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LendingClub and Hedge Funds Have Discussed Major Funding Deals [WSJ]

Started by Peter, June 08, 2016, 11:00:00 PM

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Troubled online lender LendingClub Corp. has met with at least three large hedge funds to discuss deals in which they would commit to buying billions in loans and get the right to own shares, people familiar with the talks said." class="bbc_link" target="_blank">

Rob L


It is interesting how difficult it is to do anything in private when Wall St is involved.  Note how everything leaks.  Imagine if you were negotiating with these big guys.  You wouldn't want negotiation details leaking out.


I have a meeting with one of these 3 hedge funds next week. I can ask how they were thinking about this deal.


Is it just me or does this strike anyone else as a really strange deal?  I guess idea is that buying loans (probably using very cheap borrowed money) will drive LC stock price higher.  With warrants (basically call options issued by the company) the hedge funds get the levered upside in the stock which they are essentially pushing higher by buying the notes.  Seems a little ponzi-ish to me but will probably work for a short term gain.

Dealing with the likes of third point, etc is akin to dealing with the devil, which seems like a last resort measure imo.  Are things really that dire? I'd be a lot happier if they could work something out with Morgan Stanley (unless Mack somehow makes a deal impossible) to sell notes through the adviser network or structure some products for pension, endowment type investors. I think LC will be glad they didn't have to deal with the hedge funds in the end.


If things get worse, then the warrants will become worth a lot less - maybe nothing.  If you are worried about things getting worse, better to buy puts to hedge you investment in notes.

Anyways, I understand why LC may FEEL the need to do a dilutive deal with a hedge fund, but I ask the question again, is it really in such a dire situation?  This is not a highly leveraged company that is nearing the brink of a Lehman-like death spiral moment.  If fact, they have no debt whatsoever and a fairly large cash pile relative to mkt cap.

Also, note investors are fleeing now but why should we fear a permanent buyers strike?  The returns have been good (not great) relative to other fixed income securities and the asset class has other nice attributes (low volatility, etc). Junk bonds, munis, etc have all faced buyers strikes in recent years but have bounced back (even stronger in the case of munis) when investors looked objectively at the risk-return and relative value attributes of these asset classes.

Instead of trying to temporarily spike originations by selling a piece of the "farm," I would rather see LC do something innovative on the retail investor side.  After all, they are a FinTech company, but there hasn't been any Tech or innovation at LC in years, as far as I can tell.  First I would reset investor expectations by telling them things will be bad for several quarters maybe.  Then I would do a meaningful layoff to lower opex.  Then I would try to roll out as quickly as possible new products that make it easier for retail, non-accredited investors to get exposure to retail notes.  Maybe create an note ETF, make it easier to buy and sell notes in a secondary market, work with advisors (maybe robo) to get this product in front of different kinds of investors - millennials, retirees, etc.  I'm sure all of these are hard to do from a regulatory, technology standpoint, but shouldn't we expect an innovative company to innovate. 

Also they should leverage their board.  Why have Larry Summers, Mary Meeker, John Mack and all these other luminaries and not use them to create partnerships, curry favor with regulators, etc.  There is so much to do, but under RL's leadership all we got was an IPO and some very tenuous small bank relationships.  Sorry for the rant.

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