Tuesday 24 October 2017

Fears of a bubble growing in peer-to-peer loan outfits

It's the hottest new way for an SME to get money, but could a bubble be brewing in peer-to-peer lending in the US?

MAXED OUT: Is P2P lending a flashback to the subprime mortgage boom?
MAXED OUT: Is P2P lending a flashback to the subprime mortgage boom?

Edward Robinson

Is peer-to-peer lending out of control? There's certainly some cause for concern when you consider these three facts.

Peer-to-peer (P2P) loan volume is poised to hit $77bn this year, a 15-fold increase from just three years ago.

Lending Club, the No 1 player worldwide, is trading at a market value of about $7bn - even though it lost $33m last year.

And in a flashback to the sub-prime mortgage boom, P2P start-ups have begun bundling and selling off loans through securitisations.

P2P is one of the fastest-growing asset classes in finance. Some money managers are taking equity stakes in P2P start-ups. In February, the hedge fund Third Point led a $200m investment round in Social Finance, which refinances student loans. The deal valued the three-year-old San Francisco company at $1.2bn.

Others are investing in the loans themselves. In April, Victory Park Capital, a private equity shop in Chicago that backs a number of P2P platforms, announced it was increasing its funding pipeline for one-year-old Upstart Network from $100m to $500m.

Goldman Sachs, BlackRock, Alibaba, and even Google are also making deals in the space.

And now Wall Street is cranking up the volume by running these loans through its securitisation machine.

Peer-to-peer stalwarts say their industry doesn't look like the toxic mortgage market of the 2000s. Many platforms in the US and the UK post their loan books online so investors can analyse the quality and performance of their debt on a loan-by-loan basis.

Most P2P firms also shun sub-prime borrowers. Zopa, a UK firm that's issued more than £800m in consumer loans, approves only one out of five applicants. And it has a default rate of less than 1pc.

But as institutions pour money into P2P, some platforms may relax their credit criteria and welcome riskier borrowers to accommodate the flow, especially if they can offload risk through securitisations, says Michael Tarkan, an equities analyst at Compass Point Research & Trading.

In the US market, LendingClub and its brethren have enabled consumers to pay off pricey credit card balances with cheaper P2P term loans. So what's to stop consumers from levering their credit cards back up? Such behaviour could spell bad news for investors in P2P loans if an interest rate hike or an unforeseen shock pressures borrowers, Tarkan says.

"We've created a mechanism to refinance a credit card into an unsecured personal loan," says Tarkan, who rates LendingClub a 'sell'.

"This may prove to be a superior model - but we just don't know because it hasn't been tested yet through a full credit cycle."

Renaud Laplanche, founder and CEO of Lending Club, says borrowers may indeed out their cards again. But so far, he says, they're boosting their creditworthiness after converting card debt into P2P loans by paying lower interest rates. He says the global lending market is so vast that platforms like his won't have to take on riskier borrowers for years.

"There's no need to loosen standards," he says. "It's growing very fast, but it's a controlled growth."

It may well be that the speed and efficiency of the Web fundamentally changes the business of lending. Institutional investors are certainly betting that way. The P2P boom won't just test a new business model. It will also show whether Wall Street has learned its lesson.


Also in Business