It's prime time for LendingClub Corp.'s sponsored-securitization program.
LendingClub is looking to sponsor a securitization transaction backed by prime loans in the third quarter. The transaction would mark the company's second sponsored securitization — the first was backed by near-prime assets — and another could follow before the end of 2017, CFO Thomas Casey said.
"We would expect the third and fourth quarter to include prime securitizations," Casey said, according to a transcript of an Aug. 7 earnings conference call. "We haven't specifically outlined exactly the timing, but we would expect ... probably one per quarter."
LendingClub completed its first sponsored securitization in the second quarter. By sponsoring the deals, the company is changing its model somewhat.
The company had been a pure marketplace lender that connected borrowers with investors and did not take on balance sheet risk. However, Dodd-Frank Act regulations known as risk retention rules require sponsors to retain a certain percentage of the credit risk of the securitized assets. The aim of the regulation is to align the interests of the sponsors and investors. LendingClub is expecting to retain 5% of the interest in its self-sponsored securitizations, which equated to about $8 million worth of the first deal it completed, Casey said. The retention does increase the risk exposure for the company, because the assets could lose value if borrowers stop making payments on the loans that have been securitized.
However, Stifel Nicolaus & Co. Inc. analyst John Davis said the amount LendingClub plans to retain is small. As long as the retention levels do not increase significantly, the benefits of the additional funding source outweigh the increased risk associated with the loan exposure, he said.
Along with funding diversification, the securitization program gives LendingClub additional revenue. During the second quarter, the company generated $3.7 million in revenue from the securitization. That represented less than 3% of LendingClub's total revenue of $139.6 million for the period, but without the securitization, the company would have fallen in line with management's quarterly revenue guidance instead of $2.6 million above the high end of the range. For the full year 2017, LendingClub is expecting securitization revenue to come in near the top of its guidance range of $10 million to $15 million, Casey said.
LendingClub executives announced in February that they were moving toward the self-sponsored securitization and said the program would improve the execution of the deals. Previously, an outside sponsor purchased LendingClub loans and organized the company's securitizations.
LendingClub's first securitization effort led to the 2016 resignation of former CEO Renaud Laplanche after an internal probe found that documents on loans the company sold for the deal were falsified. After being temporarily halted, the initial securitization was completed, and other LendingClub securitizations with the use of an outside sponsor followed.
In self-sponsored deals, companies can use loans from own their own balance sheet or aggregate loans from investors to use for the securitization. LendingClub's first sponsored securitization aggregated loans from investors. The aggregation effort can help different loan investors make use of the securitization. Chapman and Cutler LLP Partner Peter Manbeck, part of the firm's asset securitization group, noted that some investors interested in securitizations might not have accumulated enough loans by themselves to take part in a deal.
"But if they pool their loans with similar third-party investors, all of them get the benefit from re-selling their loans into a securitization," Manbeck said in an interview.
The thinking is that loan investors can use the securitization to free up their own balance sheets and purchase additional loans. Other marketplace lenders have also used multiple sellers in securitizations. The approach can help drive standardization, spread deal costs and reduce execution risk, according to a report on second-quarter marketplace lender securitizations from data and analytics company PeerIQ.
"This approach for loan pool aggregation benefits both loan aggregators and originators, and we expect it to continue," PeerIQ noted.
LendingClub plans to continue to use loans from outside investors, but it also expects to contribute about $100 million in loans from its balance sheet per quarter, Casey said. He added that the loan contribution from LendingClub would represent a small amount of the company's total originations, which reached $2.1 billion in the second quarter. Still, Casey was upbeat about the significance of the program.
"It's an important development," he said. "We're very, very excited about the capability we've built."