Lending Club Case Study: Securitization of Promissory Notes Analysis

This case study analyzes Lending Club's strategic decision to securitize its promissory notes to enhance liquidity and expand investor access. The case explores the company's business model, the peer-to-peer lending system, and the challenges posed by the lack of a secondary market for its loans. It examines the financial performance of Lending Club, including revenue growth and share price fluctuations, and the potential impact of SEC regulations on its operations. The study highlights the complexities of securitization, the need for regulatory compliance, and the importance of considering the size of investment offerings. The analysis provides recommendations for Lending Club regarding its registration with the SEC and the structuring of its investment offerings. The case study uses financial data from 2015 to 2018 and relevant references to support its findings, offering insights into the financial and regulatory aspects of securitizing personal loans.

PROBLEM DEFINITION:
Should Lending club securitize its promissory notes to provide liquidity to the investors by
allowing to trade in the secondary market?.
RELEVANT FACTS:
French-born Laplanche who had good understanding of calculated risks had founded the Lending
Club to facilitate the peer to peer loans system so that someone who is looking for loans of
personal nature can find someone who is ready to give such loan.("Securitizations Securing the
Future - LendingClub Blog", 2019)
The 2 major foundation principles of Lending club to facilitate peer lending were :-
a)Lack of time to explore urges people to take loans with higher servicing
b)Technology advancements in the form of social and online community can be utilized for the
purpose to allow people to lend and borrow loans
The club had started in the year 2007 with just 4 employees However, lack of liquidity of these
loans or promissory notes made them less popular than expected. With no secondary market
availability, the parties had to hold the notes for a period of 3 years until the loan gets paid off or
with term ends. ("LendingClub Closes First Self-Sponsored Securitization to Expand Investor
Access", 2019)The club is considering to undergo changes in the product types being offered by
securitizing these personal loans in the form of promissory notes and get them traded in
secondary market. Having said that, the process and the journey is extremely tedious and
definitely not an easy one as Securities and Exchange Commission (SEC) has stringent
regulations around the same. SEC would require the club to be registered if gets involved in
issuing securities, cause as of now it is only looked upon as a facilitator of loans. That would
mean undergoing the business model changes as well.(Tenebruso, 2019)
ANALYSIS:
As evident from the statements showing the analysis of the four years data below in the
Appendix A, B and C, it is clearly evident that the total revenue of the company has significantly
increased from the year 2015 to 2018. There has been a drastic increase by approximately 36.4%
in revenues, which is fairly good for an organization’s progress. The price per share of the
company was as low as 0.01 which has met an increase and is currently at a price of 0.15 which
is the hike way beyond the imagination. Irrespective of whatever the current and previous figures
and prices are, the company has largely progressed and seen a lot of ups in the company. In
around the year 2006, the company had a standard credit card rate of 15.09% which was useful
for providing instant access to its credit customers and allowed to purchase or take the cash
advances from any anybody willing. The company also had a standard rate where the lender was
$15-$20 per $100 which was borrowed on the basis of two-week loan.
RECOMMENDATIONS:

The club should register with the SEC under S-1 and S-2 as the market for personal loans is
increasingly on the rise with younger generation relying on them to a great extent. The principal
amount of investment for the Club must not ideally be too large as it would be causing a
hindrance within the SEC, not too small, as it might not even allow the club to prosper without
returning a new offering.
References:

Securitizations Securing the Future - LendingClub Blog. (2019). Retrieved 24 September 2019,
from https://blog.lendingclub.com/securitizations-securing-future/
LendingClub Closes First Self-Sponsored Securitization to Expand Investor Access. (2019).
Retrieved 24 September 2019, from
https://www.prnewswire.com/news-releases/lendingclub-closes-first-self-sponsored-
securitization-to-expand-investor-access-300478662.html
Tenebruso, J. (2019). Why LendingClub Stock Leapt 12.4% Today | The Motley Fool. Retrieved
24 September 2019, from https://www.fool.com/investing/2019/05/08/why-lendingclub-
stock-leapt-124-today.aspx
Yahoo is now part of Oath. (2019). Retrieved 24 September 2019, from
https://finance.yahoo.com/quote/LC/financials/

Appendinx A: Income Statements
Income Statement For the Years Ending 31st December
All numbers in
thousands
12/31/201
8
12/31/201
7
12/31/201
6
12/31/201
5
Total Revenue 694,812 676,555 526,646 429,943
Gross Profit 595,436 589,664 453,060 368,608
Total Operating
Expenses 747,989 778,718 635,963 432,105
Operating Income
or Loss -53,177 -102,163 -109,317 -2,162
Income from Continuing Operations
Earnings Before
Tax -128,110 -153,413 -150,197 -2,162
Income Tax
Expense 43 632 -4,228 2,833
Minority Interest 1,780 5,262 5,262 5,262
Net Income From
Continuing Ops
-128,153 -154,045 -145,969 -4,995
Non-recurring Events

Net Income -128,308 -153,835 -145,969 -4,995
Appendix B: Balance Sheet
BALANCE SHEET For the Years Ending 31st December
All numbers in
thousands
Period
Ending
12/31/201
8
12/31/201
7
12/31/201
6
12/31/2015
Cash And
Cash
Equivalents
372,974 401,719 515,602 623,531
Net
Receivables
1,928,080 3,405,504 4,369,649 4,601,688
Total
Current
Assets
3,452,686 4,333,803 5,116,570 5,323,106
Long Term
Investments
110,432 103,083 270,008 297,461
Property, plant
and equipment
113,875 101,933 89,263 55,930
Goodwill - 35,633 35,633 72,683

Intangible
Assets
82,054 55,599 47,609 41,221
Accumulated
Amortization
- - - -
Other Assets 60,480 10,780 3,548 3,233
Deferred Long
Term Asset
Charges
- - - -
Total Assets 3,819,527 4,640,831 5,562,631 5,793,634
Accounts
Payable
7,104 9,401 10,889 5,542
Short/Current
Long Term
Debt
57,012 - - -
Other Current
Liabilities
149,052 143,310 125,884 73,162
Total
Current
Liabilities
321,113 246,834 234,849 165,755
Long Term
Debt
658,144 344,223 - -
Other
Liabilities
1,969,289 3,122,017 4,352,012 4,586,019

Deferred Long
Term Liability
Charges
2,117 2,952 1,032 1,296
Minority
Interest
1,780 5,262 - -
Negative
Goodwill
- - - -
Total
Liabilities
2,948,546 3,713,074 4,586,861 4,751,774
Total
stockholders'
equity
869,201 922,495 975,770 1,041,860
Net Tangible
Assets
851,153 864,939 913,926 938,206
Appendix C: Cash Flow Statement
CASH FLOW For the Years Ending 31st December
All numbers in
thousands
Period Ending 12/31/201
8
12/31/201
7
12/31/201
6
12/31/2015
Net Income -128,308 -153,835 -145,969 -4,995

Operating Activities, Cash Flows Provided By or Used In
Depreciation 54,764 46,208 29,882 21,578
Adjustments To
Net Income -504,528 -547,800 92,613 44,855
Changes In
Accounts
Receivables - - - -
Changes In
Liabilities -16,377 -12,495 8,912 12,682
Changes In Other
Operating
Activities -40,716 70,815 17,325 14,440
Total Cash Flow
From Operating
Activities -638,950 -590,814 545 74,741
Investing Activities, Cash Flows Provided By or Used In
Capital
Expenditure -52,976 -44,615 -51,842 -39,387
Investments 66,005 223,310 1,175 -298,753
Other Cash flows
from Investing
Activities - - - -33,970

Total Cash
Flows From
Investing
Activities 878,736 998,573 -325,880 -2,406,700
Financing Activities, Cash Flows Provided By or Used In
Net Borrowings -161,561 -415,472 352,459 2,095,557
Other Cash Flows
from Financing
Activities -85,645 -61,583 -36,944 -26,611
Total Cash
Flows From
Financing
Activities -240,017 -456,882 314,483 2,085,710
Change In Cash
and Cash
Equivalents -231 -49,123 -10,852 -246,249