- Main news: Jefferies-Loan Depot securitization breaks trigger; Lending Club’s fund 1st down-month; Funding Circle’s results; GLI’s results; Lufax signs banks for IPO.
- Main analysis: PeerIQ’s summary of last 9 months.
- Main thought provoking: The causes and effects of low rates, a must read Economist article; China’s number of p2p lenders will keep growing to 10,000 ?
- Another of Jefferies’ securitization breaks triggers: Loan Depot. I am not an expert in securitization, nor in investment banking. But it looks to me that Jefferies’ made securitizations have by far the highest probability of breaking triggers. This is very strange. See Circle Back and OnDeck’s. And now LoanDepot’s.
- PeerIQ’s summary of the industry from Q1’s ABS West to Q3’s ABS East. A great summary.
- Lending Club’s fund accounting changes lead to a valuation overhaul and a 1st down month in August 2016. The cost of being more transparent and trustworthy moving forward.
- A report that is a few months old and is claiming an industry growth of CAGR of 53.06% during the period 2016-2020.
- One of the most interesting articles I ever read on the causes and effects of the low rate environment we are in. Extremely interesting and a must read Economist article.
- Klarna onboards SAP’s product in 3 months. Interesting for 2 reasons: 2 large companies doing an accounting migration in 3 months is extremely impressive. And second, SAP now has an accounting solution for fintechs.
- Funding Circles’ results which will be published tomorrow: 140% revenue growth and losses only doubled. I continue to be amazed how much importance is given to a company’s loss in the UK while it is in very fast growing mode. To me, the headline should be : Lending Circle continues vertiginous growth at 140% despite its size.
- GLI’s Finance interim results. Very interesting as well. Company Net Asset Value “NAV” per share decreased from 42.73p to 37.07p. We look forward to seeing how this re-organization will pay out moving forward.
- Landbay adds new channel : Zoopla. £100 p2p investments into buy-to-let mortgages.
- Society One raises funds through a deal with Beyond Bank Australia: $1.5m in equity and $10m funding commitment.
- Lufax signs up CITIC Securities, Citigroup, JPMorgan and Morgan Stanley for IPO.
- “The number of P2P platforms nationwide will continue to rise at a rate of 90 per cent over both of the next two years as the industry further consolidates, and could eventually reach 10,000.” I find it very hard to believe that when 1/3 of the existing platforms are in trouble, the number of platforms will continue to grow at all in fact. However, it is unclear how well information travels in China and perhaps 1/3 of the industry being in trouble is not apparent to most people.
- United States
- Internet Lender’s Bond Deal Starts to Sour a Year After Sale, (Bloomberg), Rated: AAA
- “Mark-to-market” from Q1’s ABS West to Q3 ABS East, (Peer IQ email), Rated: AAA
- LendingClub Fund Has First Negative Month on Valuation Overhaul, (Bloomberg), Rated: AAA
- Global P2P (Peer-to-peer) Lending Market Analysis 2016 Forecasts to 2021, (News Maker), Rated: A
- Low pressure, (The Economist), Rated: AAA
- Swedish FinTech Klarna Partners with SAP on Whirlwind Three-Month Business Overhaul, (PR Newswire), Rated: A
- United Kingdom
- Global expansion almost doubles losses at fintech unicorn and peer-to-peer lender Funding Circle, (City A.M.), Rated: AAA
- GLI Finance Limited Unaudited Interim Results for the six month period ended 30 June 2016, (Email), Rated: AAA
- Zoopla partners with Landbay for P2P lending solution, (Financial Reporter), Rated: B
- Financeit expands management team by tapping CFO from Capital One Canada, (Morningstart), Rated: A
- Beyond Bank Australia and SocietyOne announce key partnership, (PR Wire), Rated: A
- P2P lender Lufax taps four banks for Hong KongIPO, (China Daily), Rated: AAA
- One third of China’s 3,000 peer-to-peer lending platforms ‘problematic’: new report, (SCMP), Rated: A
Internet Lender’s Bond Deal Starts to Sour a Year After Sale, (Bloomberg), Rated: AAA
Comment: I am not an expert in securitization, nor in investment banking. But it looks to me that Jefferies’ made securitization have by far the highest probability of breaking triggers. This is very strange. See Circle Back and OnDeck’s. And now LoanDepot’s.
Online consumer loans made by LoanDepot Inc. are going bad faster than underwriters expected, threatening payments to investors who bought bonds backed by those debts less than a year ago.
Cumulative losses rose to 4.97 percent in September, breaching the 4.9 percent “trigger” in the $140 million securitization that Jefferies Group assembled last November and sold to investors that now include the Catholic Order of Foresters, according to data compiled by Bloomberg. Bondholders in the riskiest portion of the deal who may see funds diverted couldn’t be identified because the offering is private.
LoanDepot, which for years has specialized in traditional mortgage banking, began making small consumer loans over the internet last year.
Jefferies has been a lead underwriter of other securitizations backed by loans made by online startups, and at least two of its deals, for CircleBack Lending Inc. and OnDeck Capital Inc., have also breached their triggers. Those include Marketplace Loan Trust 2015-CircleBack 1 and Marketplace Loan Trust 2015-OnDeck 3.
CircleBack Lending hired Jefferies to explore a sale, people familiar said in June, as funding for online-finance companies tightened amid concern about loan performance.
LoanDepot aborted a planned initial public offering last November and turned to other sources of funds, including a $150 million term debt financing completed in August. The company says it recorded 80 percent year-over-year average annual growth from its founding in 2010 to 2015, funding more than $70 billion of loans. Second-quarter fundings reached almost $10 billion in home, personal and home equity loans, the company said.
“Mark-to-market” from Q1’s ABS West to Q3 ABS East, (Peer IQ email), Rated: AAA
This past February, at ABS West, conversations centered on deteriorating collateral performance and liquidity concerns. A steady flow of negative headlines–Madden-Midland, negative ratings actions, San Bernadino, platform layoffs, and global slowdown concerns–weighed heavily on investor sentiment.
Two events marked the peak of investor apprehension:
In the bond market, the pricing of CHAI 2016-PM1 (PeerIQ analysis here) where Mezzanine bonds delivered greater returns than the whole loans themselves.
In the equity market, investor capitulation after the Lending Club May 9th disclosures.
Turning of the Tide
Global credit markets began to firm in April. Lending Club tightened DTI criteria, elevated the role of the capital markets function, and strengthened leadership on the board and executive team.
In May, the US Treasury report published “Opportunities and Challenges in Marketplace Lending”–a constructive regulatory development. Treasury acknowledged the role of securitization in funding growth, and consistent with the PeerIQ RFI, recommended the need for standardized reps & warranties, consistent reporting standards for loan origination data, loan securitization transparency, and consistent market-driven valuation standards.
SoFi achieved a AAA rating for an MPL bond and cracked open the MPL ABS investor market to global investors via its hands-on marketing approach.
PeerIQ observed that secondary ABS spreads continued to tighten despite volatility in the equity markets. PeerIQ also observed in the Q2 tracker that the combination of stricter underwriting, higher coupons, and tighter secondary ABS spreads meant the conditions for securitization were strong.
Marlette followed in the wake of successful issuance and achieved a double-digit increase in IRR. Avant returned to market with a deal whose mezzanine bond was multiple times over-subscribed. Lending Club introduced a branded shelf potentially signaling a goal for repeat, standardized issuance. Prosper released a 10-K alongside news of a $5 Bn loan purchasing consortium.
Where do we go from here?
We are gratified to see our founding thesis take hold—the secular transition of consumer and SME credit to the capital markets. It is now generally accepted that securitization is essential to delivering low-cost, scaled, permanent capital to fund the category growth.
Looking back to media coverage from ABS East coverage nine years ago, we see the same challenges then as today: the need for greater transparency, disclosure, liquidity, and investor confidence.
Solutions–including standardization, market-driven valuation, and promoting investor confidence via third party solutions–are the key topics of the day.
LendingClub Fund Has First Negative Month on Valuation Overhaul, (Bloomberg), Rated: AAA
A LendingClub Corp. investment fund that’s struggled with withdrawals this year posted a negative return for August, the first decline in its five-year history, after overhauling how it values holdings and incurring losses on riskier debts.
The fund, overseeing about $700 million at the start of the month, had disclosed plans earlier in the summer to overhaul how it tracks assets. It enlisted outside valuation firm Duff & Phelps Corp. and shifted methodology to forecast how debts will perform individually, rather than in groups. August marked the first month under the new system, resulting in a one-time 0.95 percent reduction to returns, Sanborn wrote.
The LC Advisors Broad-Based Consumer Credit Fund ended the month down 0.49 percent, cutting this year’s net return to 1.24 percent, LendingClub Chief Executive Officer Scott Sanborn told stakeholders in a letter and report Friday.
In June, the investment vehicle was forced to limit redemptions after stakeholders asked to pull out $442 million, or 58 percent of assets under management.
But in the case of the August slump, key developments had already been signaled, with the largest hit coming from a one-time adjustment as the firm improved how it values holdings, Sanborn wrote in the letter.
In the future, “investors should expect more movement in fund returns month-over-month because the new methodology is more responsive to changes in each individual loan’s delinquency status,” he said.
Global P2P (Peer-to-peer) Lending Market Analysis 2016 Forecasts to 2021, (News Maker), Rated: A
Comment: this article is promoting a report.
The analysts forecast the global P2P lending market to grow at a CAGR of 53.06% during the period 2016-2020. To calculate the market size, Technavio considers the lending amount through P2P platforms in the Americas, Asia Pacific (APAC), and Europe, the Middle East, and Africa (EMEA).
Low pressure, (The Economist), Rated: AAA
Interest rates are persistently low. First we ask who or what is to blame. Then we look at one outcome: a looming pensions crisis.
On September 21st the Federal Reserve kept its target for overnight interest rates at 0.25-0.5% but indicated that, after raising the target for the first time in a decade last year, it hoped to raise it for a second time soon—possibly in December, after America’s presidential elections.
Earlier that day, the Bank of Japan (BoJ) said it was staying with its target of raising inflation to 2%. Indeed it went further. The bank said it would continue to buy bonds at a rate of around ¥80 trillion ($800 billion) a year, until inflation gets above 2% and stays there for a while. To help meet this “inflation-overshooting commitment”, the bank said ten-year-bond yields would remain at around zero.
The debt-laden are delighted with the persistence of a low-rate world. It costs much less to service their obligations. But savers are increasingly grumpy. Economists are simply baffled. In the 1980s and 1990s, the high real cost of borrowing (ie, after adjusting for inflation) was the puzzle. Today’s interest-rate mystery is more troubling and there is division over the reasons for it.
One side says it is simply the consequence of the policies pursued by the rich world’s central banks. The Fed, ECB, BoJ and Bank of England have kept overnight interest rates close to zero for much of the past decade. In addition, they have purchased vast quantities of government bonds with the express aim of driving down long-term interest rates.
It is hardly a mystery, on this view: central banks have rigged the money markets.
On the other side of the divide are those who argue that central banks are merely responding to underlying forces. In this view the real interest rate is decided by the balance of supply and demand for the pool of global savings. The fall in interest rates since the 1980s reflects a shift in this balance: the supply of savings has increased as demand for it has crashed.
This ongoing glut in savings is due to two factors in particular. The first is changing demography, mostly in the rich world but also in some emerging markets. Populations are aging. At the same time, the average working life has not changed much. So more money has to be squirreled away to pay for a longer retirement (see article).
A second, related, factor is the integration of China into the world economy. “A billion people with a 40% savings rate; that brings a lot more supply to the table,”
Aging is not the only long-run influence that has tilted the savings-investment scales. By skewing income to the high-saving rich, an increase in income inequality within countries has added to the saving glut. A fall in the relative price of capital goods means fewer savings are needed for a given level of investment. Both trends predate the fall in real interest rates, however, which suggests they did not play as significant a role as demography or China.
A related reason for more saving is fear. The severity of the Great Recession belied the relative economic stability that preceded it.
Consider the business of life-inssurance companies. They pledge to pay a stream of cash to policyholders, often for decades. This promise can be likened to issuing a bond. Insurance firms need to back up these promises. To do so they buy safe assets, such as government bonds.
The trouble is that the maturities on these bonds are shorter than the promises the insurers have made. In the jargon, there is a “duration mismatch”.
When bond yields fall, say because of central-bank purchases, the cost of the promises made by insurance companies goes up. The prices of their assets go up as well, but the liability side of the scales is generally weightier (see chart 4). And it gets heavier as interest rates fall. That creates a perverse effect. As bond prices rise (and yields fall), it increases the thirst for bonds. Low rates beget low rates.
If a growing bulge of middle-aged workers is behind the secular decline in real interest rates, then the downward pressure ought to attenuate as those workers move into retirement. Japan is further along this road than other rich countries. Yet its long-term real interest rates are firmly negative.
A concern is that as more people retire, and save less, there will be fewer buyers for government bonds, of which less than 10% are held outside Japan. Another of the Geneva Report’s authors, Takatoshi Ito of Columbia University, reckons there will be a sharp rise in Japanese bond yields within the next decade. There may be political pressure on the Bank of Japan to keep buying bonds to prevent this.
Swedish FinTech Klarna Partners with SAP on Whirlwind Three-Month Business Overhaul, (PR Newswire), Rated: A
SAP announced today that Klarna, has become the first customer to go live with smart accounting for financial instruments (smart AFI), a new functionality based on the SAP® Bank Analyzer set of applications, 9.0 release. In just three months SAP implemented the solution including accounting rules configuration, data integration and a full setup of the SAP HANA® database environment, proving that up-leveling market and product growth does not have to be a long and arduous process.
Global expansion almost doubles losses at fintech unicorn and peer-to-peer lender Funding Circle, (City A.M.), Rated: AAA
The peer-to-peer lending group is set to post a full-year loss of £36m when it publishes its accounts on Tuesday, after expanding into Europe and the US ate into profits. However, revenues at the firm, which was founded in 2010 and has lent more than £1.5bn to small and mid-sized businesses, rose 140 per cent from £13m to £32m last year.
“We expect our UK business to be profitable in the fourth quarter of 2016 and to generate significant cashflow in 2017 to finance international operations” said chief executive Samir Desai.
In 2015 the company raised $150m (£116m) of new equity for the business and listed the first and only single platform investment trust – the £150m Funding Circle SME Income Fund – on the London Stock Exchange.
GLI Finance Limited Unaudited Interim Results for the six month period ended 30 June 2016, (Email), Rated: AAA
- The Company losses for the period were GBP6.9m (June 2015 profit of GBP5.3m), impacted by GBP13m write downs in investments in underperforming or liquidated platforms following the strategic review;
- Group organized with Three Pillars to improve operational focus and assist reporting our strategy;
- Sancus BMS Group on a pro forma* like for like basis, increased consolidated revenues from GBP2.7 million in H1 2015 to GBP4.0 million in H1 2016. The period was notable for the consolidation of the Sancus group and its amalgamation with BMS and Platform Black to establish our specialty lending business.
- Valuations in our prioritized platforms, The Credit Junction, LiftForward, Funding Options and Finexkap increased by GBP5.5m in aggregate. Investments in underperforming or liquidated platforms were written down by GBP13m. We have been very prudent in reorganizing this portfolio and we fully expect to see value of this portfolio build materially in future periods;
- Amberton Asset Management remains de minimus and we expect to make progress on this pillar in the next 12-18 months;
- As a consequence of the considerable restructuring in the period together with writedowns in Pillar Two, the Net Loss for the period on the GLI Measurement Basis** was GBP10.3m (H1 2015: Net Profit of GBP0.2m).
- As a consequence of making early write-downs and recognizing losses in underperforming assets, together with raising capital and reorganizing Sancus BMS Group, the Companies’ balance sheet is significantly strengthened. Nonetheless, during the period the Company Net Asset Value “NAV” per share decreased from 42.73p to 37.07p;
- Company debt to gross asset ratio is 30% (31 December 2015 33%)
- Company Net Assets have increased in the period from GBP98.2m to GBP105.6m and;
- The Company’s weighted-average cost of debt decreased from 8.6% (year to 31 December 2015) to 6.8% (period to 30 June 2016).
Post period end
- Ordinary share placing raised GBP7.1m from Somerston Group in August 2016;
- New wholly owned subsidiary, FinTech Ventures Limited (“FVL”), created to hold, initially, the four Prioritised FinTech platforms thereby enabling independent capital raises to support these investments.
- Name change of GLI Alternative Finance Limited Plc to the SME Loan Fund (“SMEF”) on 1 September 2016.
Zoopla partners with Landbay for P2P lending solution, (Financial Reporter), Rated: B
The new channel on the Zoopla website includes a peer-to-peer lending solution, in partnership with Landbay, where anyone can invest from as little as £100 into buy-to-let mortgages, statistically the lowest risk form of peer-to-peer lending.
Financeit expands management team by tapping CFO from Capital One Canada, (Morningstart), Rated: A
This addition to Financeit’s management team will help propel the Toronto-based company into its next stage of maturity as it continues to expand its market share in the point-of-sale financing industry.
With 20 years’ experience managing and leading finance teams in Canada and the United Kingdom, Hanning served as Capital One Canada’s Chief Financial Officer for nearly five years. Prior to becoming CFO, Hanning held various senior positions within the bank’s Canadian and United Kingdom operations over the previous 12 years. He started his career at Glenfield Hospital NHS Trust in Leicester, United Kingdom.
Hanning’s entry into Financeit comes on the heels of the company’s $339 million acquisition of TD Bank Group’s indirect home improvement financing assets in partnership with Concentra.
Beyond Bank Australia and SocietyOne announce key partnership, (PR Wire), Rated: A
Beyond Bank Australia is continuing its expansion into the fintech sector, forming a significant partnership with the nation’s leader in marketplace lending, SocietyOne.
The agreement sees Beyond Bank tip in $1.5 million for an equity stake in SocietyOne as well as increasing its existing funding commitment in personal loans to $10 million. The arrangement was formalised on Friday, September 23.
SocietyOne now has ten mutual banks and credit unions among its 200 investor funders and is actively engaged with a number of other potential investors as it undergoes further expansion, targeting a 2-3 percent share of the $100 billion consumer finance market by 2021.
P2P lender Lufax taps four banks for Hong KongIPO, (China Daily), Rated: AAA
CITIC Securities, Citigroup, JPMorgan and Morgan Stanley have started preparatory work,although no formal mandate has been awarded, the people said.
The volume of Chinese P2P loans stood at 680.3 billion yuan ($102 billion) at the end ofAugust, more than 20 times levels seen in January 2014, according to industry data providerWangdaizhijia.
One third of China’s 3,000 peer-to-peer lending platforms ‘problematic’: new report, (SCMP), Rated: A
The 2016 Blue Book of Internet Finance, published on Friday, found 1,263 of the P2P platforms on the mainland up to the end of 2015 were problematic, which included cases of fraud or firms going out of business.
This total included 896 P2P platforms that got into problems in 2015, with more than half involved in fraudulent tricks that took advantage of loopholes in regulations, the report said.
“China’s slow economic growth has led to plunging business for small and medium-size companies; It increases the risk of loan defaults,” the report said, adding that the risk of financing usually rose after accumulating over a long period.
In one typical case of fraud, highlighted in the report, one P2P platform, Rong Zuan Dai, went online in November 2015 and published 37 financing projects that promised high interest rates to hundreds of investors. But after two weeks the website suddenly closed.
Of the current total, Guangdong province had the largest concentration of P2P platforms, with 18 per cent of the national total, the report said.
It estimates that the number of P2P platforms nationwide will continue to rise at a rate of 90 per cent over both of the next two years as the industry further consolidates, and could eventually reach 10,000.
The number of active users of P2P is also expected to surpass nine million in 2016.