Poll

As a LC retail investor, I am concerned as indicated that LC has no BRV for retail investors

Extremely concerned and already limit my LC lending because of this matter
14 (18.4%)
Very concerned and will consider limiting limiting future LC investments
16 (21.1%)
Somewhat concened and am waiting to see what happens
26 (34.2%)
No very concerned
20 (26.3%)

Total Members Voted: 76

Author Topic: Lending Club bankruptcy remote vehicle  (Read 22716 times)

dompazz

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Re: Lending Club bankruptcy remote vehicle
« Reply #45 on: April 05, 2016, 05:53:36 PM »
So what happens if Prosper/LC files for bankruptcy? Who do we contact?

In order:
1. Your wife/significant other, "honey remember that money I was investing..."
2. Your local bartender.
3. If your investment is large enough, an attorney specializing in bankruptcy claims and securities law.
    3.1 If not, wait until the dust settles and a lawyer contacts you either for the bankruptcy settlement or the class action lawsuit, or both.
4. Repeat #2 as necessary.
Think you actually might go with 2 ahead of 1.  Might hurt less when she is beating you with a higher blood alcohol level.  :P
Yeah, but alcohol is an anti-coagulant so you'll bleed more.  I think I would rather use it after the fact to dull both the physical and emotional bruising. 

lender90530

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Re: Lending Club bankruptcy remote vehicle
« Reply #46 on: April 09, 2016, 01:48:13 PM »
I invested high 5 figures in Lending club notes, and so far have been very satisfied with the returns. However, I have stopped re-investing cash from paid off notes, and plan on withdrawing cash as it accumulates. When I started investing a couple of years ago, I had hopes that Lending Club would eventually implement a BRV for retail investors, but have given up on that happening. In the event of Lending Club failing, I think I would just be another unsecured creditor waiting in line to pick at the bones of a dead corporation. While Lending Club may have a strong balance sheet now with little or no debt, I don't think there are any covenants protecting retail investors from Lending Club incurring debt in the future to do stock buybacks, or making acquisitions that may or may not succeed. Lending Club, I think, would like retail participation to grow because its funds are more stable than institutional hot money; from this perspective, I think it was a big mistake for Lending Club to go public before implementing a BRV like Prosper did for retail investors. After going public, every day I can see stock market investors' best opinion of the future prospects for the company, and it doesn't seem very encouraging with the stock down significantly from its IPO price; this makes me nervous. One of the reasons, I invested in Lending Club notes was to escape the gyrations and risks of the stock market; without a BRV, it has just followed me, which is why I am cashing out despite the excellent returns.

Fred93

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Re: Lending Club bankruptcy remote vehicle
« Reply #47 on: April 09, 2016, 03:42:00 PM »
While Lending Club may have a strong balance sheet now with little or no debt, I don't think there are any covenants protecting retail investors from Lending Club incurring debt in the future to do stock buybacks, or making acquisitions that may or may not succeed.

A valid concern.

Here's how I think about it.  Suppose that in some future year, LC takes on debt by issuing bonds, and then in some future year after that they go bankrupt.   Suppose the bankruptcy judge gave us investors no special status, so our "notes" are ranked equally with those "bonds".  Lets think about how bad that might be.

First, how we (note holders) come out depends on what the balance sheet looks like at that time.  What would the balance sheet look like?  Today the balance sheet is dominated by 4.5B of active loans on one side (assets), and 4.5B of notes (liabilities) to us investors.  I'm going to ignore stockholder's equity, because we'll assume that the stockholders are wiped out in the bankruptcy.  Today there's also 600M in cash on the balance sheet, but we'll assume they've burned thru all of that before declaring bankruptcy.

Next year,  lets say end of 2016, the active loans will be something like $6B, matched by same $ of notes to investors.  The year after that, say 2017, it may be $9B on each side.  Suppose they then issue some very large amount of bonds.  A $1B bond offering would be considered large.  Lets go with that.   Now it would take them awhile to eat thru the $1B of cash from that bond sale, so lets give them a year before they go bankrupt.  So now we're at the end of 2018, at which time the balance sheet will probably show $14B of active loans, matched precisely by $14B of notes to us investors, and of course that $1B of bonds.

Suppose they go bankrupt at this point.  Ignore the value of their furniture and whatnot, because it is small.  Suppose that the brand has been so tarnished that no one will buy the brand or existing business out of bankruptcy.  Suppose that by this time P2P lending is so tarnished by scandals and bankruptcies that no one even wants to buy the customer relationships.  I'm trying to be worst case pessimistic here.  The business just stops.  (A rare situation, but it has happened.)   There will be some employee related costs, and some legal fees.  Suppose those add up to $100M.

Now lets see what assets and liabilities we are left with.  We'll assume that the judge gives us no special treatment, and just shaves everybody equally.

I see $14B of assets, and $15.1B of liabilities.  The assets cover 92.7% of the liabilities, and we all take a 7.3% haircut.

I don't see that as the end of the world. 

Ok, maybe this isn't worst case yet.  Maybe in addition to those bonds, suppose they took on bank loans in the amount of $1B.

Then we'd have $14B of assets and $16.1B of liabilities.  The assets would cover 87% of the liabilities, and we'd take a 13% haircut.   I would complain a lot, but still not end of the world.

I took a much much much bigger loss in my stock investments in 2002 and 2008.  I took a bigger loss in my oil stocks in 2015. 

When you invest in stocks, and consider the chance that a company you invest in might go bankrupt, you have to think of it as some probability that you will lose 100% of your investment.  When you invest in bonds, it is seldom that bad, and in this case in particular, the fact that the balance sheet is ballasted by this huge pile of consumer loans really improves the situation.

To be complete, I want to admit that there is one kind of loss that I didn't count in this calculation.  Sometimes in a bankruptcy it is revealed that some of the assets on the balance sheet aren't in good shape, and may be worth less than the number shown.  I've left this possibility out because as an investor in LC notes, you already have made a judgement that the underlying loans are good.  For this reason, the above calculation is just about what might happen if the company goes bankrupt while the loans they've made are good.

It is possible of course that consumer loans will go to crap at some point in the future, but you take that risk when you invest in notes thru LC already.  This calculation is about the risk that you will lose money in an LC bankruptcy, which we presume you would not have lost if there had been a bankruptcy-remote-vehicle.  To say it a different way, this is about the specific risk we take because we do not have a BRV.

Of course the most likely scenario is that they do not go bankrupt at all, but continue as an ongoing business.  If they do run into trouble, the most likely scenario is a buyout (at a very low price) by another lender, or some other reorganization which does not haircut our notes at all.

jz451

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Re: Lending Club bankruptcy remote vehicle
« Reply #48 on: April 09, 2016, 04:50:10 PM »
When I've gone over this to me it leads in the direction that noteholders will not be. While not 100% for certain I am confident that a bankruptcy judge would separate the assets/liabilities of the noteholders and people issued loans with the assets/liabilities for the operations of Lending Club. Just imagine what would happen in this case if a judge lumped all assets/liabilities together. A class-action lawsuit would surely come about on our behalf to make sure all existing loans are paid out to noteholders with the fees paid to the creditors.

rawraw

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Re: Lending Club bankruptcy remote vehicle
« Reply #49 on: April 09, 2016, 08:33:26 PM »
I've known of some stupid decisions from bankruptcy courts when it comes to financial matters that has cost investors lots of money unfairly.  Never know what that judge may come up with in terms of our legal status