Last week I chatted with Mike Cagney, CEO of SoFi, to talk about recent developments with their student loan platform. For some background on SoFi you should read my profile of the company from late last year. Quite a lot has changed since then.
After doing a pilot program at Stanford University in the fall of 2011, SoFi launched more broadly in April of last year. Since then they have issued just under $200 million in loans to around 2,500 borrowers. These borrowers are typically MBA graduates or other degree-holders looking to refinance their student loans at a lower interest rate.
The First Securitization in the Industry
One of the biggest changes happening at SoFi right now is the launch of their securitization product. This deal is still being put together but when it closes it will be the first securitization in the online lending industry. So how will this work? Basically, SoFi is working on a $180 million credit facility that will be combined with $20 million of investor money to create a $200 million pool. In effect, investors in SoFi can receive a 9:1 leverage on their investment by participating in this pool.
SoFi is giving existing alumni investors the option of whether to participate or not. Most are choosing to do so. Why? With this leverage comes the possibility of earning double-digit returns whereas right now returns are in the low to mid single digits. While this is certainly higher risk Cagney said there was been tremendous demand for this product. The slice of the equity pie (the $20 million) that was assigned to institutional investors has been significantly oversubscribed.
With any leverage comes additional risk. And with 9:1 leverage it will not take many loan defaults for investors to be impacted dramatically. But Cagney is very confident in his base of borrowers. [Read more…]