Author Topic: What happens if Lending Club goes bankrupt?  (Read 3658 times)

jd

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What happens if Lending Club goes bankrupt?
« on: October 16, 2017, 03:53:24 PM »
Hello everyone,

I was wondering if anyone had any information on what would happen to outstanding notes if Lending Club went bankrupt?  I have heard (trying to confirm) that various banks are in place to take over the outstanding loans.  Can anyone confirm that?

I'm looking over the prospectus and some other official sources of information right now.

Thanks in advance for you time,

Eddie

Rob L

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Re: What happens if Lending Club goes bankrupt?
« Reply #1 on: October 16, 2017, 04:48:33 PM »
We individuals own "notes", not actual pieces of loans. These "notes" we own are unsecured IOU's from LC. They are on LC's balance sheet a such.
My guess would be that if LC were to go bankrupt our "notes" would worth exactly zero. All of LC's secured creditors would get first claim to the loans.
LC does offer "whole" loans which are purchased and owned by large investors such as banks. LC sells them and then services them for the buyer.
Individuals may participate in the "Broad Based Consumer Credit Fund" operated by LC's "LC Advisors". Whole loans are owned by the fund so your investment there would not go to zero in the event of an LC bankruptcy. It's performance hasn't been exactly stellar of late.

There's been plenty of discussions on this topic here on the forum. Search for BRV (bankruptcy remote vehicle) to find them.
A BRV is designed to attempt to provide protection to individual "note" owners, making the notes more than just unsecured corporate obligations.
LC does not have a BRV; Prosper does.
IMO there is a small (today) but non-zero risk of total ruin when investing in LC notes. That's why LC's returns to individual investors are so high.  ::)

jd

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Re: What happens if Lending Club goes bankrupt?
« Reply #2 on: October 16, 2017, 05:55:35 PM »
Thank you so much for your reply.

Fred93

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Re: What happens if Lending Club goes bankrupt?
« Reply #3 on: October 16, 2017, 06:17:30 PM »
The answer is pretty simple: In a bankruptcy, the judge decides what happens.

He considers all the stakeholders.  Debt (such as notes) is ahead of the common stock, by law.  You and I hold notes, so we would get paid before the stockholders.  That's good.

There isn't any other debt, other than the notes, so the money isn't gonna go to some other folks.  And, each of our notes is balanced on the asset side of the balance sheet by a loan.  Therefore there are enough assets to cover the notes at all times.  This is a wonderful balance.  It means we'd be ok.

Now the loans have to get "serviced" of course.  LC has prearranged for someone to be ready to do that in the case that LC was no longer able.  If the judge agreed, he would allow that to proceed.  If he didn't agree, he'd pick somebody else.  He isn't gonna just let them sit not being serviced, because his job is to look out for the interests of all the stakeholders, and every stakeholder cares about the assets of the company being properly cared for.

So we'd be ok.

Finally, think about how a company goes bankrupt.  There has to be debt, and not enough cash to pay the payments on the debt.  It is failure to make such payments that causes bankruptcy.  Now how could that happen with LC?  LC has NO NET DEBT.  When I say "net" I mean that there is no debt other than our notes, each of which is carefully balanced by a loan on the asset side of the balance sheet.  These are contingent payment notes, which means that if the borrower doesn't pay LC, then LC doesn't owe you and me.  Hence there is no situation in which LC would have to pay but not have a flow of money to use to make the payments.  Therefore, LC can't go bankrupt unless or until some big changes occur.

Oh, and by the way, they have a HUGE pile of cash sitting on the balance sheet.  This money came from their IPO, and is far from being exhausted.  They could lose money for many many quarters and still have cash in the bank.  Only after that cash is exhausted would they possibly need to borrow money.  (Borrowing money is what makes bankruptcy possible.)   Even then, they could avoid borrowing by simply scaling back the business.

If they exhaust the cash years from now, and don't make good business decisions, and then decide to borrow money, and don't scale back the business, and things don't get better, then eventually they could have so much debt that they might go bankrupt.  After such a bankruptcy, the judge would likely consider that debt and our notes to have equal priority, so we could get diluted.  However, at that point there would be massively more $ in the notes than the other debt, so the dilution would be small.

This is just not a problem.

jd

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Re: What happens if Lending Club goes bankrupt?
« Reply #4 on: October 16, 2017, 08:43:52 PM »
Your reply was very detail and well thought out. I very much appreciate the effort.

Eddie

anabio

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Re: What happens if Lending Club goes bankrupt?
« Reply #5 on: October 17, 2017, 09:23:11 AM »
Finally, think about how a company goes bankrupt.  There has to be debt, and not enough cash to pay the payments on the debt.  It is failure to make such payments that causes bankruptcy.  Now how could that happen with LC?  LC has NO NET DEBT.  ...

Therefore, LC can't go bankrupt unless or until some big changes occur.

If I may interject something here...

LC might have debt in the future if all those stockholders get that class action lawsuit for the LC debacle in May of 2016. How many years into the future that might be is anyone's guess.

Also, wasn't there a court case in a certain US district court about usury laws being applied to such companies as LC??? That could cause another lawsuit which will affect LC's assets.

AND YES >:( I agree with Fred93 about the judge deciding...just look what happened with GM.
As Will Rogers stated: : I'm not as concerned about the return on my money as I am the return of my money

jd

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Re: What happens if Lending Club goes bankrupt?
« Reply #6 on: October 17, 2017, 09:37:19 AM »
Lawsuits are always an annoying cloud above every company.  Who knows....

That thing with GM was strange.

rubicon

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Re: What happens if Lending Club goes bankrupt?
« Reply #7 on: October 17, 2017, 10:35:34 AM »
can lenders sue LendingClub for changing its underwriting standards materially for the same loan grades without informing investors? Isn't that securities misrepresentation?

After all, these are securities issued by LendingClub.

MarinBB

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Re: What happens if Lending Club goes bankrupt?
« Reply #8 on: October 17, 2017, 02:47:56 PM »
I generally agree with Fred, my major concern is whether borrowers would see a LC BK as a reason to stop making payments and thus introduce a new source of toxicity to the overall portfolio.

jd

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Re: What happens if Lending Club goes bankrupt?
« Reply #9 on: October 17, 2017, 03:49:59 PM »
That is a valid point. I know people who stopped paying their mortgage when the housing crisis hit and a few of those companies went away.

They got a rude awakening one day in the mail....

Rob L

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Re: What happens if Lending Club goes bankrupt?
« Reply #10 on: October 17, 2017, 07:39:27 PM »
My theory is that LC lasts as long as its cash from the unfortunate investors that bought its stock at the IPO. It is a lot of cash. This cash hoard will be depleted quarter by quarter (drip by drip) via stock based compensation to the privileged few and when it's gone the game is over. Given the irrational exuberance of the IPO buyers and the size if the cash hoard this could take a while.

Fred93

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Re: What happens if Lending Club goes bankrupt?
« Reply #11 on: October 17, 2017, 09:51:10 PM »
This cash hoard will be depleted quarter by quarter (drip by drip) via stock based compensation to the privileged few and when it's gone the game is over.

STOCK BASED compensation does NOT deplete CASH. 

Stock based compensation occurs when the company gives employees compensation in the form of new shares of stock RATHER THAN CASH.  Stock based compensation is cash neutral.

rawraw

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Re: What happens if Lending Club goes bankrupt?
« Reply #12 on: October 19, 2017, 12:23:38 AM »
Fred, I'm traveling for the next month but I am pretty sure LC either took out an unfunded line or actual borrowings from a bank. Also I haven't checked their disclosures, but things like long term leases and such expenses act as debt even if they are not disclosed as a liability.

Fred93

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Re: What happens if Lending Club goes bankrupt?
« Reply #13 on: October 19, 2017, 03:01:50 AM »
...I am pretty sure LC either took out an unfunded line or actual borrowings from a bank.

Show me actual borrowing when you find it. 

A line not drawn down means nothing.

Wouldn't make much sense for them to borrow, because LC has $538,444,000 cash just sitting there in the bank (not counting "restricted cash") and $225,261,000 securities available for sale (ie investments in stocks, bonds, etc) on the balance sheet.  One generally adds these two together, and just calls this >$763 Million in cash.

Leases don't bother me.  Leases can be a liability per accounting rules, but they are tiny relative to the amount of notes, and from a practical perspective I think of them as ongoing operating expenses.  They just don't change my basic argument.

rawraw

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Re: What happens if Lending Club goes bankrupt?
« Reply #14 on: October 19, 2017, 04:11:26 AM »
I agree, what I'm saying is you don't actually know their commitments. Leases, for example, have to be disclosed in the footnotes. But there have been plenty of financial companies that go broke and have structured lots of off the books arrangements.  It's just something to be mindful of.

And if the unfunded line exists, it matters because they would draw in the event something goes wrong and may have some sort of claim on our assets. The existence of any ability to borrow means that it is not independent from things going bad. The alternative is trying to borrow once trouble happens and that isn't nearly as easy to get credit. For example, in the oil crisis lots of oil and has companies Drew to the maximum contractual obligation of their lines much to the dismay of the lenders.