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

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

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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more entwined with existing financial infrastructure, P2P lenders made a conscious decision to move away from the outdated “peer-to-peer” name.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

About all those high-yield energy bonds…

About all those high-yield energy bonds…

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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

Here’s looking at you Lending Club

Here’s looking at you Lending Club

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Two years ago I took an interest in an up-and-coming fintech company called Lending Club.

Today they listed on the New York Stock Exchange, achieving an astounding valuation of $8.9bn in the process.

Here are a few stories that illustrate how we got from San Francisco start-up to NYSE listing.

The New York Stock Exchange on Lending Club listing day
The New York Stock Exchange on Lending Club listing day

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Did someone ask for more on bond market liquidity?

Did someone ask for more on bond market liquidity?

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Marketmakerliquidity

 

The Bank for International Settlements has released a 57-page paper on bond market liquidity, mostly examining the issue from the perspective of shrinking capacity on the dealer-bank side. It comes with the above schematic and plenty of other interesting facts and charts.

See also FT Alphaville, where my colleague Izabella Kaminska has started a liquidity series.

October 15. A financial markets whodunnit.

October 15. A financial markets whodunnit.

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On October 15, prices of US government bonds – one of the most liquid markets in the world – whipsawed violently and sparked a wave of speculation on Wall Street as to the culprit(s) behind the wild moves.

Here’s a longish analysis of what happened. The key suspects: lack of liquidity, the rise of electronic trading, a classic gamma trap (possibly sparked by the scuppering of the AbbVie/Shire deal) and much, much more.

… On October 15, the yield on the benchmark 10-year US government bond, which moves inversely to price, plunged 33 basis points to 1.86 per cent before rising to settle at 2.13 per cent. While that may not seem like much, analysts say the move was seven standard deviations away from its intraday norm – meaning it might be expected to occur once every 1.6bn years.

For several minutes, Wall Street stood still as traders watched their screens in disbelief. Electronic pricing machines, which now play a bigger role than ever in the trading of Treasuries, were halted and orders cancelled by nervous dealers as prices see-sawed.

The events have sparked a financial “whodunnit” as investors, traders and regulators seek to understand what happened – and to determine whether October 15 was a unique event or a harbinger of further perilous trading conditions to come.

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Bonds: Anatomy of a market meltdown

The slow drip liquidity story – updated

The slow drip liquidity story – updated

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Updated: October 17, 2014 given recent market events and sudden interest in all things liquidity-related. To be clear, the lack of liquidity just exacerbates market moves. The underlying problem is that complacent investors have been in the same (long) positions for the past five years, selling volatility and levering up to boost returns.

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A by-no-means-extensive list of my work on the changing structure of the bond market.

Goldman eyes electronic bond trading (March, 2012)

Finance: Grinding to a halt (June, 2012)

Dealer and investor talks over liquidity fears (June, 2012)

Goldman launches bond trading platform (June, 2012)

Bond trading model shows signs of stress (October, 2012)

Banks tout idea of sharing bond data (November, 2012)

Slow-drip bond sell-off masks a problem (November, 2012)

Markets on edge as investors seek exit (June, 2013)

ETFs under scrutiny in markets turbulence (June, 2013)

Markets: the debt penalty (September, 2013)

Digging into dealer inventories (September, 2013)

Verizon’s $49bn bond sale whets appetite for larger issues (September, 2013)

ETFs: Tipped as liquidity source (November, 2013)

Global liquidity: Buyers struggle to find a safe landing (November, 2013)

Big US banks back new bond trade venue (November, 2013)

Investors turn to ‘shadow’ bond market (January, 2014)

Banks are a proxy for credit bubble fears (March, 2014)

Taper tremors fail to deter ETF investors (May, 2014)

Checking out of the ETF hotel could be costly (May, 2014)

‘Patient capital’ ready to exploit bond market sell-off (June, 2014)

Fed looks at exit fees on bond funds (June, 2014)

Bonfire of the bond funds (June 2014)

BlackRock’s Aladdin: Genie not included (July 2014)

Investors in junk bonds face a Matrix moment (August 2014)

Finance: The FICC and the dead (August 2014)

Investors dine on fresh menu of credit derivatives (August 2014)

Yield-hungry markets overlook credit risk (September 2014)

US corporate bond traders go electronic (September 2014)

Gross exit from Pimco tests bond market (September 2014)

Wall St sheds light on Bill Gross reign after Pimco departure (September 2014)

At the risk of sounding like a broken record, expect more on this.

Shadow banking, a compendium

Shadow banking, a compendium

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Sometimes, looking at your past work reveals not only the progression of a real-world trend but also a subtle shift in the narrative of the topic under discussion.

It used to be that the ‘shadow banking system’ encompassed a relatively select group of non-bank financial intermediaries – broker-dealers, the repo market, money market funds, SIVs, etc. That group grew enormously in the years before the financial crisis, but has since collapsed pretty significantly.

Nowadays the definition of shadow banks appears to have expanded to include a host of non-bank financiers like direct lenders, asset managers, hedge funds etc.

Here’s a selection of some shadow banking pieces that illustrates the trend.

 

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