On Friday of last week, LendingClub announced that it closed a new kind of transaction. It was a whole loan transaction structured as a tradable pass through security called a CLUB Certificate.
So what does this actually mean? I reached out to Lending Club to find out more. While they were very careful not to say anything that could be construed as a forward-looking statement they did provide a little more color than the press release.
This was an initiative that was investor led. Basically, they had a potential investor who did not want to invest in whole loans. They are not for everyone, given they are an illiquid investment that has a duration of several years. What this investor wanted was a security that acted like a whole loan but one that had liquidity.
So, LendingClub created a security with a CUSIP that was cleared by the DTCC and could potentially be traded in OTC markets. It was a $25 million deal that was sold to one investor and in keeping with Dodd-Frank rules LendingClub retained 5% of the deal total on their balance sheet.
While LendingClub would not share details of this deal we did learn that these were both three and five year loans of one particular loan grade. They customized this deal to meet the investors exact requirements. And this is really what makes this vehicle quite appealing. It would be close to impossible to replicate this exact deal inside a traditional securitization structure given those are usually pools of loans with broad criteria.
LendingClub claimed that this was a first of its kind deal in marketplace lending but in my research I discovered this piece on Asset-Backed Alert from April 2016 that talked about a similar structure that Prosper was working on last year. Now, I have not heard whether this planned structure received traction at Prosper so LendingClub may well be right that this is the first ever deal of its kind that has closed in the industry. It just shows that others have been thinking about this for some time.
While there hasn’t been much coverage of this CLUB Certificate deal, PeerIQ had some interesting thoughts in their latest newsletter. Also, GlobalCapital was out with an interesting piece right after the announcement.
From my perspective there are two main advantages of the CLUB Certificates:
- Provides liquidity – because the whole loan pool is structured as a security it has liquidity. It should be able to be traded on existing secondary markets.
- Will provide an independent valuation – If enough of these securities are traded it will lead to a price discovery that will provide a proxy for a valuation of these loan pools whether wrapped in a certificate structure or not.
It remains to be seen whether or not the CLUB Certificate structure will get traction in the market. But there are certain types of investors that require liquidity so this could very well expand the potential investor pool. And that will be a good thing for both LendingClub and the industry as a whole.
I am surprised that you find passthroughs a new product: at SmartLenders AM we issued more than USD 130M since 2015 on the same underlying with an ISIN code (not a CUSIP) for easy integration in Europeans portfolios and life insurance products.
Hi Jerome,
I didn’t know that was the structure you guys were using for your US investments. Thanks for sharing.
No worries Peter. We then moved to a SICAV (fund) format, as these passthroughs are mono-vintage and a multi-vintage approach provides a better diversification. Always great to read your industry updates.
Looks to me that this transaction is at the cost to retail investors as the pool of Lending Club loans for sale has been considerably smaller since that deal went down. but then LC has down tricks in the past as we know. They care about the stock market more than about good business.