For those who are fans of big twists, stunning reversals and spectacular admissions of defeat, last week’s news cycle came as a sort of Christmas in March.
No, we are not talking about healthcare, politics or whatever it is that happened on Capitol Hill.
Our job in the Data Dive is to take you through last week’s high drama outings — of which, remarkably, there were many in payments and financial services. Alt lending, particularly marketplace lending, looks like it is about to become a much smaller neighborhood. The auto-lending market continues to kill canaries in those coal mines at an alarming rate. And the retail death cycle mows on with HHGregg officially declaring bankruptcy and Sears more or less admitting to its shareholders that the same fate may soon befall them.
So how did the stormy weather set in so quick?
The Marketplace Lending Meltdown
Prosper Marketplace had some grim news to share with the world this week: net losses for 2016 have more than quadrupled.
All in all, Prosper lost $118.7 million last year, up from $26 million in 2015. According to the in-house explanation, those losses are primarily derived from lower loan volumes, higher costs that are also attributed to legal settlements and restructuring efforts.
In other words, the trifecta of doom, if you are lender.
Loan volume seems to have taken the biggest hit, falling a full 41 percent to $2.2 billion. That slowdown did not come from lack of borrower interest, but from money managers “pausing or significantly reducing their purchases of the company’s credits,” according to the filing.
Since Prosper makes its money charging fees for the unsecured personal loans it arranges, revenue has suffered, falling by one third to $132.9 million.
And Prosper isn’t alone in losing money in marketplace lending — OnDeck reported $85.5 million in annual losses for 2016, and LendingClub is looking at $146 million.
OnDeck also made the news this week through speculation that it has become an acquisition target for rival non-bank (but not primarily marketplace) SMB lender Kabbage.
OnDeck Capital has a market capitalization of $321 million at present, meaning it is a whole lot less expensive than it once was.
OnDeck has seen its share price drop 80 percent since first going public in 2014, and, as of February of this year, had posted five straight quarters of losses. Unfortunately more losses are widely expected to come. OnDeck has already publicly noted that it has been forced to set aside additional funds for future losses after determining its calculations in its internal models were off.
The rumor now circulating is that Atlanta-based Kabbage is looking to raise equity funding for the express purpose of taking on OnDeck’s baggage. As of yet, no official word has come down from either firm — sources that requested anonymity have told the media that the negotiations are ongoing and confidential.
Auto Lending Alarm Bells
Auto lending could be heading for a breakdown.
The latest data out of Ally Financial indicates that growth in the auto lending segment will come in between 5 percent and 15 percent of adjusted earnings in 2017.
That is not quite a full downgrade — their January estimate was targeting 15 percent — but the soft downgrade was certainly eye-catching.
Particularly when combined with the drop-off in the price of used-cars, which drives down the profitability of auto leases since cars turned over at the end of a lease period now have less residual value to offer.
The National Automobile Dealers Association indicates that its used-car price index has dropped 8 percent from a year ago and now sits at its lowest level in seven years.
Also adding to general feelings of unease was Ally’s data that subprime and near prime loans are showing the most weakness and the highest level of defaults — and that those levels continue to climb.
As this is one of several concern reports out of the auto-lending and sub-prime lending segment in the last six months, it is a market segment worth watching.
So Many Retailers, so Many Plugs to Pull
As Queen sang, another one bit the dust this week in the world of retail.
Appliance and electronics retail giant HHGregg publically revealed its decision to end a non-binding term sheet agreement with an unnamed organization to buy out all assets via a Chapter 11 reorganization under the United States Bankruptcy Code.
Back on March 6, HHGregg filed for Chapter 11 bankruptcy, and, without a buyer in line, it has no choice but to move forward with the filing.
In the meantime, HHGregg has interim approval for the company’s $80 million debtor-in-possession loan facility to help continue to run business as usual through the sale and bankruptcy filing process.
“We have received strong interest from third parties interested in buying some or all of the company’s assets. We and our advisors continue to work with potential acquirers to help them understand our business model for future growth and our value proposition,” noted HHGregg’s CEO, Robert J. Riesbeck.
Sears, as of this week, is still around, but its most recent regulatory filing indicates strongly that it is warming up for its final aria.
“Our historical operating results indicate substantial doubt exists related to the company’s ability to continue as a going concern,” Sears said in the annual report for the fiscal year that ended Jan. 28.
Sears fall off retail’s cliff in recent years has been steep, although firms have certainly worked hard to keep the ship afloat. It has already spun off some its more high-value stores into a real estate investment trust and sold off some of its still-valuable brands like Craftsman to Stanley Black & Decker for $900 million earlier this year.
Sears has also raised debt from its CEO Edward Lampert’s hedge fund to deal with the slump and to cut costs by $1 billion and reduce debt and pension obligations by at least $1.5 billion over the course of 2017. It also has said it plans to find ways to unlock value across a range of assets.
But Sears’ current debt load is $4.16 billion, and it so far has not managed to find a solution to drive consumers back into their stores. The reality of the potential dead end of that situation is beginning to really sink in.
So, to recap: alt lending is re-organizing, auto lending is having an ever-proliferating series of issues and retail is quickly shifting into the quickly adapting and the no-longer-around.
If it sounds like a lot to keep up with — and a little bit worrisome — it could be worse. It could be healthcare.