All Is Forgiven? The Bond Buyers Return To Online Lenders

After the rather spectacular fireworks display that Lending Club had going on this time last year, it was not great surprise when the bond buyers who had been snapping up P2P marketplace debt suddenly got a case of cold feet and starting fleeing those marketplace lending platforms.

But in the year since the big meltdown — as firms like OnDeck, Prosper and Lending Club have seen their balance sheets take a beating — those firms have done some rethinking about how they handle risk, securitize their loans and staff their executive ranks.

The thinking, notes the Wall Street Journal, is a bit less Silicon Valley and a bit more Wall Street these days to counteract investor skepticism.

And those efforts are showing early signs of working.

Since April of this year, over $2 billion in securities backed by loans have either been sold or are being prepared for an imminent sale, according to credit-rating firms and people familiar with the matter.

That is some much needed good news for the segment, as it represents more than was issued in the entire second quarter of 2016, according to data tracker PeerIQ.

And it seems to be a continuation of recent activity that saw $3 billion in bonds backed by online loans that were issued in the first quarter of 2017, double the amount from the same period a year earlier.

The renewed confidence, according to investors, came as online lenders moved to tighten up and professionalize their lending and lending criteria.

“It was really important to see there was some kind of a consumer lending background…as opposed to just an algorithm,” said Joseph Astorina, head of asset-backed securities research at AllianceBernstein Holding LP.

Bonds backed by online loans is a small part of the securitization market — as of 2016, $7.8 billion of bonds backed by online loans were issued, compared with $191 billion in total issuance of asset-backed securities, according to S&P Global Ratings.

And investors — though more excited by the segment again — are still cautions after the rounds of burns many took last year when bonds did not live up to predictions about their performance.

How much the segment has really recovered will get another litmus test in the next few weeks as Lending Club brings to market a roughly $400 million deal of bonds backed by loans it made to less creditworthy consumers, according to people familiar with the matter. Last week, a $450.5 million deal backed by 39,334 Prosper personal loans was oversubscribed, according to unnamed inside sources.

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