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Messages - AmCap

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241
All -

The 5 year issue has nothing to do with the SEC.  This fun little issue is tax related.

Recall that, by form, the notes that you hold are indebtedness of Lending Club and not the individual borrowers.  In essence, you loan money to lending club, and then they lend it to the borrowers acting as a conduit. 

Interest income on these notes is included in gross income to corporations and deductible in the year interest is paid.  So if lending club borrows money from you and takes the proceeds and loans it out to a borrower, the result should be a tax nothing; lending club includes the OID  that it recognizes from the borrower, and deducts the interest it pays out to you [this in itself is an interesting tax issue because, assuming LC isn't an accrual basis taxpayer, it would have to accrue and include OID faster than it would deduct the interest it receives on a cash basis - not sure about this].

Anywho, as you can imagine it is *really* important to LC that they be able to deduct the interest they pay out to investors.  Otherwise, they would be forced to include in gross income the OID they get from the borrowers, but not deduct that same amount paid out to investors. 

Section 163(e) denies a deduction to a corporation for a portion of interest paid out on an Applicable High-Yield Debt Obligation (AHYDO), as defined by Code Section 163(i).  Without getting into the weeds, an AHYDO is almost any debt instrument with an interest rate of 5% above the AFR, a maturity of greater than 5 years., and significant OID.  I don't have time right now to do the calculations to determine OID on a typical LC note but I assume here they are issued with significant OID.  Nearly every note LC issues will exceed the AFR plus 5%, so LC's conclusion is that the Notes are AHYDOs for purposes of Section 163. 

If that is so, then you can see why LC will simply not pay out any payments it receives to investors after 5 years.  If it did, then the entire Note would be recharacterized as an AHYDO.  Keep in mind that the entire instrument is recharacterized, so past interest payments for which LC took a dedction would be recharacterized as disallowed AHYDO payments, and LC would have quite the tax deficiency waiting for it come April. 

242
Interest Radar / Re: New Feature: Average Offer Price
« on: December 12, 2012, 03:00:17 PM »
This is amazing and very helpful. Knowing the average offer price gives us a much clearer idea of what the notes are worth after issuance.

243
Interest Radar / Re: Secondary market ideas?
« on: November 28, 2012, 03:24:23 PM »
That is a perfectly good point...the only thing I could analogize to is maybe unsecured debt recoveries in personal bankruptcies, which I am told hover around the 20-30% range (non chapter 7).  But that is still guesswork huh...

244
Interest Radar / Re: Secondary market ideas?
« on: November 28, 2012, 02:07:49 PM »
I've thought a bit more on it - I think your estimated loss projections might be a bit rosy.  An investors estimated loss shoukd be a function of the likelihood that the loan will fall delinquent and the amount that might be recovered if the loan is rehabilitated.  As of now, you are estimating the probability that a loan, given a particular loan status, might be recovered (LC says its recovery rates are 6 month estimates of loans that are partially or fully recovered).  But then wouldnt you have to take another percentage of that figure to estimate how much principal one can expect back from a defaulted loan?  It might involve pure guesswork, but that number surely cant be 100%

245
Interest Radar / Re: Secondary market ideas?
« on: November 28, 2012, 01:09:59 PM »
Ahhh ok I think we are on the same page now!

246
Interest Radar / Re: Secondary market ideas?
« on: November 28, 2012, 12:46:28 PM »
You know I'm not sure.  First, when you say probability of loss do you mean the probability of  receiving no further payment (e.g., the probability that the note is worthless) or is it the estimate of what percentage of outstanding principal might be ultimately recovered?

Second - do I follow your math correctly?  Assuming the borrower made no payment and an estimated loss rate of 23%, I assume you are taking (1-.23) 24.  But I get $18.48, rather than 17.71.  I also went to law school so don't trust my math!  Finally your point about whose loss is definitely important. The previous investor's loss is already known right?  Their loss would be interest received plus what I paid for the note less remaining principal.  My loss should then be estimated only by reference to what I paid ...or so I'd think.  E.g., if the loan goes into default then my entire portfolio should only see a loss of $3, regardless of what's owed on the note.

247
Interest Radar / Re: Secondary market ideas?
« on: November 28, 2012, 10:35:59 AM »
It is - the amount invested represents my cost basis in the note.  But, and I may be wrong, I don't think that's the number you use to calculate estimated loss.  Does that make sense?

248
Interest Radar / Re: Secondary market ideas?
« on: November 27, 2012, 10:57:20 PM »
If you guys could come up with a way to recalculate loss rates for when you have notes that you acquired on the trading platform at prices very different from the remaining principal, it'd be helpful.  From what I can tell, your calculations for both ROI and estimated loss rely on the remaining principal due, regardless of how much the secondary note buyer paid.

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