Alternative Finances

Lending Club’s Tough Fall

Lending Club has had a tough year.

In early May, news broke that Lending Club had played fast and loose with its documents and disclosures, including the fact that then-CEO Renaud Laplanche had failed to disclose a personal stake in a firm Lending Club had an investment relationship with. The revelations were shocking. Within a week of the results of an independent audit, Laplanche was out, and the share price was in virtual freefall.

As a point of comparison, Lending Club’s IPO stock price in 2014 was $24.69; a year ago, it was trading at around $14.37. Over the summer, it hovered in the $5 range.

But in mid-August, there were some very early indications that perhaps Lending Club’s investors were beginning to warm up as the weather began to cool down. Stock prices finally got above $5 a share, and for the back half of September and the first few days of October, it even managed to get above $6 share.

But it looks like the streak is done for now. Stocks, as of the time this story was filed, had fallen to $4.99 a pop, with all indications that continued declines in after-hours trading should be expected.

What happened to the good vibrations?

Lending Club officially made some rough news public at the end of the last week, and so, the stock market greeted it this week with a selloff.

How bad was the news?

Well…

 

More Controlled Borrowers, More Expensive Loans

The glass-half-full interpretation of the news from last week was that Lending Club is working hard to get its investors better returns on the loan packages they buy. But the way it is doing it raised some eyebrows. Interest rates are going up, and credit standards will be getting tighter.

“We have continued to observe higher delinquencies in populations characterized by high indebtedness, an increased propensity to accumulate debt and lower credit scores,” the San Francisco-based company said on Friday (Oct. 14) in a regulatory filing. “Although the trend can now be observed across grades, it is less notable in lower-risk grades and more notable in higher-risk grades.”

Translation: Riskier borrowers — particularly those carrying more debt — are defaulting at a higher-than-expected rate, which means borrowing on the platform is increasing.

Lending Club will charge a weighted average of 0.26 percentage points more to take out a loan, with the biggest increases going to borrowers who receive its lowest credit scores.

And some borrowers will not make the grade at all, as Lending Club has also announced that it will no longer extend loans to borrowers with high levels of revolving debt and multiple recent installment loans.

To entice investors, the company gradually raised interest rates a weighted average of 135 basis points from last November through June and tightened its credit policy in April. On Friday, the company said it was stepping up its effort to collect on delinquent loans.

 

Wall Street Nervousness

While the upping of standards — and the increased cost of borrowing — may please investors buying on the platform, Lending Club’s Wall Street investors, as of yesterday (Oct. 17), were clearly a bit disturbed by the revelation that defaults are on an upswing and that Lending Club’s borrower base could well be shrinking.

Shares declined 7.25 percent to $4.99 on heavy trading volume early yesterday afternoon after many selling on the news of increased interest rates and tightening credit standards.

“These latest actions could curtail borrower demand,” Michael Tarkan, an analyst at Compass Point Research & Trading, wrote in a note, according to Bloomberg. “Investors may begin to lose confidence in the underwriting model and loan product, especially at the lower end of the credit spectrum.”

Lending Club maintains that the increased costs and tightened limits will effectively eliminate about 1 percent of its previous borrowers.

Yesterday saw 8.87 million Lending Club shares traded — well above the firm’s daily average of 6.78 million.

As the tally comes in, analysts’ main concern is that there are too many rocks on Lending Club’s scale at this point, and that its accumulating issues are becoming insurmountable.

Of particular concern are eroding net income, generally high debt management risk, disappointing return on equity, weak operating cash flow and increasingly weak stock performance over time.

Lending Club is by no means alone in the difficulties it is facing. Marketplace lenders nearly across the board have faced mounting headwinds this year as investors have notably cooled in the public stock and private equity markets this year as marketplace lending has come to look rather risky as 2016 has worn on.

But Lending Club it seems could be looking at particularly rough sledding going forward, including from the regulators. New rules are anticipated by some to be coming soon.

There is also the remaining unknown around the Federal Reserve and whether or not an increase in interest rates will be coming before the end of 2016, as many suspect. That changes the math on the profitability of lending to consumers and small businesses, which could make the competitive landscape more crowded as more traditional lenders consider moving more in the space.

Which means Lending Club, which has its own specific issues, could easily see things get rougher before they get smoother.

We’ll keep you current.

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