A cash crisis is impeding the online lending industry’s growth since the cost of borrowing grows, funds become increasingly limited and ratings agencies maintain a cautious outlook toward the space.
Besides, start-ups that have grown into unicorns originating billions of dollars’ worth of loans may find themselves doing less lending or, the other way, putting more of their loans onto their own books.
The asset-backed securities market is slowing down and issued $40 billion in January, that is the lowest total since at least 2012, according to Dealogic data; and generated a meager $10 billion in ABS loans in February. In terms of deal volume, ABS deals in 2016 have also drop to an all-time low.
“We want to tap into the ABS market. We think the market will be there for our product, it’s just a matter of what cost,” said Suk Shah, CFO of lender Avant.
As said by Shah, he is expecting an increase in the cost of capital for online lenders. However, Avant, that hit a valuation of $2 billion in late 2015, has other avenues it can use to fund operations. The company has access to more than $1 billion in existing debt financing and operates a high-net worth lending platform for clients looking to take bigger blocks of peer-to-peer loans. Therefore, it is not dependent on ABS deals to issue loans.
Loans originated by online lender Prosper last year were put on the watch list by Moody’s earlier this month, citing the possibility of greater losses than was initially anticipated by the ratings agency.
“The reviews for downgrade of the Class C Notes were prompted by a faster buildup of delinquencies and charge-offs than expected in transactions backed by Prosper-originated loans,” Moody’s researchers wrote in their February 11 report.
Credit data company TransUnion projected in a survey released earlier this year that the 60-day-plus secured loan delinquency rate will rise to 3.72 percent by the end of this year. According to the research, this coincides with an expected increase of about 7 percent in the average secured loan balance per consumer, comparing 2014 numbers to projected numbers for this year.
Lending Club CEO Renaud Laplanche said on the company’s earnings call this month that pension funds, insurers and other asset managers contributed 21 percent of more than $8 billion that was invested through the company’s platform in 2015. Besides as he said, thanks to online lenders building up a longer track record institutional buyers can trust, he expects that source of capital to grow:
“When they get in, they do so at large numbers.”
Both Lending Club and On Deck Capital have seen stocks struggle after their respective IPOs; as of midday trading on Friday the shares of each were down more than 18 percent on the year. On Deck Capital entered into a partnership with JPMorgan Chase late last year to develop an origination platform with the help of the bank.
All lending companies emerged in the wake of the financial crisis, and have not yet had to sail with proverbial economic headwinds in their faces.