ETF News

Online lenders seek safe haven capital

* Citi-Prosper split sparks search for alternatives

* Pension money, private funds and family offices eyed

NEW YORK, April 14 (IFR) - Online lenders are desperate to find new funding sources after setbacks with hedge funds and wobbles in the markets dented confidence in their ability to drum up fresh capital.

Investors were keen to throw money at the popular marketplace lending industry, helping it to double US loan volumes in each of the past three years and potentially reach US$37bn this year, according to Morgan Stanley.

But given the volatility in the broader markets, hedge funds have been pulling back, leaving online lenders looking for more stable sources of funding to keep growing their businesses.

“There was plenty of fast money in the industry [last year],” said David Snitkof, co-founder of marketplace loan data and analytics company Orchard.

“But a lot of those funds have faced redemptions in other asset classes,” he told IFR on the sidelines of an industry conference, where funding was the main topic of concern.

Those worries were deepened as it emerged during this week’s conference that Prosper Marketplace had ended its securitization bond issuance program with Citigroup.

That relationship abruptly ended after Citigroup was forced to pay a wide 12.5% yield in March on the deal’s B/BB- rated notes.

Similar bonds priced in July at a much more favorable 5% yield. But volatility in the first quarter of this year hit spreads in the sector especially hard.

“Most people still think that for this industry to grow that securitization is essential,” said Vincent Basulto, a partner at law firm Richards Kibbe & Orbe focused on structured finance and marketplace lending.

“But you can’t always count on that market to be open when you need it.”


While issuers of liquid ABS paper have started to see stability in recent weeks, non-benchmark sectors such as rental car ABS were still struggling this week.

There have also been price swings in the stock market, where shares of Lending Club - one of the leading names in online lending - have more than halved to US$7.45 a share from US$18.80 a year ago.

In a further obstacle for the sector, the broader volatility has also increased the cost of warehouse lines - the bank credit facilities that help lenders fund their retail loans.

Wall Street banks have increased rates on warehouse lines to online personal lenders from the 3% range to 5% and even higher, one platform executive told IFR.

“It happened in the last two months,” he said. “Really fast.”

Last year, much of the industry was focused on rapid growth in loan origination in order to feed the securitizations that help lenders gain a foothold with institutional investors.

Now, industry players say, online lenders are looking for less fickle funding sources including closed-end funds, family offices and pension funds.

“Last year it was all about raising capital in both equity and debt,” said Albert Periu, global co-head of capital markets at Funding Circle, a small-business lender in the sector.

“Now you are seeing a shifting of focus to more permanent sticky capital.” (Reporting by Joy Wiltermuth; Editing by Marc Carnegie)