school partnerships and 21 state licenses by the end of 2016.
MPOWER Partners with FUTR to Support Domestic and International Student Loans, (PR Web), Rated: B
MPOWER Financing today announced that it is partnering with FUTR Corporation to provide superior loan servicing and support to MPOWER borrowers.
FUTR is a privately held and venture-backed higher education finance provider headquartered in San Francisco, with an operational hub in Bryan, Texas. FUTR is focused on bringing together modern technology and quality service to provide new levels of transparency and insight that borrowers need to optimally manage their financial future.
The Time To Start Thinking About Repaying Student Loans Is When You Take Them Out, (Forbes), Rated: B
Comment: article written for borrowers. Probably not useful to our readers.
Credible.com is a multi-lender student loan marketplace. One issue that’s underappreciated is that the time to start thinking about repaying your student loans is not when you graduate, but when you take them out.
The 27 fintech unicorns from around the world, ranked by value, (Business Insider), Rated: AAA
Comment: Article would have deserved to be in an international section. However it is only marginally relevant to our readers and we prefer not focus our newsletter on this article. Hence we located it at the end of our US section.
An interesting list. Many of our own industry participants are present. However I had not heard of a few of them. Worth a read.
VPC Specialty Lending Investments PLC, (VPC Specialty Lending), Rated: AAA
Comment: There is a disclaimer the readers must read and agree to before accessing this article.
In the second quarter of 2016, VPC Speciality Lending Investments PLC (“VSL” or the “Company”) delivered a net return of 0.33%. Although the return wasbelow expectations, it does not reflect what we believe will be the level of long-term returns for our shareholders given our existing portfolio and pipeline. There are several reasons for the decline in short-term performance, which are outlined below along with the steps we are taking to mitigate these factors in the near term.
The decision by U.K. voters to leave the European Union (“EU”) and the subsequent depreciation of the GBP had a negative impact on the Company’s performance as we had to maintain an outsized cash balance related to our currency hedge. Leading up to the EU Referendum, we took a conservative approach to our cash management and credit allocations. A substantial portion of our assets are held in USD and other currencies, which are hedged to GBP via forward currency swaps. The hedging program was put in place when the investments were made following the Company’s March 2015 IPO and September 2015 C share offering. Since then, due to the substantial depreciation of GBP against USD, the Company has had to deposit in cash up to 11.5% of the Company’s NAV. While the direct effect of the currency swings on our income has been limited because our non-GBP exposure is largely hedged, the obligation to settle the hedges upon expiration and the need to maintain additional liquidity in the event the GBP depreciates further has limited our ability to be largely fully invested, as we strive to be. The outlook for the GBP continues to be uncertain – several economists have set target prices for USD/GBP at $1.20 or below with a one-year time horizon – leaving us to remain conservative. We are reviewing all available options to reduce the cash drag related to the margin requirement, including a revolving credit facility for the Company.
The majority of our whole loan portfolio performed in line with our expectations, although certain positions did experience higher than expected losses.
Accordingly, we believe we are now in the period of peak losses for our portfolios (assuming static economic conditions), leading to muted NAV returns in the near term but we expect the returns to even out over the life of the investments.
As previously announced, our portfolio of Funding Circle US loans has continued to substantially underperform our expectations, a trend which continued during the quarter and created a drag on the overall portfolio. We stopped purchasing new Funding Circle US loans late in 2015 so the portfolio continues to amortize down.
We also saw a reduction in the value of three residual interests in securitizations of Avant loans that are held at fair market value.
On a more positive note, our balance sheet loan portfolio continued to show excellent performance with no impairments and coupons ranging from 12% to 16%.
- On 26 May 2016, the Company made initial investments in West Creek Financial, Inc., a provider of point-of-sale lease-to-own financing to underserved customers enabling purchases of durable goods such as furniture, mattresses, and appliances.
- On 30 June 2016, the Company made initial investments in Fundbox Ltd., a provider of short-term working capital advances to small and medium-sized businesses in the U.S. and the Company funded a new tranche of senior secured debt to Elevate Credit, Inc. Elevate is a provider of cash advances and installment loans to U.S. consumers.
While cash drag as a result of the currency hedge and the performance of certain whole loan investments were disappointing, we are encouraged by the performance of our existing balance sheet investments as well as the attractive terms of newer deals. In order to further demonstrate our commitment to the Company and our confidence in achieving returns of 8% or greater, we have agreed with the Company’s Board of Directors to modify our management agreement such that we will apply 20% of our monthly management fee to purchase shares of the Company at the prevailing market price on an ongoing basis, whilst the shares are trading at a discount to net asset value.
Understanding of risk remains a central issue for P2P industry, (Alt Fi), Rated: A
Andrew Tyrie, Chairman of the Treasury Select Committee, has written to the outgoing and incoming heads of the FCA – Tracey McDermott and Andrew Bailey respectively.
“Government policies to promote the crowdfunding sector may have the right intention – to increase competition in the small to medium enterprise lending market – but government tax incentives, in effect government subsidies, may be encouraging some consumers into the use of inappropriate products.”
The problem of a perceived lack of understanding of risk by investing consumers has been a common sector theme of late.
Analysis from AltFi Data illustrates that, to date, the lending performance of the largest UK platforms has delivered consistently positive net returns. Zopa, Funding Circle, Ratesetter and MarketInvoice together make up over 65% of the sector’s origination volume and lead the way when it comes to disclosure of their lending track record. 10 years of data representing that track record demonstrates that net returns have remained positive in a range of 5-6.5%. Bad debt performance has also been impressive, coming in at 5% for the worst ever annual cohort i.e. less than 1.7% annualized, and at no worse than 1.66%, i.e. less than 0.55% annualized, over the past 5 years.
Assetz Capital Reports: Peer-to-Peer Lending Expected to Thrive As Bank of England Slashes Interest Rates, (Crowdfunding Insider), Rated: A
On Thursday, Assetz Capital one of the UK’s largest peer-to-peer lenders, announced it is predicting that both savers and borrowers will continue to turn to alternative finance companies in increasing numbers as Bank of England slashes interest rates from 0.5% to 0.25%.
Assetz Capital revealed, since launching in 2013, around £130 million has flown through its platform to credit-worthy borrowers, earning investors a total gross interest of more than £12 million to date and this lending is predicted to continue to rise rapidly.
Assetz Capital also predicted the number of business borrowers will also rise as a result of the cut interest rate.
Fintech B2B small business lending marketplace Bigstone raises million, (Financial Review), Rated: A
Fintech start-up Bigstone has raised $3 million from a range of investors, including ASX-listed diversified investments and venture capital firm CVC, to grow its small business lending marketplace and offer an alternative to the big banks.
Other major investors in the round were the founders of Bangkok-based fund Lighthouse Venture Partners Paniti Junhasavasdikul and Narith Phadungchai, in addition to private investors.
By the end of the year, Bigstone is hoping to have financed $10 million worth of loans to more than 200 small businesses.
A University of Sydney and KPMG study released earlier this year found that Australia’s online alternative finance market grew by 320 per cent in 2015 to $460 million, making it the third largest market in the Asia Pacific behind China and Japan.