An eBay For Money: What You Need To Know About Lending Club's IPO
Alternative lending provider, Lending Club (NYSE: LC) will debut Thursday, December 11. The company is paving the way for a new method of financing, designed to cut out the middleman and connect lenders with borrowers using its technology-based platform as a launchpad.
Old Vs. New Methods
Traditional banks use a tedious loan underwriting process that will use reams of paper and take weeks, if not months, to complete. Requirements for loans can be cumbersome, with the demands of banks being unreasonable for the purposes of the borrower.
In some cases, the borrower may own a small restaurant in a large city. To increase flexibility, the owner may lease their space instead of purchasing it. Even if the business has extensive cash flows and can prove profitability and an ability to repay, banks may deny a loan application due to lack of collateral.
The Gap Lending Club Can Fill
Lending Club provides lenders with high-quality data on credit attributes, financial data and loan characteristics of the borrower. A proprietary credit scoring model is used to help investors (lenders) develop and implement a loan portfolio to suit their desired goals.
Because Lending Club’s lenders are looking for the ability to repay, they are willing to make a loan to a business that is profitable, but lacks collateral, traditional financing sources demand.
Since launching in 2007, Lending Club has facilitated more than $6 billion in loans, with annual volumes increasing in excess of 100 percent since 2012.
In a recent interview, David Goldin, president and CEO of alternative funding provider AmeriMerchant said, "[Lending Club] is the first company in the alternative lending space to go public, which really legitimizes the next step in evolution of alternative lending. It's no different than what Uber has accomplished in the transportation industry."
Lending Club's Specifics
Lending Club’s bottom line has been positive one time since 2009. For the nine-month period ending September 30, the largest net loss to date came in at -$23.9 million due to sales and marketing and creating brand awareness. Despite the expenses, the company is still being valued at nearly $5 billion.
Goldin said, "Alternative lending is disrupting the banks. At this point, the industry only makes up 2 to 3 percent of all lending in the US. What Wall Street is seeing is a tremendous amount of upside through a new alternative to the banks."
Alternative lenders are currently providing capital mainly to those who don’t fit the model of traditional bank financing. This scratches the surface of the services and types of loans this industry can provide. As people become aware, companies like Lending Club will be able to expand into new loan types, likely providing mortgages, auto loans and even student loans.
Loan Provider And Borrower Profiles
The people providing the loans range from individuals to major institutions. This is a borrower-to-institution transaction for the most part. In a world where yield is scarce, hedge funds, pensions and even banks are looking at the alternative funding space as a viable option for generating a stable loan portfolio without having to sacrifice quality by moving into junk bonds.
The current yield of the SPDR Barclays Capital High Yield Bnd ETF (NYSE: JNK) is 6 percent. The average credit quality for JNK’s bonds is a single B. The fund itself has a five-year standard deviation of 7.7 percent and the S&P 500's volatility over the same time period is almost 13 percent. That means a portfolio of low quality bonds is about half as volatile as stocks.
Borrowers on Lending Club's platform embody quality. The average FICO for borrowers is 699, with a debt-to-income ratio of 16.9 percent. Average personal income is $73,157, and the average loan is $14,182. As little as $25 can be invested at a time, and for investors with at least 100 notes, returns have been positive 99.9 percent of the time according to the Lending Club website. The average interest rate for a grade-A borrower on Lending Club’s platform is 7.6 percent, almost 2 percentage points higher than JNK.
The world is increasingly digital, opening up new sources for cyber criminals to take advantage of people. Safety of users is imperative for Lending Club and the company is investing plenty of money in cyber security and network protection.
Goldin said the threat of having personal information compromised on a site like Lending Club is much less than other e-commerce sites because of the nature of the information: "When people compromise identity, it’s typically for something that can be turned into cash fast like a credit card number."
Concluding the interview, Goldin said, "Lending Club is being viewed as a technology play, no different than eBay Inc (NASDAQ: EBAY) with its buyers and sellers. But, instead of selling baseball cards or old cameras, they’re selling money. They’re matching buyers and sellers of money. Lending Club takes no risk on the loans, they make their money by servicing fees."
Proceeds of the offering will be used to increase its capitalization and pay down $49.2 million of term loan debt.
Lending Club will list its shares on the New York Stock Exchange under the ticker, “LC.” Underwriters for the IPO are Goldman Sachs and Morgan Stanley. A total of 57.7 million shares will be offered between $12 and $14 per share to raise $750 million.
Disclosure: At the time of writing, the author holds no positions in any of the above mentioned securities.
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