Canada Peer-to-Peer Lenders Court Bond Investors

Borrowell's Norm Cappell
Norm Cappell, head of capital markets at Borrowell. Photographer: Kevin Van Paassen/Bloomberg

Norm Cappell is easy to spot among the skinny jeans, hoodies and flannel shirts populating the Toronto tech startup where he works. He’s the guy in the suit.

Cappell left his job arranging multimillion-dollar bond deals at Royal Bank of Canada in February to join peer-to-peer lender Borrowell Inc. after watching companies such as BlackRock Inc. pour money into similar U.S. websites.

“The asset class globally has now proven itself to institutional investors,” Cappell, 40, said, sitting in a glass-enclosed boardroom in Toronto where words like “peoplefluent” are scrawled in marker on the walls. “Now you know as a startup you can attract institutional money and that makes it possible to launch the business in Canada.”

Peer-to-peer lending, which bypasses traditional banks to match up borrowers and lenders online, stalled in Canada because regulators here classified the loans as securities. That barred anyone but accredited investors -- institutions or wealthy individuals -- from financing them.

With those investors now taking an interest in the asset class in the U.S., Cappell said the time is ripe for Borrowell to grab a slice of Canada’s C$1.8 trillion ($1.5 trillion) consumer-credit market.

Borrowell isn’t alone. Vancouver-based Mogo Finance Technology Inc. filed last week to sell shares in a C$50 million initial public offering, according to people familiar with the process who asked not to be identified because the terms aren’t public.

En Masse

While Mogo finances most of its loans by borrowing at wholesale rates from U.S. private equity firm Fortress Investment Group LLC., Borrowell and Grouplend, also based in Vancouver, back their loans with investments from accredited investors.

In the U.S., online loan volume is poised to reach $77 billion this year, a 15-fold increase from just three years ago, attracted by yields that can be more than double the near-record lows in traditional debt markets. With algorithms that allow loans to be processed in minutes, investors can scoop up investments en masse.

“We’re providing access to an asset class they didn’t have before,” he said. The company started lending on March 31 and is receiving about C$1 million in loan applications daily, though he declined to disclose Borrowell’s loan book. Cappell expects the market to reach “several hundred million” dollars annually in originations by 2017.

BlackRock Financing

BlackRock, the world’s largest asset manager, bought more than $330 million of consumer debt arranged by San Francisco-based Prosper Marketplace Inc. in the two years to February. The purchases represent about a sixth of the debt arranged by Prosper over two years.

The average coupon available to investors on the loans Borrowell has made so far is 14 percent, and the company estimates that will translate to a return of 9.1 percent, he said. The global high-yield bond market currently offers about a 6 percent average yield, translating to returns of 3 percent this year, according to Bloomberg bond index data.

Borrowell offers loans of C$1,000 to C$35,000 for three or five-year terms at interest rates of about 5.2 percent to 30 percent, plus an origination fee of 1 percent to 5 percent.

Offering money for everything from weddings to home renovations, the lender focuses on borrowers with mid-level credit scores. That translates into the bottom two rungs of investment-grade debt and the highest grades assigned to junk bonds under rating-company grading, Borrowell data shows.

Accident Awaiting

That means the risk of default on one of Borrowell’s consumer loans is about the same as a company like Sobeys Inc. or Rona Inc. defaulting on one of its bonds.

As the volume of peer-to-peer loans swells, so do comparisons to the 2008 U.S. mortgage bubble, despite assurances from many firms they don’t service sub-prime clients or those with lower credit ratings.

Wall Street has already begun packaging peer-to-peer loans into bonds and selling them onto investors, the same process that helped turn the U.S. housing bubble into a global credit crisis. In February, BlackRock unveiled the first investment-grade-rated package of peer-to-peer consumer loans with a $281 million offering of notes.

“They kind of look like an accident looking for a place to happen,” said Bill Girard, who manages about C$10 billion in corporate bonds at Bank of Nova Scotia’s 1832 Asset Management in Toronto. “Lending without credit adjudication expertise, in an unregulated marketplace, wrapped in promises of above market returns and low risk. Sounds strangely familiar doesn’t it?”

Banker Language

Cappell said peer-to-peer lenders have so far stayed clear of subprime in the U.S., and tend to attract higher quality borrowers. Borrowell’s chief risk officer is a veteran of a Canadian bank who managed a C$2 billion credit-card portfolio through the credit crisis and recession, and is committed to only loaning to people with higher credit scores, he says.

While Cappell now works at a startup he’s still doing the same thing he did when he worked in high-yield origination at RBC -- trying to win big money from big investors.

“We’re in the fixed income business, you have to speak a language of returns, and assets and correlations,” he said. “We’re not reinventing the language, we’re just playing the game in a different way, and better.”

Most days, that still means he still wears a suit.

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