Lending Club Has One Year

| About: LendingClub Corporation (LC)


Recent weekly report suggests that Lending Club has to spend almost $1 billion to fund its own loans.

Given the cash on hand, the company can last just one year assuming that it can break even on operation.

The rapid growth that is desired by many investors will actually make the situation worse, but growth is unlikely to materialize.

Lower transaction fees will increase cash needs, but this could be offset by lowering marketing expenses.

Click to enlargeSource: lendingclub.com

Last time I talked about the two paths that Lending Club (NYSE:LC) can pursue: shut down and preserve capital, or take a gamble and keep going (read Shutting Down Is Not The Best Idea). I believed that a safe decision would be to wind down and save equity holders some money. The more risky, but possibly more lucrative decision would be to keep operating in hopes that the company can instill confidence in loan buyers again. According to a recent weekly report, it has become apparent that the management has chosen the more risky route. The clock has begun to tick.

During the second week of June, Lending Club purchased $18.7 million of its own loans and retail loan sales volume recovered a bit to $23.2 million from the 2016 low of $18.9 million. While retail volume is recovering (still half of 2015's high), the company is now hemorrhaging cash to fund the loans that it originates. At a rate of $18.9 million per week, we are talking about $983 million per year. Furthermore, this cash drain will likely increase as volume of originations rises, since the company would have to spend more of its own cash to plug the funding deficiency. However, this may not be something that we have to worry about.

As I mentioned in my last article, the company has tightened its lending policies by raising interest rates. This will draw in new investors at the expense of the volume of originations. We don't have the full picture yet, but this is a logical conclusion. The V20 Portfolio holds a position in a retailer (NASDAQ:CONN) that also acts as a lender, and recent credit changes have caused same store sales (i.e. demand) to decrease by 7%. If Lending Club "suffers" from the same fate, it may actually be beneficial for shareholders as the company won't have to fund as many loans with its own bank account.

A key question that everyone wants to know is how long Lending Club can last given the current circumstances. The biggest factor is whether institutional lenders will return; but if we assume that the cash drain of $983 million per year will be the norm in the near-term, I believe that Lending Club can last one more year at most before being forced to wind down. At the end of Q1, the company had $973 million of monetary assets, including restricted cash (we are being quite liberal here). Assuming that the company can break even from operation, then the cash on hand should roughly give the company another year before capital dries up. One year may seem like a long time, but is our break-even assumption realistic?

In my previous article, I forecasted that originations could be halved, which would add another $232 million of cash outflow as transaction fees drop. However, given the rumors that the company is drastically cutting marketing spend, it's possible that this extra cash burden can be dramatically reduced. Of course, this would be detrimental to the company's long-term prospects as competitors (e.g., On Deck Capital (NYSE:ONDK)) would be busy gobbling up market share in the meantime.


The management has chosen to take the gamble and fund originations with Lending Club's own cash, giving the company a year to regain the trust of institutional investors. Even though the company has almost $1 billion of funds on its balance sheet, this is only a short-term remedy, as demand for loans far outpaces the supply, to the tune of $983 million per year. Keep in mind that I'm not implying that the cash used to fund the loans will be lost, as the assets (i.e. the loans) will still be on the balance sheet. But if the company doesn't find additional sources of capital soon, it will be forced to wind down. At that point, equity investors have no choice but to take a significant loss, depending on how aggressively the company will cut costs over the coming quarters.

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Disclosure: I am/we are long CONN.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.