Lend Academy Network Forum

Lending Club Discussion => Investors - LC => Topic started by: Randawl on November 08, 2014, 01:57:02 PM

Title: 10-Q September 30, 2014
Post by: Randawl on November 08, 2014, 01:57:02 PM
Lending Club released their newest 10-Q a few days ago.  I thought this snippet was interesting in light of our recent discussions:

If we were to become subject to a bankruptcy or similar proceeding, the right of payment of investors in our notes may be senior to
the right of payment of our stockholders and there may not be value recoverable by our stockholders.
Under the terms of the notes offered through our marketplace, we are obligated to pay principal and interest on each note on a nonrecourse
basis only if and to the extent that we receive principal, interest or late fee payments from the borrower on the corresponding
loan, but the notes become fully recourse to us if we fail to pay such obligation, which would include being prohibited from making
such payments as a result of a bankruptcy or similar proceeding, or if we breach a covenant under the indenture governing the notes.
In a bankruptcy or similar proceeding due to a default under current or future indebtedness, an action for repurchase or rescission of
securities or other event, there is uncertainty regarding whether a holder of a note has any right of payment from our assets other than
the corresponding loan. It is possible that a note holder could be deemed to have a right of payment from both the corresponding loan
and from some or all of our other assets, in which case the note holder would have a claim to the proceeds of our assets that is senior
to any right of payment of the holders of our common stock, regardless of whether we have received any payments from the
underlying borrower, making it highly unlikely that there would be any value recoverable by our stockholders.



http://www.sec.gov/Archives/edgar/data/1409970/000119312514397209/d794350d10q.htm (http://www.sec.gov/Archives/edgar/data/1409970/000119312514397209/d794350d10q.htm)

Page 66.
Title: Re: 10-Q September 30, 2014
Post by: lascott on November 08, 2014, 05:32:03 PM
So at least investors of notes would still get their payments...

Lending Club released their newest 10-Q a few days ago.  I thought this snippet was interesting in light of our recent discussions:

If we were to become subject to a bankruptcy or similar proceeding, the right of payment of investors in our notes may be senior to
the right of payment of our stockholders and there may not be value recoverable by our stockholders.
Under the terms of the notes offered through our marketplace, we are obligated to pay principal and interest on each note on a nonrecourse
basis only if and to the extent that we receive principal, interest or late fee payments from the borrower on the corresponding
loan
, but the notes become fully recourse to us if we fail to pay such obligation, which would include being prohibited from making
such payments as a result of a bankruptcy or similar proceeding, or if we breach a covenant under the indenture governing the notes.
In a bankruptcy or similar proceeding due to a default under current or future indebtedness, an action for repurchase or rescission of
securities or other event, there is uncertainty regarding whether a holder of a note has any right of payment from our assets other than
the corresponding loan. It is possible that a note holder could be deemed to have a right of payment from both the corresponding loan
and from some or all of our other assets, in which case the note holder would have a claim to the proceeds of our assets that is senior
to any right of payment of the holders of our common stock, regardless of whether we have received any payments from the
underlying borrower, making it highly unlikely that there would be any value recoverable by our stockholders.



http://www.sec.gov/Archives/edgar/data/1409970/000119312514397209/d794350d10q.htm (http://www.sec.gov/Archives/edgar/data/1409970/000119312514397209/d794350d10q.htm)

Page 66.
Title: Re: 10-Q September 30, 2014
Post by: core on November 08, 2014, 05:49:09 PM
So at least investors of notes would still get their payments...

No that is not what it says.  In such filings they always warn investors of the worst case lest somebody sue later.  In this case they are warning potential stockholders.  "May" doesn't mean "will".  And "obligated" means nothing when the company is bankrupt.
Title: Re: 10-Q September 30, 2014
Post by: JoeB on November 08, 2014, 07:50:02 PM
So at least investors of notes would still get their payments...

No that is not what it says.  In such filings they always warn investors of the worst case lest somebody sue later.  In this case they are warning potential stockholders.  "May" doesn't mean "will".  And "obligated" means nothing when the company is bankrupt.


+1
Title: Re: 10-Q September 30, 2014
Post by: AnilG on November 11, 2014, 02:32:22 AM
Fully agree with you. According to 10-Q, the stockholder rights to any payment are below that of the investors in notes. But nowhere 10-Q mentions that investors in notes have higher (senior) rights than the other creditors and debt holders. As investor in notes, you are at the bottom of the totem pole in comparison to other creditors of LC.

In most bankruptcy cases, typically stockholders receive nothing and get wiped out. And, most creditors take a major haircut and/or convert their debt to equity in the company (typically terms are dictated by largest creditors and senior most debt holders).

So at least investors of notes would still get their payments...

No that is not what it says.  In such filings they always warn investors of the worst case lest somebody sue later.  In this case they are warning potential stockholders.  "May" doesn't mean "will".  And "obligated" means nothing when the company is bankrupt.
Title: Re: 10-Q September 30, 2014
Post by: lascott on November 11, 2014, 09:55:33 AM
So in the very unlikely event of a bankruptcy the borrowers loans are "forgiven", need to be paid in full immediately, or they can continue to make payments if they feel generous?
Title: Re: 10-Q September 30, 2014
Post by: rawraw on November 11, 2014, 09:59:14 AM
So in the very unlikely event of a bankruptcy the borrowers loans are "forgiven", need to be paid in full immediately, or they can continue to make payments if they feel generous?
In bankruptcy, creditors may get the judge to rule that loan payments should be diverted to them until their claims are satisfied.  While LC has very little "bank creditors," other people become creditors as well: the person you signed your lease with, energy company, etc.  Depending on LC's retirement system, the employees themselves could actually be creditors as well.
Title: Re: 10-Q September 30, 2014
Post by: LonghornSF on November 11, 2014, 10:01:58 PM
Interesting that revenue has increased so substantially and yet they still cannot turn a profit.

Anybody who knows this industry should start to seriously question the long-term profitability of P2P platforms. I believe they can be profitable, but will never becomes cash cows. It simply costs too much to acquire and service borrowers and borrower retention rates are not that high. Putting aside all the hype, if Lending Club is on track to originate $5 billion and they STILL cannot generate profit it is a serious red flag. This business is hardly worth $5 billion. Even $1 billion might be generous.
Title: Re: 10-Q September 30, 2014
Post by: Prescott on November 12, 2014, 02:23:33 AM
Interesting that revenue has increased so substantially and yet they still cannot turn a profit.

I think it's been mentioned before, but they are plowing any profits back into growth - marketing, technology etc. You could argue they don't have to plow all of it back to growth, I'll leave it to others to argue with you over growth strategies.
Title: Re: 10-Q September 30, 2014
Post by: Thatguybil on November 12, 2014, 04:32:48 AM
Interesting that revenue has increased so substantially and yet they still cannot turn a profit.

Maybe Amazon should buy lendingclub!
 :P
Title: Re: 10-Q September 30, 2014
Post by: LonghornSF on November 12, 2014, 07:41:47 PM


I think it's been mentioned before, but they are plowing any profits back into growth - marketing, technology etc. You could argue they don't have to plow all of it back to growth, I'll leave it to others to argue with you over growth strategies.

I laugh when I hear this explanation. Marketing is an expense, not an "investment." If they reduced marketing spending then origination would immediately decline. The cost of customer acquisition is far, far higher than most people understand which is what makes this business so unattractive. Customers are not loyal at all and you constantly have to reacquire them at a very high cost.

I also hear the "they're scaling up" argument a lot. Folks, Lending Club is already huge - they will originate >$5 billion in 2014 and have 600+ employees. If there were magical scale benefits to be had, we would have seen them by now. Instead, this business looks fundamentally the same as it did in '12 and '13.

Title: Re: 10-Q September 30, 2014
Post by: core on November 12, 2014, 08:01:33 PM
I think it's been mentioned before, but they are plowing any profits back into growth - marketing, technology etc.

I laugh when I hear this explanation. Marketing is an expense, not an "investment."

Very good point, quite true.  This ain't payday loans.  Repeat customers are rare.  Well unless you email them every few months offering borrowers a lower refinance rate and screwing investors in the process.  Guess they've got that covered.

And Prescott, so the rest of their "investment" is in "technology" you say?  What "technology" have they invested in recently?  The same "technology" that caused them to have to buy back (steal) ~1% of all open loans from people due to a "system error"?  The same "technology" that can't hardly keep up with a few hits per minute from one investor and they have to start going on an automation witch hunt?  The same technology that blasts out wholly incorrect data via the API, a different fiasco each week?  The same technology that can't properly calculate a FICO trend, accrued interest, payments remaining?  The same technology that allows shark Folio traders to screw over other traders because the system is so hosed?

I think they got gypped.  Now I know where the Obamacare site programmers went after they got done with that site.

I'm not even going to address the overuse of the word "technology" these days.  A freaking few lines of code is not "technology".
Title: Re: 10-Q September 30, 2014
Post by: Fred on November 12, 2014, 08:56:50 PM
Folks, Lending Club is already huge - they will originate >$5 billion in 2014 ...

I beg to differ here.  Origination is not the same as revenue (let alone profit).

IMO, financial companies are considered huge when the Fed starts treating them as "too big to fail".
Title: Re: 10-Q September 30, 2014
Post by: LonghornSF on November 12, 2014, 10:02:57 PM

I beg to differ here.  Origination is not the same as revenue (let alone profit).

IMO, financial companies are considered huge when the Fed starts treating them as "too big to fail".

I don't disagree with your first point. My point is that Lending Club is not a small player anymore. In terms of portfolio loans outstanding, they would already be solidly in the ranks of a mid sized bank. We should be seeing economies of scale by now but instead are only seeing costs increase linearly with expense.
Title: Re: 10-Q September 30, 2014
Post by: rawraw on November 13, 2014, 10:04:14 AM
Folks, Lending Club is already huge - they will originate >$5 billion in 2014 ...

I beg to differ here.  Origination is not the same as revenue (let alone profit).

IMO, financial companies are considered huge when the Fed starts treating them as "too big to fail".
LC is more like a mortgage company than a bank.  Closest thing in banking is a mortgage subsidiary of a bank.
Title: Re: 10-Q September 30, 2014
Post by: hoggy1 on November 13, 2014, 02:09:13 PM
Core beat me to the heart for the "Technology" criticism. But please be careful not to include LC with the likes of a "bank". LC accounting and statistics are poor enough to disqualify them as a fiduciary for their own employees retirement plan.
Title: Re: 10-Q September 30, 2014
Post by: lascott on November 13, 2014, 05:29:36 PM
I thought LAP24 was pretty interesting.

http://www.lendacademy.com/lap24-jonathan-morris-titan-bank/
Jonathan Morris is a banker, but he is not your conservative banker who works at a big bank, he is very much an innovative and forward thinking banker. His bank, Titan Bank, was one of the first banks to invest on the Lending Club platform. They started in June of 2013 so they already have some track record with their Lending Club investments.

Quote
Peter: Right, yeah that makes sense. I just want to go back to when you started up with Lending Club. When you…obviously for   them it was a big deal to get some banks   on the platform. They’ve beentalking about disintermediating the banks and here we are now, now we talk about partnering with the banks. Did they have to change much when you went to look at them and you obviously had lots of talks in advance of signing a deal, did they have to change much of their processes or they were so compliant that you went, okay, this is great, we just slot right in here and just really making sure it was comfortable. What was that like?

Jonathan: It kind of was a shock at how good Lending Club was when we went there; the level of
policies that they have, the quality of people, some of the verification systems that we were able to see on site really surprised me in a good way. I think there was then…. and over time as things have    evolved, a few things have had been let's say tweaked, but they were running their programs better than probably 90% of the banks do themselves. It worked fairly well for us in that respect.
Title: Re: 10-Q September 30, 2014
Post by: Prescott on November 13, 2014, 06:54:35 PM


This ain't payday loans.  Repeat customers are rare.  Well unless you email them every few months offering borrowers a lower refinance rate and screwing investors in the process.  Guess they've got that covered.

Confirmed Covered! Repeat customers aren't rare

And Prescott, so the rest of their "investment" is in "technology" you say?  What "technology" have they invested in recently?  The same "technology" that caused them to have to buy back (steal) ~1% of all open loans from people due to a "system error"?  The same "technology" that can't hardly keep up with a few hits per minute from one investor and they have to start going on an automation witch hunt?  The same technology that blasts out wholly incorrect data via the API, a different fiasco each week?  The same technology that can't properly calculate a FICO trend, accrued interest, payments remaining?  The same technology that allows shark Folio traders to screw over other traders because the system is so hosed?

er, yes, that's the technology. Sad how both LC and Prosper get this so f'd up and they get silence from most the mouth pieces in this industry.

I guess you could argue they are spending tons of cash on marketing dollars to continue the growth in loans while they figure out how to make a profit? I can go with that. In which case get your liquidity event (LC = IPO, Prosper = sell?), and gtfo before it's falls apart?