Editorial: The state of the debt markets, July 2016

Editorial: The state of the debt markets, July 2016

Dear readers, This past week, despite a lot of people being on vacation, had important news that may affect us for the years to come: 1.  According to the bond market yield curve and a Deutsche Bank model, there is 60% chance of recession. The interesting part is that the equity market, who erased the post […]

Editorial: The state of the debt markets, July 2016

Dear readers,

This past week, despite a lot of people being on vacation, had important news that may affect us for the years to come:

1.  According to the bond market yield curve and a Deutsche Bank model, there is 60% chance of recession. The interesting part is that the equity market, who erased the post BREXIT losses, doesn’t agree.

2. If we do enter a recession the Debt-to-EBITDA multiples for private equity deals with U.S. targets in 2016 has hit a whopping 6.8x. This is probably correlated with the general corporate and SME debt markets.  We all know what happens in an overleveraged environment when the music stops.

3. And on the unsecured personal side Morningstar published a report showing that the Non-housing debt is at around $3.5 trillion from $2 trillion in 2004. The report is titled “Please Sir, can you lend me some more ?”. Bad of you if you lend, bad of you if you don’t. On the bright side, default rates are not inching up yet except in sub-prime auto.

This week we also saw Avant planning to lay off 40% of their workforce. One may think this is a negative signal for the company. On the contrary, in my eyes this allows Avant to be profitable and to be ready for whatever the next 12 months throws at the overall market. In Chess, it pays to build a flexible position with many options of attack and defense vs throwing all your pieces on a single make or break attack. Avant is prepared for the worst and if the market turns around it can react fast in the same way we saw the company build $2bil in origination in only 3 years.

On the fundraising side EarnUp, a new fintech type of loan servicing which was bootstrapped so far and already has traction, raised $3mil in a seed round.

Events: As I am based in New York I will be attending the AltLend conference at the Princeton Club on Wednesday and Thursday, July 13th and 14th.

And last but not least I have put together a Press Kit for Lending Times. If you are interested in supporting Lending Times through advertising with us please ask for our press kit.

Thank you,

George Popescu

July 7th 2016, Daily News Digest

July 7th 2016, Daily News Digest

News Comments United States EarnUp raises a $3mil seed round to help 200 million consumers smooth their loan repayment experience. Could EarnUp be a good lead source for lenders ? Or a good alternative data source ? A great table of MPL raises and valuations from CrunchBase, who claims that data hints at future down […]

July 7th 2016, Daily News Digest

News Comments

United States

  • EarnUp raises a $3mil seed round to help 200 million consumers smooth their loan repayment experience. Could EarnUp be a good lead source for lenders ? Or a good alternative data source ?
  • A great table of MPL raises and valuations from CrunchBase, who claims that data hints at future down rounds for marketplace lenders. However, we have recently seen BizFi, Promise Financial and more raising good rounds at decent terms. Perhaps there is a difference between fund-raising for mature MPLs and fund-raising for challenger Alt Lending 3.0 start-ups.
  • Very interesting 1st hand data from Morningstar about the state of US consumer debt, including trends and statistics. Credit Cards charge-off rate chart, 90 days delinquent data per asset class.
  • 500 Startups shares fintech investment trends chart and data and discussed government policies that could and should enable fintech innovation.
  • Through the survey of France’s P2P and MPL lenders, a great analysis of the lessons learned from Lending Club’s crisis.
  • Securitization trends in Marketplace Lending. A must read.
  • Acquiring borrowers is difficult. Acquiring borrowers at purchase decision time is easier. Focusing on point-of-sale partnerships to generate credit demand is a very interesting direction which is, therefore, popular and gaining ground. A quick article as a reminder of this interesting direction.
  • Royal of Canada dumped 99.5% of their LC stock in Q1 2016. Interesting timing.

Australia

  • Getting SME lender’s loan data is at best difficult. In a space where we talk about transparency, SME originator’s data is a good example of the opposite. RateSetter stands out for publishing their data which lead to a nice summary, mostly figure based, article. I am not sure if this data is from RateSetter Australia only or includes other geographies.

United Kingdom

  • A small article, that is not well researched, not well documented, but asks a question that is worth exploring a lot more “How can p2p lending companies fail, and what happens in that case ?” . The quick and dirty answer is: if they are setup right, where the operations and the loan books are separate with backup servicing, the only effect is that new loans stop being generated. We would love to publish a long article on this matter.

European Union

 

United States

Paying Loans Sucks – FinTech Startup EarnUp Lands Million To Intelligently Automate Payments, (PR Newswire) ,Rated: AAA

 EarnUp, a consumer-first fintech platform that intelligently automates loan payments, announced its launch today with $3 million in seed funding.  Blumberg Capital, Kapor Capital, Camp One Ventures, Fenway Summer Ventures, and other leading angel investors provided seed capital to accelerate the platform’s development and expand user access with a mission to improve consumer financial health. Forbes recently announced EarnUp as a winner of the prestigious Financial Solutions Lab in partnership with JPMorgan Chase & Co. (NYSE: JPM) and the Center for Financial Services Innovation. Though still in private beta, EarnUp already manages hundreds of millions of dollars in consumer loans on its platform. More information is available at www.EarnUp.com.

“Millions of Americans suffer financial stress from income volatility, where their income doesn’t match up with when loan payments are due,” said Matthew Cooper, co-founder of EarnUp. “Our product solves this issue by effectively budgeting for the consumer. We help put money aside as it comes in, giving people peace of mind in knowing the money they need will be there when loan payments need to be made. We give control back to the consumer.”

There are over 200 million Americans with debt and a typical household may have income and expenses hitting their bank accounts over 20 times a month. This financial chaos causes incredible stress for consumers, who may struggle to come up with even the minimum loan payments on time. EarnUp works by automatically putting a few dollars aside for future loan payments whenever consumers can afford it, then sending those payments and making sure they are applied in a way that reduces debt faster.

EarnUp has been bootstrapped to date and the $3 million in seed financing represents the company’s first institutional funding.

Data hints at down rounds, but not wipeout, for marketplace lending, ( TechCrunch), Rated: AAA

Comment: This is bad news for entrepreneurs. VCs usually have terms that protect them in a down round.

Private valuations across the lending space, where available, showed marked appreciation in 2014 and 2015. SoFi, for instance, was valued at $3.5 billion as of July, up from about 1.4 billion in early 2015 and $400 million in early 2014.

Those are post-money values, but the appreciation is well in excess of the sums invested. Avant showed a similar rise, with its post-money valuation doubling in less than a year. And Prosper more than doubled in less than a year, hitting a $1.8 billion valuation in April of last year.

Alternative lending currently looks like the reverse of the standard VC model, in which private markets are where one builds a business, and public markets are where one gets a lucrative exit.

That said, while we can expect down rounds near-term, it’s not clear VCs will lose their shirts in marketplace lending forays, particularly those who were mid- or early-stage investors.

High VC ownership levels mean that even a lackluster exit could return all or more of invested capital. Even after LendingClub’s stock plummet, for instance, VC’s post-IPO stakes would be worth more than the $392 in disclosed investments before going public.

You can find the report here if you register.

Nonhousing consumer debt levels are increasing, with student-loan debt leading the charge, according to the Federal Reserve. Student-loan delinquencies more than 90 days past due have risen since late 2011. With the proliferation of postcrisis loans made to students, especially to those attending for-profit colleges with focused specialties, Morningstar Credit Ratings, LLC expects to see challenges in the sector.

Credit Card and Mortgage Delinquencies at Lows Since the crisis, credit-card and mortgage delinquencies have

Since the crisis, credit-card and mortgage delinquencies have improved, with the balance more than 90 days delinquent declining, according to the Federal Reserve Bank of New York. After  seaking at 8.9% in the first quarter 2010, mortgage delinquencies have come down considerably from their highs, resting at 2.1% at the end of the first quarter. Credit-card delinquencies have also dropped, with the current level of 7.6% nearly half the 13.7% recorded in the first quarter of 2010. Low interest rates made it easier for consumers to either refinance or stay current on their debt obligations.

Meanwhile, after little change over the past few years, auto- loan delinquencies have edged higher, as competition among underwriters led to an increase in subprime auto loans. While we expect to see an uptick in auto delinquencies given the larger subprime component, overall auto-loan delinquency rates remain at relatively low levels. If unemployment remains in check, those auto-loan delinquency gains should be within reason, while we expect credit-card and mortgage delinquency rates to remain low.

New data that has been released since publishing solidifies the trend of consumer spending improving after a typical slow start of the year, with 1Q16 GDP growth at 1.1%.  In addition, consumer confidence has strengthened.

Eye on the Road: Student and Auto Loans Bear Watching Consumers are adding to their household debt levels, with student-loan debt leading the way behind mortgages. Postcrisis, students enrolled in for-profit colleges in record numbers, with dreams of a future career. For many, those dreams never materialized, and they were left saddled with heavy student-debt obligations that they were unable to meet. This pool of nonpaying indebted students contributed to the student loan delinquency rate rising steadily since the end of 2012. While the pace of student-loan delinquencies has slowed, Morningstar Credit Ratings views the sector as vulnerable to declines in employment as the delinquency rate remains near record levels despite a generally healthy job market.

Fintech Investment is Exploding — 5 Ways Governments & Ecosystem Builders Can Help, (500 Startups), Rated: AAA

Quarterly financing to VC-backed fintech companies has been growing immensely:

But investment is not flowing freely everywhere.  For example, in 1Q2016, Chinese fintech companies received $2.4 billion in funding (albeit primarily from two mega-deals), while the rest of Asia received only $0.2 billion.  Meanwhile in Europe, deal count increased but the amount of capital invested did not.  Even when the investment flows, the performance often does not.

Fintech’s 3 Ecosystem Challenges
1. Regulatory regimes are often ill-suited for fintech. Regulations in the finance sector are often unclear or highly complex, and regulatory processes and agencies may be slow.

2. Traditional financial institutions may hold down fintech startups, intentionally or unintentionally. Not long ago in the U.S., many banks did not even entertain meetings with or extend invitations to fintech startup founders.

3. Customer preferences may not be ready for certain fintech solutions. Customer acquisition is very difficult in fintech. Banks in the US spend over $500 to acquire a single user, and over time many startups will get there as well.

5 Ways Goverments Can Help

1. Create a “regulatory sandbox” that provides startups the opportunity to test new ideas without immediate threat of regulation.
2. Offer fast and transparent regulatory review of potential new fintech products or services.
3. Create a support system or kit to help fintech startups meet regulatory requirements.
4. Roll out consumer awareness initiatives to increase demand.
5. Encourage traditional financial institutions to invest in or partner with fintech startups — preferably non-exclusively.

The Lending Club Predicament & The Lessons Learned, (Crowdfund Insider), Rated: AAA

Lending Club’s problems should make the sector reflect on the governance issues that arise from the mixed business models that some crowdfunding platforms have evolved into.

Banks lend their own money and take risk on their balance sheet; hence, they must meet regulatory requirements such as Basel III. Asset managers manage other people’s money and invest on their behalf; hence, they are regulated as financial advisers. Platforms must clearly choose their business model because it has regulatory consequences. It also has an impact on the market valuation of the company. Marketplaces are currently much more highly valued by investors than banks. Even before the scandal, Lending Club’s stock was valued rather like a bank’s stock. Eventually, mixed business models potentially lead to conflicts of interest of the type observed at Lending Club.

Lending Club lost its way a long time before the scandal and the subsequent dismissal of Renaud Laplanche. By progressively marginalizing retail investors and letting investment funds securitize Lending Club’s loans on their own terms, Lending Club de facto surrendered the control of the platform to the very same established finance that P2P Lending was supposed to present an alternative to. This change of course created a detrimental layer of complexity, and potentially of systemic risk, in what was supposed to be a simple and direct relationship between private lenders and borrowers.

Beyond the image problem, the impact of the incidents has been small. European institutional investors are still very much interested in marketplace lending, as can be seen from two recent announcements: a$100 million loan program through Funding Circle by the European Investment Bank and €70 million multiplatform crowdlending fund by Eiffel Investment and French insurers Aviva and AG2R La Mondiale.

Marketplace Lending Securitization Tracker, (PeerIQ), Rated: AAA

Marketplace lending securitization volume topped $1.7 billion this quarter, up 14.8% from Q1, with cumulative issuance reaching $10.3 billion. YTD issuance of the sector stands at $3.2 billion as compared to $1.8 billion from prior year, a 77% increase. Q2 saw a total of 6 deals: 3 are backed by student loans, 2 by unsecured consumer loans, and 1 by SME loans. SoFi issued its first rated unsecured consumer loan deal and received an industry first ever AAA rating from Moody’s on its recent student loan transaction.

MPL securitizations are moving towards rated and larger transactions. The second quarter was the first to have all deals rated by one or more rating agencies. Further, the growth in average deal size continued, the average deal size grew to $267 million in 2016 as compared to $64 million in 2013.

New issuance and secondary spread tightened by quarter end, a good sign for the industry. Across all segments in MPL, Q2 2016 saw moderate spread compression in senior tranches of newly issued deals and widening in junior tranches as compared to Q1 2016.

Numerous factors, including lending platform rate increases, and spread tightening in both primary and secondary markets, look to improve future deal economics. The increase in rates from platforms increases excess spread and improves the economics of securitization for residual holders. The demand for

The demand for higher standard of due diligence, transparency and analytics will be the norm. With the recent Lending Club headlines, ABS investors are demanding greater transparency and validation to enhance trust.

A total of 6 deals were done in Q2 and spanned several marketplace lenders and categories. Here is the breakdown from Q2 2016:

  • 3 student loan securitizations (Earnest, SoFi, CommonBond)
  • 2 unsecured consumer loan securitizations (Avant, SoFi)
  • 1 SME securitization (OnDeck)

Despite Citi stopping the securitization of Prosper loans, they continue to be the leader in marketplace lending securitizations followed closely by Morgan Stanley and Credit Suisse.

Cited as factors for an improving securitization market are increasing platform rates and spread tightening in both primary and secondary markets. A detailed analysis of specific securitizations are outlined in PeerIQ’s report.

Why mobile point of sale (MPOS) Is Gaining Ground in FinTech, (Tech.co), Rated: AAA

Comment: in our market context I would think that lenders would like to acquire/partner/sign up with Point of Sales solutions to extend credit in physical stores.

One such story goes of Swedish payments giant Klarna that recently announced that they were moving beyond its online services into physical stores, which it will accomplish by partnering up with mobile point of sale (MPOS) and e-commerce company Sitoo.

We are approaching a near future where the value chain for payments as we know it will be forever altered and new constellations will surface. More specifically, we expect to see more payment providers partnering up with POS companies to add value to their services and to diversify their position. There’s also a strong possibility that we’re likely to see some of the more aggressive payment providers outright acquiring POS-companies to accelerate growth and control a larger chunk of the value chain.

Royal Bank Of Canada Sold A Lot More LendingClub Corporation Common (LC) Stock, (Fidaily), Rated: A

Royal Bank Of Canada says it sold 35,334 shares last quarter decreasing its holdings in LendingClub Corporation Common by 99.5%. Its investment stood at $1,000 a decrease of 99.7% as of the end of the quarter.

 

Australia

The average RateSetter business loan, (Finder), Rated: AAA

United Kingdom

If Funding Knight went bust how safe is peer-to-peer lending?, (The Telegraph), Rated: AAA

A peer-to-peer website has been rescued after falling into administration, offering a lifeline to 900 savers who faced being unable to get their cash back.

Funding Knight was promising investors returns of up to 12pc for lending cash to small businesses.

Many feared that they would lose their money when the company ran out of cash and went into administration last month.

However, last week  the firm was rescued by GLI Finance, an investment firm, which said savers cash was safe and could be withdrawn at anytime. GLI has also invested a further £1m in the business.

Despite Funding Knight savers being assured that their cash is safe by the new owners, the incident has raised concerns over the safety of peer-to-peer lending.

Any funds they lend through a peer-to- peer website are not covered by the government-backed Financial Services Compensation Scheme (FSCS), which protects bank savers up to £75,000.

A spokesman for the Peer-to-Peer Association, a trade body of which Funding Knight is not a member, said:

He said: “We have been consistent in calling for, and embracing, regulation of the sector and requires robust adherence to its published operating principles, including the publication of platform loan books in full and clear information on all fees and charges to investors and borrowers.”

“Peer-to-peer lending offers overall a lower risk profile than some other forms of investment with less volatility, but it is not entirely without risk.

“Within the peer-to-peer lending sector, there are a number of different asset classes each with their own risk-return profile.”

 

 

European Union

Why Funding SMEs Within The EU Capital Markets Union Action Plan Is Challenging, (Seeking Alpha), Rated: A

European banks are caught in a conundrum because they still have to clear up their bad loan portfolios, which their US counterparts have largely dealt with. This situation, together with stricter capital requirements, and a challenging policy environment with low or negative interest rates, has led to a double whammy affecting both banks and SMEs. Additionally, credit information is still very fragmented in the EU, as shown by our CFA Institute member survey on the Capital Markets Union from May 2015.

Author:

George Popescu