June 4, 2017 – May’s employment data softened with payroll growth totaling 138,000 jobs compared to the consensus forecast of 182,000.  Downward revisions to March and April data brought the total “miss” to 110,000 fewer jobs than expected. The unemployment rate continued to fall, to 4.3%, from 4.4% in April, largely due to a drop in the labor force participation rate.  Average hourly earnings increased by 0.2% in May from a month earlier or 2.5% on an annualized basis, the same annual rate they have been stuck near since late 2015. That is weak from a historical perspective.  When the unemployment rate was 4.4% in May 2007, wages for nonmanagerial workers were growing better than 4% annually. In May 2001, those wages were up 4% from a year earlier.  Despite the soft numbers, this report is probably not alarming enough to prevent the Fed from hiking interest rates at its upcoming meeting on June 14. The low unemployment rate and the near record number of job openings still point to a labor market that is tight and getting tighter. The lack of strong underlying wage pressure will reassure the Fed that its slow pace of rate increases remains appropriate.

Equity markets reached another all time high while interest rates fell in reaction to the news this week.  After three straight days of flat trading, the 10 year US Treasury yield fell immediately following the employment report and closed the week at 2.16%, a seven month low.  A continued lack of wage pressure, even as the unemployment rate hits new cycle lows, has also contributed to the decline in yields.  Markets fully expect the Fed to raise interest rates at its upcoming meeting next week but after that, no more hikes are expected until 2018.  Until there are further signs of wage pressure and/or inflation, despite a robust labor market, interest rates appear to remain low.  Low interest rates and tight credit spreads will continue to benefit Alternative Lenders as they seek the lowest cost of capital to fund their businesses.  

In funding news this week, U.K.based lender, Zopa, raised a £32 million financing round led by Wadhawan Global Capital and VC fund Northzone.  The funding is meant to support the launch of their “next generation” bank.  CommonBond priced $232 million of securities in their first securitization of 2017 on Friday.  After $1.75 billion of deals were priced in May, June could be an active month as issuers take advantage of the strong demand for paper and the low rate and spread environment.  Finally, IMN is hosting their Global ABS conference in Barcelona this coming week with attendance expected to high.


Opinions expressed within the commentary are general opinions of Chris Lalli and Jae Lim and are not opinions of CapAccel or SF Sentry Securities, Inc. Nothing in this commentary should be viewed as solicitation to buy or sell specific securities or a recommendation to participate in any transactions. Securities offered through SF Sentry Securities, Inc., member FINRA/SIPC.

Sources:  Orchard Platform, TIAA-CREF, Bureau of Labor Statistics

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May 29, 2017 – Following their worst one day performance in eight months on May 17, U.S. equities rebounded this past week.  A six day winning streak that began the next day and stretched through May 25 lifted the S&P 500 Index above the 2,400 mark for the first time, bringing its year-to-date return to 8.8%.  Minutes from the Federal Reserve’s May 2/3 meeting, released on May 24, indicated that policymakers believe a rate hike will be coming “soon,” as long as economic data meets their expectations.  In other words, the Fed will tighten in June barring signs of a sudden and sharp decline in the quality of U.S. economic data.  Markets interpreted the minutes as dovish helping to keep Treasury yields in a narrow trading range. The yield on the 10 year note hovered around 2.25% for most of the week.  

Amidst some turbulence in both equity and debt markets, the Alternative Lending space has been resilient and active.  In May, over $1.75 billion of securities have been issued including unsecured deals from Prosper (PMIT 2017-1, $496m) and SoFi  (SOFI 2017-C, $561m) and student loan deals from Earnest (EARN 2017-A, $170m) and SoFi  (SCLP 2017-3, $530m).  CommonBond will also be in the market shortly with a student loan deal.  Private equity manager, Pollen Street Capital, announced that it merge with private credit manager, MW Eaglewood Ltd. The combined firm will be called Pollen Street Capital and will manage the P2P Global Investments PLC investment trust. Neighborly announced that it raised $25 million in funding co-led by 8VC; and Emerson Collective to help them modernize access to public finance. Existing investors including Sound Ventures, Maven Ventures, Bee Partners, and Stanford University also participated in the funding round. This investment brings the company’s total funding to $35 million. Finally, Tennessee State Bank launched an online consumer lending service, powered by LendingClub. We expect to see more bank partnerships of this sort in 2017 and beyond as the compliments of Alternative Lenders with banks makes sense.  


Opinions expressed within the commentary are general opinions of Chris Lalli and Jae Lim and are not opinions of CapAccel or SF Sentry Securities, Inc. Nothing in this commentary should be viewed as solicitation to buy or sell specific securities or a recommendation to participate in any transactions. Securities offered through SF Sentry Securities, Inc., member FINRA/SIPC.

Sources:  Orchard Platform, TIAA-CREF

May 21, 2017 – Mounting political turmoil in Washington, with new claims that President Trump attempted to interfere in an FBI investigation of former national security adviser Michael Flynn, heightened concerns that the administration has lost the political capital needed to push through his pro-business agenda. In response, the S&P 500 experienced the largest daily move of 2017 on Wednesday, declining 1.8%, its worst day in eight months and the first time since March 21 that the index has fallen by 1% or more in a single trading day. The index rebounded after the midweek stumble offsetting most of the decline.   Interest rates rallied by approximately 5 to 20 basis points across the yield curve in response to the political events.  The treasury yield curve flattened significantly with the spread between 2 year and 10 year maturity bonds moving from 104 basis points to 94, testing Q4 2016 levels. Given the turmoil and questioning of President Trump being able to advance his growth agenda, the market now expects only 1.2 hikes in 2017, down from 2 hikes just a few weeks ago.  

The Alternative Lending space remains active with more issuance and announcements.  SoFi announced the launch of SoFi Wealth, which will allow members to sign up and create low-cost, tax-efficient investment portfolios. It is another step for SoFi towards its goal of being at the center of their clients’ financial lives. LendingClub announced that former PayPal Head of Global Credit, Steve Allocca, will join as President and be tasked with driving lending growth. Prosper marketplace is issuing a $450.5 million consumer loan ABS transaction (PMIT Series 2017-1) that is expected to close on May 24, 2017.  Kroll Bond Rating Agency assigned preliminary ratings of single A to the Class A notes, triple B to the Class B’s and single B+ to the Class C’s.  The transaction represents the sixth securitization collateralized by unsecured consumer loans originated through Prosper and the first sponsored by Prosper itself.  Earnest issued its first student loan securitization of 2017, EARN 2017-A, pricing $175.26 million of three classes of notes.  .  Finally, the New York Department of Financial Services has joined the growing list of state regulators wishing to put a stop to the Office of the Comptroller of the Currency’s (OCC) proposed national FinTech charter and has filed a lawsuit. Alternatively, the Conference of State Bank Supervisors (CSBS) has put forth their own recommendations for state banking supervision in something called ‘Vision 2020′.  These developments bear close watching, as well as those in other regions, as regulations are being updated and regulatory and supervisory sandboxes are being created to support financial innovation.  


Opinions expressed within the commentary are general opinions of Chris Lalli and Jae Lim and are not opinions of CapAccel or SF Sentry Securities, Inc. Nothing in this commentary should be viewed as solicitation to buy or sell specific securities or a recommendation to participate in any transactions. Securities offered through SF Sentry Securities, Inc., member FINRA/SIPC.

Sources:  Payden & Rygel, TIAA-CREF

 

May 14, 2017 – U.S. corporate earnings posted the strongest annual growth in the first quarter of 2017 since initially recovering from the financial crisis back in 2009.  Profits increased by 15%, with companies beating analysts’ expectations by an average of nearly 6%. More importantly, revenues rose by almost 9%, a positive sign for investors concerned that the market has been overly supported by cost cutting and not enough by increasing sales.  Meanwhile, the Consumer Price Index (CPI) rose 0.2% in April and 2.2% over the past 12 months, down from 2.4% in March and 2.7% in February. The “core” CPI, which excludes food and energy costs, edged up just 0.1% in April and 1.9% compared to a year ago.  With economic growth firm and tame inflation, this should allow the Fed to raise rates at a moderate pace as it has done over the last 18 months and is expected to do over the remainder of 2017 with two more Fed Funds hikes anticipated.  Markets continue to be range bound with interest rates at the lower end of their six month trading range and equities hovering near their all-times highs posted on March 1 of this year.  

The Alternative Lending environment remains strong with more announcements and deals pricing this week.  SoFi is planning to apply for an industrial bank charter in the next month according to the company. If approved, it would become the first company to receive a new industrial loan company (ILC) charter in a decade. SoFi also priced their $530 million SoFi Consumer Loan Program (SCLP) 2017-3 deal.  The 2-tranche sequential-pay fixed rate offering received a double A rating for the senior tranche and a single A rating for the second tranche.  This transaction represented the tightest pricing seen to date for the SoFi personal loan ABS program.  Finally Kreditech, a Germany-based consumer credit lender that focuses on serving underbanked, emerging markets, announced that it closed a EUR 110 million investment from PayU, a global payments firm that provides financial services in emerging markets. According to the announcement, it is the largest equity investment in a German fintech company.


Opinions expressed within the commentary are general opinions of Chris Lalli and Jae Lim and are not opinions of CapAccel or SF Sentry Securities, Inc. Nothing in this commentary should be viewed as solicitation to buy or sell specific securities or a recommendation to participate in any transactions. Securities offered through SF Sentry Securities, Inc., member FINRA/SIPC.

Sources:  Wall Street Journal, Department of Commerce,  TIAA-CREF

May 7, 2017 – Economic data released this week show the economy continues to move forward at a relatively modest pace. The Fed refrained from raising the Fed Funds rate at the latest May meeting but still sees economic activity on course with the previous expectations for a rate hike in June. April payrolls released on Friday showed 211,000 jobs were added, more than the expectations of 190,000 and the unemployment dropped to 4.4%, the lowest since 2007.  Average job gains remained a healthy 170,000 per month over the past 12 months, versus 205,000 and 229,000 for the 12-month periods ended April 2016 and April 2015, respectively.  Despite the low unemployment rate and growth in the labor market, there is little evidence of upward pressure on incomes and inflation. Average hourly earnings for private sector workers rose 2.5% in April compared with a year earlier. The growth rate of pay increases has slowed in recent months but remains near the fastest pace since the recession ended.  The Fed’s preferred measure of inflation, the Personal Consumption Expenditure Index (PCE) ticked down in March to a 1.8% annual rate but excluding food and energy prices, core PCE was 1.6%.  When taken all together, the Fed still sees economic activity, the labor market and inflation on course with its expectations, positioning it to raise the fed funds rate in June as the market expects.  

Equities rose to all-time highs on the news this week while rates rose slightly from their recent lows.  Interestingly, the VIX index, or “fear” gauge hit a 10 year low on May 1st.  Volatility remains extremely low with market swings unusually small.  The S&P 500 has moved up or down by 1% or more just three times this year, far below historical norms.  For Alternative Lenders, steady growth, low volatility and range bound markets are the perfect combination for borrowers looking loans and investors looking for good risk adjusted returns.   


Opinions expressed within the commentary are general opinions of Chris Lalli and Jae Lim and are not opinions of CapAccel or SF Sentry Securities, Inc. Nothing in this commentary should be viewed as solicitation to buy or sell specific securities or a recommendation to participate in any transactions. Securities offered through SF Sentry Securities, Inc., member FINRA/SIPC.

Sources:  Wall Street Journal, Department of Commerce, Bureau of Labor Statistics, Wells Fargo Securities

April 30, 2017 – The US economy stumbled during the first quarter of 2017 as gross domestic product grew at a 0.7% annual rate, the slowest pace of expansion in three years.  Consumers cut back spending on larger items causing overall consumer purchases to grow at the slowest pace since late 2009.  However, one needs to look further at the first quarter number before drawing conclusions about economic growth.  In three of the last four years, first quarter GDP has disappointed only to rebound in the subsequent quarters.  Seasonal adjustments are to blame according to most economists; looking only at a quarterly annualized rate of GDP in any quarter can be misleading.  The US economy grew at 2% in Q1 when measured on a year over year basis, very consistent with the annualized rate of growth over the last few years.  

imageReactions in the US markets were muted for the week.  As the chart titled, “Rates and Credit Spreads” shows, interest rates as measured by the 10 year Treasury yield and credit spreads as measured by the CDX.IG 5 year on-the-run spread remain range-bound for the first four months of the year despite: i) a new President with his pro-growth agenda, ii) geo-political events including Syria, North Korea and Russia, and iii) European elections (including France’s highly charged Presidential election on May 7th) which could have dramatic implications for the European Union.  

For Alternative Lenders, the low, steady rate and credit environment works favorably for the lending businesses.  Avant upsized and tightened pricing dramatically on their Avant Loans Funding Trust 2017-A (AVNT 2017-A) deal this week.  The deal grew to $218.9M from $192.6M and pricing improved dramatically from their last deal in August of 2016.  The $147M senior class of 0.50 year average life, single A minus rated notes narrowed by 100 basis points to 115 basis points over swaps compared to its prior deal in August. The $50M of 1.64 year weighted average life, triple B minus rated notes tightened to 215 basis points over swaps from 400 basis points in August.  The riskiest $23.1M of 2.21-year average life double B notes, which were more than 14 times over-subscribed, priced at 450 basis points over swaps to yield 6.13%. Similar notes in August priced at a 9% yield.  Expect to see more deals announced and priced in the coming weeks as lenders take advantage of the investor demand for assets currently.  


Opinions expressed within the commentary are general opinions of Chris Lalli and Jae Lim and are not opinions of CapAccel or SF Sentry Securities, Inc. Nothing in this commentary should be viewed as solicitation to buy or sell specific securities or a recommendation to participate in any transactions. Securities offered through SF Sentry Securities, Inc., member FINRA/SIPC.

Sources:  Wall Street Journal, Department of Commerce, Orchard Platform, PeeriQ

April 23, 2017 – Treasury yields have trended lower over the last several weeks as markets have pared back expectations for further rate increases this year. Recent and expected economic data in addition to geopolitical events are driving rates lower.  First quarter GDP estimates (to be released this coming Friday) continue to track below one percent, while the March payrolls number and downward revisions indicated a slowdown in hiring. Core CPI (Consumer Price Index) unexpectedly falling in March points to a more protracted return to the Fed’s 2.0% inflation target and expectations are for core PCE (Personal Consumption Expenditures) inflation to slow to 1.6 percent in March from 1.8 percent in February when released.  All these indicators hint that the Fed has more time before raising rates.  Markets continue to put the odds of the FOMC raising rates again in June slightly above 50/50.  Combine the economic data with the geopolitical climate of tensions with North Korea, Russia and Syria, and a French election that could have further implications for the breakup of the European Union, pressure will remain for lower rates it seems in the foreseeable future.  

This environment is a positive for Alternative Lenders as they access the capital markets with more securitizations and find institutional investors in search of good risk adjusted returns.  Avant Loans Funding Trust 2017-A (AVNT 2017-A) filed form ABS-15G with the SEC this week which will represent the first securitization of 2017 for Avant.  More securitizations are in the pipeline for the month of May.  SoFi is also taking advantage of the climate announcing it raised a $105 million fund, The SoFi Prime Income Fund, for institutional and high net worth investors.


Opinions expressed within the commentary are general opinions of Chris Lalli and Jae Lim and are not opinions of CapAccel or SF Sentry Securities, Inc. Nothing in this commentary should be viewed as solicitation to buy or sell specific securities or a recommendation to participate in any transactions. Securities offered through SF Sentry Securities, Inc., member FINRA/SIPC.

Sources:  Wall Street Journal, TIAA-CREF, Orchard Platform

April 16, 2017 – During the past couple of weeks, markets began to fret over a wide range of potentially worrisome geopolitical events including, escalating tensions in Syria and North Korea and deteriorating relations with Russia.  Additionally, mixed first quarter earnings results from several global banks and President Trump’s asserting the currency “is getting too strong” have contributed to sending the equity market lower, lowering the US dollar and rallying interest rates. The S&P 500 Index lost 1.2% over the past two weeks while the yield on the 10-Year Treasury rallied 15 basis points to 2.23%, a five month low.  Credit spreads have reacted to the news by widening slightly yet remain near the lower end of the recent trading ranges.  

The Alternative Lending space remains active in the early part of 2017.  The first initial public offering of the year for an online lender, Elevate Credit (ELVT), a lender focused on subprime consumer lending, pricing its IPO at $6.50 per share. In another example of banks trying to compete in the Alternative Lending space, it was reported that Bank of America launched an online lending pilot program for consumer auto loans that allows prospective car buyers to research financing options from specific local dealerships, and ultimately apply for auto loans for specific cars.


Opinions expressed within the commentary are general opinions of Chris Lalli and Jae Lim and are not opinions of CapAccel or SF Sentry Securities, Inc. Nothing in this commentary should be viewed as solicitation to buy or sell specific securities or a recommendation to participate in any transactions. Securities offered through SF Sentry Securities, Inc., member FINRA/SIPC.
Sources:  Wall Street Journal, TIAA-CREF, Orchard Platform

April 2, 2017 – The Alternative Lending space remains extremely active.  Elevate Credit, a non-prime consumer lender based in Fort Worth, Texas, announced that they plan to raise US$100 million through an initial public offering this coming week.  Waterfall Asset Management, who has been very active in the space in the US, committed £100 million to a U.K.-based lending platform, Lendable.   We expect to see more US based asset managers seek non-US opportunities.

Conversely, CreditEase Wealth Management, a Chinese asset manager, announced that the Offshore Private Credit Fund (OPCF) invested $30 million in transactions with OnDeck and LendingHome. It’s the first Chinese offshore fund to provide Chinese high net worth investors a way to invest in the loans of US-based lenders.  Finally, in another example of a traditional bank partnering with a FinTech firm, Androscoggin Bank, a community bank based in Maine, launched a small business lending platform after developing the offering with an undisclosed FinTech firm.  The bank hopes to provide its customers with fast, efficient, seamless digital loan offerings.  


Opinions expressed within the commentary are general opinions of Chris Lalli and Jae Lim and are not opinions of CapAccel or SF Sentry Securities, Inc. Nothing in this commentary should be viewed as solicitation to buy or sell specific securities or a recommendation to participate in any transactions. Securities offered through SF Sentry Securities, Inc., member FINRA/SIPC.

Sources:  Wall Street Journal, TIAA-CREF, Orchard Platform

March 26, 2017 – After trading 109 straight days without a 1% decline, the S&P 500 lost 1.2% on Tuesday and 1.4% for the week, its worst showing since October 31, 2016.  Markets focused all week on the health care vote to “repeal and replace” Obamacare which by late Friday afternoon was postponed indefinitely.  With the Trump administration and Congress unable to follow through on a core theme of their campaign, the rest of the Trump administration’s pro-growth agenda, which has fueled the S&P 500’s post-election rally, may be delayed or potentially never materialize as expected.  US Treasury yields continued to decline also reflecting concerns the Trump administration’s plan for fiscal stimulus may disappoint markets.  After beginning the week at 2.50% and rising as high as 2.62% just prior to the Fed’s March 15 meeting, the yield on the 10-year note closed at 2.41% Friday.  

imageAs shown in the chart labeled “Rates and Credit Spreads”, since the November election, interest rates remain range bound but have rallied to the lower end of the trading range.  Credit spreads also remain tight but have widened slightly given recent political events.  Markets will now be watching for Trump’s tax cuts and further progress on the pro-growth agenda. That said, the capital markets remain favorable for Alternative Lenders at the moment.    


Opinions expressed within the commentary are general opinions of Chris Lalli and Jae Lim and are not opinions of CapAccel or SF Sentry Securities, Inc. Nothing in this commentary should be viewed as solicitation to buy or sell specific securities or a recommendation to participate in any transactions. Securities offered through SF Sentry Securities, Inc., member FINRA/SIPC.

Sources:  Wall Street Journal, TIAA-CREF