Certificate Investor

[Randawl]

Looks like investors through LCA got the company to insure their investment against losses with their "Credit Support Agreement."

Oh the sweetheart deals that can be concocted if only you have enough money.   

From the 10-K:

Contingencies
Credit Support Agreement
During the nine months ended December 31, 2012, the Company entered into a Credit Support Agreement with a Certificate investor. The Credit Support Agreement requires the Company to pledge and restrict cash in support of its contingent obligation to reimburse the investor for credit losses on Member Loans underlying the investor’s Certificate, that are in excess of a specified, aggregate loss threshold. The Company is contingently obligated to pledge cash, not to exceed $3.0 million, to support this contingent obligation and which number is premised upon investor volume. As of December 31, 2012, approximately $2.3 million was pledged and restricted to support this contingent obligation.
As of December 31, 2012, the credit losses pertaining to the investor’s Certificate have not exceeded the specified threshold, nor are future credit losses expected to exceed the specified threshold, and thus no expense or liability has been recorded. The Company currently does not anticipate recording losses resulting from its contingent obligation under this Credit Support Agreement. If losses related to the Credit Support Agreement are later determined to be likely to occur and are estimable, results of operations could be affected in the period in which such losses are recorded.

[Zach]

Looks like investors through LCA got the company to insure their investment against losses with their "Credit Support Agreement."

Oh the sweetheart deals that can be concocted if only you have enough money.   

From the 10-K:

Contingencies
Credit Support Agreement
During the nine months ended December 31, 2012, the Company entered into a Credit Support Agreement with a Certificate investor. The Credit Support Agreement requires the Company to pledge and restrict cash in support of its contingent obligation to reimburse the investor for credit losses on Member Loans underlying the investor’s Certificate, that are in excess of a specified, aggregate loss threshold. The Company is contingently obligated to pledge cash, not to exceed $3.0 million, to support this contingent obligation and which number is premised upon investor volume. As of December 31, 2012, approximately $2.3 million was pledged and restricted to support this contingent obligation.
As of December 31, 2012, the credit losses pertaining to the investor’s Certificate have not exceeded the specified threshold, nor are future credit losses expected to exceed the specified threshold, and thus no expense or liability has been recorded. The Company currently does not anticipate recording losses resulting from its contingent obligation under this Credit Support Agreement. If losses related to the Credit Support Agreement are later determined to be likely to occur and are estimable, results of operations could be affected in the period in which such losses are recorded.

That would be amazing to see on the retail side. I can't believe they're trying to guarantee an investment, but....

I assume this insurance is only for principal investment, not interest; unless they're guaranteeing a specific rate of return - for example 7% maybe?

[yojoakak]

Are they insuring individual loans?

Or an entire portfolio?

[Randawl]

Are they insuring individual loans?

Or an entire portfolio?

Individual Member Loans of which the entire portfolio is comprised, it seems.

[ee1x]

Should this type of agreement even be legal? I'm having a hard time understanding why LCA is still associated with LC at all... it makes just about as much sense as a hedge fund that's owned by a stock exchange. Too many potential conflicts of interest here.

[Fred]

I'm having a hard time understanding why LCA is still associated with LC at all...

LC created LCA to accommodate institutional investors.  LC needs LCA as much as the institutional investors.

[Fred]

I just read the 10-K again: http://www.sec.gov/Archives/edgar/data/1409970/000119312513136975/d450565d10k.htm

While I did see statements about Credit Support Agreement (CSA) page 110, however they seem to contradict the following (paragraph 2 over Overview -- page 2):

The Certificates can only be settled with cash flows from the underlying Member Loans and Certificate holder does not have recourse to the general credit or other assets of the Trust, Company, borrower members or other investors.

To me, it looks like CSA is a recourse.

Anyone can explain what these statements mean?

[ee1x]

I'm having a hard time understanding why LCA is still associated with LC at all...

LC created LCA to accommodate institutional investors.  LC needs LCA as much as the institutional investors.

How much are they making on LCA relative to the rest of the business?

[Fred]

LC created LCA to accommodate institutional investors.  LC needs LCA as much as the institutional investors.

How much are they making on LCA relative to the rest of the business?

Management fee, charged to Certificate holders:
Up to 1.25% annualized fee, based on month-end capital balance.

LCA earned management fees from investors in Certificates totaling $0.7 million and $0.1 million for the nine months ended December 31, 2012 and 2011, respectively.

[Fred]

Just for a better perspective:

For the nine months ended 12/31/2012, LC made $26 million on origination, and $1.5 million on servicing.

[ee1x]

LC created LCA to accommodate institutional investors.  LC needs LCA as much as the institutional investors.

How much are they making on LCA relative to the rest of the business?

Management fee, charged to Certificate holders:
Up to 1.25% annualized fee, based on month-end capital balance.

LCA earned management fees from investors in Certificates totaling $0.7 million and $0.1 million for the nine months ended December 31, 2012 and 2011, respectively.

Just for a better perspective:

For the nine months ended 12/31/2012, LC made $26 million on origination, and $1.5 million on servicing.

Forgive me if I'm missing something here, but how does this translate to LC "needing" LCA? If LCA only earned them $0.7M, it's certainly not necessary to their core business. If you back the numbers out, the LCA fees increased $0.6M, which roughly translates to new inflows of - at most - $64M to the LCA product during 2012 based on that 1.25% annualized fee figure. This is hardly important when they originated a total of $718M in loans during that time period. Sure, it helps the business to a certain extent, but to me, something just doesn't seem right about the marketplace offering its own advisory service. It is non-essential and I'd feel better about potential conflicts of interest if it were spun off into its own company.

I can't find any opinion pieces or specific laws prohibiting this, but I'll say it again, this time as a question - would it be wrong for a stock exchange to own a hedge fund? If the NASDAQ owned a hedge fund that only dealt in NASDAQ-traded securities, is there not some sketchiness to this situation? Perhaps I am mistaken but it just doesn't seem right to me.

[Fred]

LC also collects origination and servicing fees on Notes  that Certificate Investors acquired.  The Management fees are "extra".

I didn't say that LC needs LCA, per se.  I did say LC needs LCA as much as the institutional investors.  If LC somehow decided not to bother with institutional investors anymore, then LCA can go as well.

However, from LC perspectives, the institutional investors are desirable; they provide significant demand on Notes on their platform.

Sure, it helps the business to a certain extent, but to me, something just doesn't seem right about the marketplace offering its own advisory service.

I think this is just a business trying to expand and maximize their revenue streams.

Would it be 'questionable' if a real estate broker is also a landlord?

 

[ee1x]

LC also collects origination and servicing fees on Notes that Certificate Investors acquired.  The Management fees are "extra".

Still, LCA note fees would only account for less than 9% of the origination and servicing fees for the overall loan volume in 2012.

I didn't say that LC needs LCA, per se.  I did say LC needs LCA as much as the institutional investors.  If LC somehow decided not to bother with institutional investors anymore, then LCA can go as well.

However, from LC perspectives, the institutional investors are desirable; they provide significant demand on Notes on their platform.

I would venture a guess that the vast majority of that $718M was still due to institutional investors even ignoring LCA. I would imagine most institutions would prefer to do their own research and optimize returns using their own methods rather than deferring to an outside party.

Sure, it helps the business to a certain extent, but to me, something just doesn't seem right about the marketplace offering its own advisory service.

I think this is just a business trying to expand and maximize their revenue streams.

Would it be 'questionable' if a real estate broker is also a landlord?

It certainly is an attempt to maximize their revenue streams; I don't question that.

Also, you didn't answer my question - should the NASDAQ run a hedge fund exclusively dealing in NASDAQ-traded securities? I don't see what the conflict is in the real estate broker / landlord case.

[Fred]

Also, you didn't answer my question - should the NASDAQ run a hedge fund exclusively dealing in NASDAQ-traded securities? I don't see what the conflict is in the real estate broker / landlord case.

From financial intermediation perspectives, NASDAQ is a market maker, so is a broker dealer.  Landlords and hedgefunds are stakeholders.

One has to do with real estate, the other with public equities.

Besides, there is a case to be made here around public vs. private aspect of the transactions when comparing NASDAQ-hedgefund vs. LC-LCA.  Public markets are highly regulated, privates are not so much.

The Notes involved in LC-LCA case are technically "private placements."

[AlphaGen]

Last I checked when LC broke the $1B threshold LCA had 'invested' more than $400M in loans from LC.  They were more than half of all loans.  Yes, they need LCA to buy the loans from themselves.