We first warned that the Peer-2-Peer lending industry is poised for major trouble in May of 2015, when we predicted that not only are write-off rates set to surge, but that as the resulting struggling lenders seek to entice new borrowers they would have to push rates higher eating up profitability, as demand for future loans slides and as the firm is forced to remark the value of existing loans. This was confirmed in February of this year when the now infamous, and recent frontrunner in the space, LendingClub announced write-offs had surged, doubling forecasts as US consumers were struggling with repaying loans. We don’t have to remind readers about the subsequent scandal that engulfed LendingClub in early May when as a result of an unexpected exit of former CEO Renaud Laplanche , the stock crashed and suddenly everyone else gave the P2P model a much closer, second look.
What they have found is troubling.
As the WSJ reports, a five year old fund managed by LendingClub that invests in the company’s online consumer loans and which is the largest in-house portfolio run by LendingClub unit LC Advisors LLC and has regularly returned about 0.5% a month or more, just hit a brick wall: it is now expected to report its first-ever negative month, after 63 consecutive months of positive returns. As Peter Rudegeair adds, “the unusual result shows how a confluence of negative trends is hitting performance for the unsecured personal loans held in LendingClub’s Broad Based Consumer Credit (Q) Fund. Performance for the roughly $800-million fund in June “is likely to be negative,” LendingClub CEO Scott Sanborn wrote in a letter to investors Tuesday.”
What caused this unprecedented shift? The very same factors we warned about first over a year ago: “the fund has been under pressure as defaults have risen and LendingClub has taken steps to manage them. In March,the fund returned only 0.05%, following a 0.13% gain in December.”
The CEO added in the letter to investors Tuesday that the June returns have been weighed down by a series of increases on borrower interest rates designed to entice new investments. Although the higher rates will ultimately lead to higher yields for fund investors, under accounting rules LC Advisors must mark down the value of existing loans the fund holds that carry lower coupons.”
The damage control followed promptly: “It is important to remember that these markdowns are not reflective of the expected cash flow performance of underlying loans held by the Fund,” Sanborn wrote. Of course, what the fund expects and what actually happens are as of this moment unknown, with the company forced to dramatically change strategy.
A just as signficiant problem for Lending Club is that as of June 17, the credit fund had received $442 million in redemption requests, or 58% of its overall assets. As a result LendingClub gated investor withdrawals and said it would consider a potential wind-down of the fund, The Wall Street Journal reported earlier this week.
The flurry of redemptions was unleashed when LendingClub said in a recent filing that LC Advisors had not followed standard accounting rules when it was determining the value of the loans in its portfolio as well as their monthly returns, leading to further questions about the company’s “projections.” Before his departure, Mr. Laplanche served on the investment policy committee of LC Advisors along with LendingClub Chief Financial Officer Carrie Dolan and General Counsel Jason Altieri. Ms. Dolan and Mr. Altieri remained at the company.
Sanborn said in an interview this week that the company is considering a plan for LC Advisors over the next two months that will be in the best interest of investors that want to stay as well as those that want to leave. “The issue this revolves around is confidence in LendingClub and that’s what we need to rebuild,” he said. “The asset itself is continuing to perform and it’s my belief we can rebuild that confidence over time.”
Who knows, maybe some clueless Chinese investors will swoop in and bailout the company’s troubled shareholders, buying up what little assets the company has left in the ongoing Chinese rush to disguise outbound capital flight as offshore M&A. They better do it fast.
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