P2P Loans Provider LendingClub Changes Tunes

Peer-to-peer (P2P) lending platforms provide borrowers with an alternative to banks when looking for personal loans. Through online marketplaces, P2P websites bring private lenders and borrowers together to transact loans, often with rates lower than those charged by banks and with more liberal acceptance of lower credit scores.

But LendingClub, the largest peer-to-peer (P2P) lender, is worried. Its shares have fallen 60 percent in the last 12 months, and the company is more vulnerable to a softening in the market for loans than are most of its competitors. The reason: unlike other P2P lenders that earn the majority of their revenues from the interest charged over the life of a loan, LendingClub depends on fees for the bulk of its revenues.

LendingClub is a colossus in the P2P industry, having delivered $16 billion in loans since 2008. In February 2016, the company boldly predicted that its annual revenues would skyrocket by 72 percent compared to 2015.

A shortfall in 2016 earnings will clobber its already beleaguered stock price even further. To ensure its survival if loan demand craters or default rates rise, LendingClub is turning to a form of financing it has previously eschewed: direct securitization.

Many of its competitors already participate in the securitization market, in which a P2P lender bundles its loans into pools that collateralize new bonds it sells to investors. This creates an immediate cash inflow to the P2P and transfers default risk to bond investors. In return, the investors receive the interest and principle payments from the pools, minus administrative fees.

Now, LendingClub is getting into the securitization market even as its competitors cut back on their participation. Sales of online loan pool-backed bonds dropped 21 percent to $1.5 billion in the first quarter of 2016 compared to the $1.9 billion sold in Q4 2015.

In the past, third parties such as hedge funds have pooled and securitized LendingClub loans without the participation of the P2P lender. Now, LendingClub is reportedly working with Goldman Sachs and with a unit of conglomerate Leucadia National Corp. to organize securitization deals. Goldman Sachs will help package the better quality LendingClub loans, whereas Jefferies, the Leucadia unit, will advise on loans to less creditworthy borrowers.

LendingClub is dipping its toe into the securitization market at a time when pool-backed investors are demanding high yields. For example, LendingClub’s chief P2P competitor, Prosper Marketplace, offered securitized bonds in March at yields that were 5 percentage points higher than similar offerings made in late 2015.

The new tactics are a reversal for LendingClub. Its CEO, Renaud Laplanche, previously boasted that LendingClub has a big competitive advantage over some of the newer P2P lending platforms, many of which have no retail investors and rely strongly on the securitization markets.

Previously, LendingClub has employed other schemes to boost investor returns, such as saddling new borrowers with higher interest rates. It recently raised rates by 0.23 percentage points, the third rate boost in the last 6 months, in order to offset growing loan losses.