Author Topic: LendingClub and Hedge Funds Have Discussed Major Funding Deals [WSJ]  (Read 7780 times)

rubicon

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Troubled online lender LendingClub Corp. has met with at least three large hedge funds to discuss deals in which they would commit to buying billions in loans and get the right to own shares, people familiar with the talks said.

http://www.wsj.com/articles/lendingclub-and-hedge-funds-have-discussed-major-funding-deals-1465476543

Rob L

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Re: LendingClub and Hedge Funds Have Discussed Major Funding Deals [WSJ]
« Reply #1 on: June 09, 2016, 09:33:06 AM »
Okay then, maybe a partial buy out.

Fred93

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Re: LendingClub and Hedge Funds Have Discussed Major Funding Deals [WSJ]
« Reply #2 on: June 09, 2016, 09:45:54 AM »
It is interesting how difficult it is to do anything in private when Wall St is involved.  Note how everything leaks.  Imagine if you were negotiating with these big guys.  You wouldn't want negotiation details leaking out.
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Among the discussion points with the hedge funds were how much equity—in the form of warrants, or rights to own shares in the future—they would receive in exchange for the commitments to LendingClub, the people said. Some funds sought more than 10%, the people said.

I can understand them asking for warrants.  My first question is "10% of what?"  Really sloppy innumerate journalism to say "10%" but not say of what.

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in recent weeks discussed with LendingClub proposals to fund as much as $5 billion in loans, though no deals have resulted

10% of LC would be warrants for $168M worth of stock.  10% of a $5B funding deal would be warrants for $500M worth of stock. 

Does LC have the ability to issue warrants at this time without shareholder approval? 

« Last Edit: June 09, 2016, 09:56:44 AM by Fred93 »

rubicon

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Re: LendingClub and Hedge Funds Have Discussed Major Funding Deals [WSJ]
« Reply #3 on: June 09, 2016, 09:55:15 AM »
I have a meeting with one of these 3 hedge funds next week. I can ask how they were thinking about this deal.

bcartpa

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Re: LendingClub and Hedge Funds Have Discussed Major Funding Deals [WSJ]
« Reply #4 on: June 09, 2016, 10:11:17 AM »
It is interesting how difficult it is to do anything in private when Wall St is involved.  Note how everything leaks. 

Or perhaps LC purposefully leaked this to try to create some positive sentiment :-)
Individual Investor on Lending Club since 2013 and creator of the P2P Investor Kit, automation software for Lending Club investors: www.p2pinvestorkit.com

LonghornSF

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Re: LendingClub and Hedge Funds Have Discussed Major Funding Deals [WSJ]
« Reply #5 on: June 09, 2016, 11:04:45 AM »
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I can understand them asking for warrants.  My first question is "10% of what?"  Really sloppy innumerate journalism to say "10%" but not say of what.

The hedge funds are proposing that LC give them warrants to buy 10% of the common equity of Lending Club. In exchange, the hedge funds will commit to funding a certain volume of LC loans.

Bad news for existing LC shareholders but this type of creative solution should alleviate funding concerns if the hedge funds commit to a large enough amount.

mchu168

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Re: LendingClub and Hedge Funds Have Discussed Major Funding Deals [WSJ]
« Reply #6 on: June 09, 2016, 12:00:16 PM »
Is it just me or does this strike anyone else as a really strange deal?  I guess idea is that buying loans (probably using very cheap borrowed money) will drive LC stock price higher.  With warrants (basically call options issued by the company) the hedge funds get the levered upside in the stock which they are essentially pushing higher by buying the notes.  Seems a little ponzi-ish to me but will probably work for a short term gain.

Dealing with the likes of third point, etc is akin to dealing with the devil, which seems like a last resort measure imo.  Are things really that dire? I'd be a lot happier if they could work something out with Morgan Stanley (unless Mack somehow makes a deal impossible) to sell notes through the adviser network or structure some products for pension, endowment type investors. I think LC will be glad they didn't have to deal with the hedge funds in the end.

LonghornSF

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Re: LendingClub and Hedge Funds Have Discussed Major Funding Deals [WSJ]
« Reply #7 on: June 09, 2016, 12:31:36 PM »
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Dealing with the likes of third point, etc is akin to dealing with the devil, which seems like a last resort measure imo.  Are things really that dire?

It's pretty clear that funding has dried up a lot. LC has also being doing various promos to try to get more retail money. I don't think they would reach this deep into the funding bag if they had better alternatives.


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I'd be a lot happier if they could work something out with Morgan Stanley (unless Mack somehow makes a deal impossible) to sell notes through the adviser network or structure some products for pension, endowment type investors.

These types of investors don't want to touch LC right now given the uncertainty. LC's plan is most likely to reestablish stability in the short term via the deal with the hedge funds. Once the funding situation stabilizes they can probably woo these longer-term investors back.

nonattender

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A little nonsense now and then is relished by the wisest men.

PhilGD

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Re: LendingClub and Hedge Funds Have Discussed Major Funding Deals [WSJ]
« Reply #9 on: June 09, 2016, 01:54:13 PM »
Is it just me or does this strike anyone else as a really strange deal?  I guess idea is that buying loans (probably using very cheap borrowed money) will drive LC stock price higher.  With warrants (basically call options issued by the company) the hedge funds get the levered upside in the stock which they are essentially pushing higher by buying the notes.  Seems a little ponzi-ish to me but will probably work for a short term gain.

I think it's more about protecting themselves from the possibility that things continue to get worse for LC. If that were to happen then the warrants could be used to buy a seat on the BOD and play the role of activist investor.

mchu168

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Re: LendingClub and Hedge Funds Have Discussed Major Funding Deals [WSJ]
« Reply #10 on: June 09, 2016, 02:21:59 PM »
If things get worse, then the warrants will become worth a lot less - maybe nothing.  If you are worried about things getting worse, better to buy puts to hedge you investment in notes.

Anyways, I understand why LC may FEEL the need to do a dilutive deal with a hedge fund, but I ask the question again, is it really in such a dire situation?  This is not a highly leveraged company that is nearing the brink of a Lehman-like death spiral moment.  If fact, they have no debt whatsoever and a fairly large cash pile relative to mkt cap.

Also, note investors are fleeing now but why should we fear a permanent buyers strike?  The returns have been good (not great) relative to other fixed income securities and the asset class has other nice attributes (low volatility, etc). Junk bonds, munis, etc have all faced buyers strikes in recent years but have bounced back (even stronger in the case of munis) when investors looked objectively at the risk-return and relative value attributes of these asset classes.

Instead of trying to temporarily spike originations by selling a piece of the "farm," I would rather see LC do something innovative on the retail investor side.  After all, they are a FinTech company, but there hasn't been any Tech or innovation at LC in years, as far as I can tell.  First I would reset investor expectations by telling them things will be bad for several quarters maybe.  Then I would do a meaningful layoff to lower opex.  Then I would try to roll out as quickly as possible new products that make it easier for retail, non-accredited investors to get exposure to retail notes.  Maybe create an note ETF, make it easier to buy and sell notes in a secondary market, work with advisors (maybe robo) to get this product in front of different kinds of investors - millennials, retirees, etc.  I'm sure all of these are hard to do from a regulatory, technology standpoint, but shouldn't we expect an innovative company to innovate. 

Also they should leverage their board.  Why have Larry Summers, Mary Meeker, John Mack and all these other luminaries and not use them to create partnerships, curry favor with regulators, etc.  There is so much to do, but under RL's leadership all we got was an IPO and some very tenuous small bank relationships.  Sorry for the rant.
« Last Edit: June 09, 2016, 02:23:31 PM by mchu168 »

dompazz

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Re: LendingClub and Hedge Funds Have Discussed Major Funding Deals [WSJ]
« Reply #11 on: June 09, 2016, 02:45:09 PM »
If things get worse, then the warrants will become worth a lot less - maybe nothing.  If you are worried about things getting worse, better to buy puts to hedge you investment in notes.

Anyways, I understand why LC may FEEL the need to do a dilutive deal with a hedge fund, but I ask the question again, is it really in such a dire situation?  This is not a highly leveraged company that is nearing the brink of a Lehman-like death spiral moment.  If fact, they have no debt whatsoever and a fairly large cash pile relative to mkt cap.

Also, note investors are fleeing now but why should we fear a permanent buyers strike?  The returns have been good (not great) relative to other fixed income securities and the asset class has other nice attributes (low volatility, etc). Junk bonds, munis, etc have all faced buyers strikes in recent years but have bounced back (even stronger in the case of munis) when investors looked objectively at the risk-return and relative value attributes of these asset classes.

Instead of trying to temporarily spike originations by selling a piece of the "farm," I would rather see LC do something innovative on the retail investor side.  After all, they are a FinTech company, but there hasn't been any Tech or innovation at LC in years, as far as I can tell.  First I would reset investor expectations by telling them things will be bad for several quarters maybe.  Then I would do a meaningful layoff to lower opex.  Then I would try to roll out as quickly as possible new products that make it easier for retail, non-accredited investors to get exposure to retail notes.  Maybe create an note ETF, make it easier to buy and sell notes in a secondary market, work with advisors (maybe robo) to get this product in front of different kinds of investors - millennials, retirees, etc.  I'm sure all of these are hard to do from a regulatory, technology standpoint, but shouldn't we expect an innovative company to innovate. 

Also they should leverage their board.  Why have Larry Summers, Mary Meeker, John Mack and all these other luminaries and not use them to create partnerships, curry favor with regulators, etc.  There is so much to do, but under RL's leadership all we got was an IPO and some very tenuous small bank relationships.  Sorry for the rant.
I agree 99%.  The warrants are a way for LC to pay a rebate on fees that doesn't hit the income statement.  The buyers can turn around and sell those as soon as the deal closes -- boosting returns day 1.

An ETF would be hard because you have to be able to do creation and redemption units.  That means the notes need to be tradeable and I doubt the SEC would consider Folio a good enough market.  A closed end mutual fund would work well, though.  It's permanent capital (i.e. principal is always going to get reinvested) and able to be bought by any Joe-schmo with a Schwab account.  It's an old school solution (that no one uses much anymore) to the old school problem of getting illiquid investments to retail investors.

LonghornSF

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Re: LendingClub and Hedge Funds Have Discussed Major Funding Deals [WSJ]
« Reply #12 on: June 09, 2016, 02:50:42 PM »
Quote
Instead of trying to temporarily spike originations by selling a piece of the "farm," I would rather see LC do something innovative on the retail investor side.  After all, they are a FinTech company, but there hasn't been any Tech or innovation at LC in years, as far as I can tell.

Good point but I think you've really hit on the problem. LC has tried to spin itself as some type of innovative startup for years. If you've been in their office and got to know their people you would understand that this isn't true. The entire management team was stacked with east coast "old economy" folks that really weren't interested in doing anything that innovative. Hence why LC migrated towards institutional funding pretty quickly. Most of the mid to senior level management saw an interesting opportunity at a time when the startup market was hot and made a fortune on options. A lot of them have since left for greener pastures.

I went to Lendit two years ago and was surprised by some of the BS these companies were claiming. I don't mean just LC. Some of the other platforms were making huge claims about their innovations and superior underwriting capabilities that just weren't true. A lot of these companies were in startup gaga mode and saying whatever it took to get that next round of funding at an even higher valuation.

investny

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« Last Edit: June 10, 2016, 04:06:31 AM by investny »

newstreet

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Re: LendingClub and Hedge Funds Have Discussed Major Funding Deals [WSJ]
« Reply #14 on: June 10, 2016, 05:51:34 AM »
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Instead of trying to temporarily spike originations by selling a piece of the "farm," I would rather see LC do something innovative on the retail investor side.  After all, they are a FinTech company, but there hasn't been any Tech or innovation at LC in years, as far as I can tell.

Good point but I think you've really hit on the problem. LC has tried to spin itself as some type of innovative startup for years. If you've been in their office and got to know their people you would understand that this isn't true. The entire management team was stacked with east coast "old economy" folks that really weren't interested in doing anything that innovative. Hence why LC migrated towards institutional funding pretty quickly. Most of the mid to senior level management saw an interesting opportunity at a time when the startup market was hot and made a fortune on options. A lot of them have since left for greener pastures.

I went to Lendit two years ago and was surprised by some of the BS these companies were claiming. I don't mean just LC. Some of the other platforms were making huge claims about their innovations and superior underwriting capabilities that just weren't true. A lot of these companies were in startup gaga mode and saying whatever it took to get that next round of funding at an even higher valuation.

Most are still delusional and in gaga mode.  They will sober up after Propser fails to get a bid that is greater than 15% of its last investment round.