Tag Archives peer to peer lending

Debt-based Crowdfunding inspires Financial Innovation: Securitization of Peer-to-Peer Lending

Post financial crisis, even if you’re a risk-taking investor, chances are you’d still play safe with the new financial products. Now consider this – a New York based hedge fund Eaglewood Capital acquired some of the loans of the Lending Club and then securitised them to sell them further. Lending Club is a leading online peer-to-peer lending company found in 2006. It provides a platform for investors to lend money to borrowers at an interest rate determined by the credit rating of the borrowers. Supporters of peer-to-peer lending believe that the platforms such as Lending Club fill the vacuum left by the banks. With stringent credit terms, it has become difficult to avail loan from US banks.

Eaglewood Capital established and run by Jonathan Barlow, as an investment adviser focuses on online lending strategies. On Sep 27, Eaglewood securitized and sold the $53 million peer-to-peer loans to investors including an unnamed insurance company. Securitization is a financial term in which the issuer creates a financial instrument (bond) by bundling together some other financial asset (loan). In this deal, the investors bought bonds backed by loans which Eaglewood chose from Lending Club. The cash flows from these loans would cover the principal and the interest on the bonds.

Securitization is an important development for peer-to-peer lending because it could enable a larger number of investors to buy such loans. In Eaglewood’s deal, a big insurance company took a maximum share of the Eaglewood deal. Apparently, the buyer was legally constrained to invest directly in Lending Club loans. Eaglewood did not disclose the insurance company’s name and the actual yield.

The securitization model in the peer-to-peer lending reminisces of the blunders committed by the banks in the sub-prime crisis, in which the banks burdened investors with bonds backed by bad home loans. Post crisis, the experts suggested that the firms doing securitization should also have some exposure in the loans. To that effect, Eaglewood has agreed to take losses up to $ 13 million (about 25% of the entire loan amount) before other investors incur losses. According to Barlow, in six years of loan history Lending Club’s credit losses have run slightly more than 3 percent of the total loans value. Additionally, most of the loans he bought are debt consolidation loan. Together, it implies a low overall debt servicing costs for the borrower. Eaglewood obviously gains out of this transaction as it gets the cash which it can invest in other loans and enhance its returns.

The securitization has opened a new avenue for peer-to-peer lending firms who can now sell the loans to big institutional investors, like Eaglewood, who then package the loans and sell them as marketable securities. At a time when financial assets are at historic lows, peer-to-peer lending has attracted investors. Recently, Prosper Marketplace Inc. – another peer-to-peer lending website, raised $25 million from Sequoia Capital and BlackRock to accelerate company’s growth.