NEW YORK--(BUSINESS WIRE)--Lending Club's plan to raise approximately $500 million of new equity in an IPO before the end of 2014 would be a key milestone in peer-to-peer (P2P) lending's evolution, according to Fitch Ratings. A successful IPO could act as a catalyst and benchmark for other P2P institutions to pursue IPOs in order to raise capital and/or for investors to monetize their P2P investments. Publicly traded shares could also serve as a currency for acquisitions for industry consolidation or product/geographic expansion purposes.
Fitch believes the P2P industry overall would benefit from a successful Lending Club IPO, although broader business execution risks would remain. The industry still has distance to cover in lengthening its operating history, achieving adequate scale and delivering consistent credit performance and profitability through market cycles, all of which are key factors that Fitch would consider in possible P2P credit ratings.
Lending Club, Prosper Marketplace, Funding Circle, Zopa and % RateSetter are among a large number of firms that have emerged across the globe that are competing in the P2P space, yet, Lending Club is the first P2P lender to pursue an IPO in the U.S. If achieved, a $500 million equity raise would roughly triple the $168 million in preferred equity thus far raised by the startup firm since its founding in 2007.
In an August 2014 special report, Fitch outlined several major challenges for the P2P space, including loan credit performance, the regulatory landscape and eventually, maintaining demand in a rising interest rate environment, to name several. We also believe that any P2P firm's concentrations in loan purpose, such as credit card consolidation, would tend to limit the P2P firm's ability to achieve higher ratings, given the credit- and interest rate-sensitive nature of this product use.
Lending Club's S-1 filing provides a peak at loan credit performance by displaying two of the company's net cumulative chargeoff rate curves for three- and five-year loans, by vintage year, going back to 2008. Based on these curves, we see mixed, but overall improving performance in net chargeoffs since inception, which Fitch attributes to improvements in underwriting and a benign credit environment. Fitch believes that over time, P2P investors will gain a better understanding of the variability of these curves through market cycles, as well as other risk reward measures.
On the regulatory front, P2P lenders' strategic focus, investor profile (e.g. retail or institutional) and geographic focus may result in more or less aggressive enforcement related to lending activities. As with any new, rapidly growing industry, we expect that the relevant regulatory authorities will closely scrutinize the P2P industry in order to ensure that investors, particularly retail investors, are adequately protected. P2P lenders essentially must comply with a number of the same major regulations that any bank lender must comply with, yet P2P firms are not formally designated as lenders. Managing regulatory risk and the expectations of public shareholders are among the challenges for the sector over the short to medium term.
Fitch expects that some portion of new capital to be raised in any P2P IPO may be used to increase marketing, enhance borrower and lender education, and develop more refined underwriting models and risk management/reporting tools. These efforts may attract a more diverse set of investors to fund loan growth, which would benefit P2P firms, in our view. We believe P2P lender platforms are well suited for loan-level surveillance disclosures, but it remains to be seen how much further P2P lenders will push their loan-level disclosures to attract a wider range of loan investors.
For more information on Fitch's broader opinions on peer-to-peer lending and its potential challenges to the traditional consumer finance sector, see the video 'Marketplace Lending Challenges Consumer Finance' located at www.thewhyforum.com/videos/marketplace-lending-challenges-consumer-finance.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
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