January 2015 – Tracy Alloway

What’s in a name? How peer-to-peer became marketplace lending

January 28, 2015 Tracy Alloway Comments 0 Comment

I’ve written repeatedly about how peer-to-peer lending – the cuddly industry that began with the aim of disintermediating big banks by directly connecting individual borrowers with lenders – has been co-opted by the very industry it once set out to disrupt. As the industry grew and became more entwined with existing financial infrastructure, P2P lenders made a conscious decision to move away from the outdated “peer-to-peer” name.

Ever wonder how that happened? Here’s the story.

The future of the US peer-to-peer lending industry was decided in a luxurious San Francisco hotel on a spring evening last year.

On the sidelines of an alternative-lending conference, the heads of some of the biggest companies in the “P2P” space met privately to discuss rebranding the sector.

Eyeing the success of Uber and Airbnb — tech groups that have created digital marketplaces for car rides and rooms — they agreed to drop the peer-to-peer name in favour of “marketplace lending”.

In investor materials released over the following months by Lending Club, the biggest US P2P lender, as it prepared for its $5bn initial public offering, the phrase “peer-to-peer” did not appear once.

Democratising finance: P2P lenders rebrand and evolve

New column – Markets’ misplaced faith in central banks

January 23, 2015 Tracy Alloway Comments 1 comment

For years the omnipotent, all-powerful central bank has been a dominant influence on markets.

Can investors blind believe in central banking last forever? Does the power of monetary policy know no bounds?

I have my doubts.

Our Draghi, who art in Frankfurt, hallowed be thy name.

Mario Draghi’s €1.1tn of shock and awe — €60bn a month of bond buying until September 2016 — might yet turn out to be insufficient to kickstart a moribund eurozone, but it is possible that it has achieved something more important for the animal spirits of markets: a revival in the cult of central banks.

For the last six years many on Wall Street have knelt at the altar of central banks, singing the praises of bulk asset purchases and taking for granted the omnipotence of the men and women who run them.

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As Ben Hunt, chief risk officer at asset manager Salient Partners, puts it: “We pray for extraordinary monetary policy accommodation as a sign of our central bankers’ love, not because we think the policy will do much of anything to solve our real-world economic problems, but because their favour gives us confidence to stay in the market.” Sometimes ‘cult’ is too soft a word.

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Crises of faith are rarely pleasant experiences and the unwinding of the central bank cult — when it comes — looks set to be no different.

Markets’ misplaced faith in central banks

About all those high-yield energy bonds…

January 19, 2015 Tracy Alloway Comments 1 comment

I’m not an energy person. So I was delighted to learn about reserve-based lending and the semi-annual “redetermination of the borrowing base” procedure that oil companies undertake with their bank lenders.

It’s no secret that energy companies have borrowed heavily from Wall Street to fund their shale exploration. With the price of oil halved from its peak last year, those companies are under pressure. One place this is showing up is in the world of bank credit lines to energy firms, and also junk-rated bonds they sold.

There is lots of information in the below article, including talk of the hedge funds and private equity firms waiting in the wings to “rescue” energy firms on potentially punitive terms. One thing I would like to stress is a rather unsavory dynamic at play here. If energy companies have to turn to second-lien financing to plug holes in their bank loan facilities, the claims of existing unsecured creditors – i.e bondholders – get pushed further down the payment hierarchy. Because so many of these bonds have been issued on a cov-lite basis, subordinating them becomes even easier. In short, there are interesting times ahead for the high-yield energy sector.

April in Texas traditionally marks the start of the spring thunderstorm season. This April, the tempestuous weather looks set to be accompanied by an additional financial squall for the state’s oil and gas companies as banks begin cutting back on the reserve financing on which these firms rely.

Such financing is typically re-evaluated twice a year, usually in October and April, and is tied to the value of the borrowing firms’ oil and gas reserves and related assets such as pipelines.

With the price of US crude now less than 50 per cent of its recent peak of $107 a barrel, the likely consequence is that banks will significantly reduce their lending to energy firms across the US, forcing companies to look for alternative sources of financing on more punitive terms.
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Energy bondholders at risk as bank loans ebb
Energy bondholders could lose out in refinance deals
A dozen ways to stretch your borrowing base

Reading list – Unruly places: Lost spaces, secret cities and other inscrutable geographies

January 13, 2015 Tracy Alloway Comments 0 Comment

The bitter cold of a New York winter makes me long for travels to far-flung locations. That’s not on the cards this year, and so I am instead reading a book about said far-flung locations. Unruly Places is a compendium of mini-essays about the hidden or exceptional geographies of the world. Some of them are well-known – such as Pripyat, site of the Chernobyl disaster, or the floating garbage islands of the Pacific – but others are far more esoteric.

On that note, one that I found interesting from a markets perspective is the Geneva Freeport, a giant warehouse where things can be imported and exported essentially free of customs duties and other taxes. As author Alastair Bonnett puts it: “The freeport vaults are able to conjure ever more exchange value out of cultural artifacts that possess only abstract worth.”

It’s worth a read, especially in conjunction with some of Izabella Kaminska’s thoughts on artificial scarcity. Here’s Bonnett:

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Tracy Alloway

random musings – mostly about markets

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Month: January 2015