Online Lender for Shakier Borrowers Plants Bond Flag

  • Avant says more deals are to come as it boosts operations
  • `Taking customers' from traditional banks, CEO Goldstein says

A startup lender catering to borrowers with less-than-pristine credit is joining the list of online companies turning to the bond market to finance their growth.

Avant Inc., which makes personal loans to borrowers in the U.S. and U.K., completed an inaugural $139 million securitization this month, according to Chief Executive Officer Al Goldstein, who said the deal is the first of more to come as the lender ramps up its operations and expands its product line.

The company is among a crop of non-banks trying to shake up the way consumers are offered loans by linking borrowers and funders over the Internet, claiming to differentiate themselves from traditional banks and finance firms by making borrowing an easier process.

Avant originated $1.5 billion since 2013, and expects to hit $2 billion in originations by the end of the year. The company’s borrowers “aren’t subprime, but they’re not quite super-prime either,” he said. Its loans average about $8,000 in size and interest rates range from 9 percent to 36 percent, he said, with delinquencies in the securitization estimated at about 10 percent.

Investors have been more than willing to finance these firms’ lending capabilities so far, which could grow to as much as $75 billion, according to Morgan Stanley. Sales of whole loans have surged close to fourfold over the past two years, according to Morgan Stanley data in a May report. It’s easy to see why: returns on those loans averaged about 10 percent in aggregate in 2014, the data show.

Source: Morgan Stanley

Goldstein, who founded the company in 2012, describes Avant as fitting “somewhere in between” the consumer-finance firm Springleaf Holdings Inc.-- which is trying to close its acquisition of Citigroup Inc.’s OneMain Financial unit -- and LendingClub Corp., the largest online lending startup whose stock market valuation once topped $10 billion before plunging by more than half.

“All of us are offering products that are providing better opportunities than banks,” Goldstein said, regarding the rise of the online finance companies. “We are taking customers away from brick-and-mortar lenders.”

This new breed of lender could take as much as $11 billion in annual profits away from the banking sector over the next five years, according to a March analysis prepared by Goldman Sachs Group Inc.

Next year, Avant may begin offering two new products, including residential mortgages, and is even considering issuing its own credit cards, Goldstein said.

The company is also poised to announce a new $200 million warehousing agreement with JPMorgan Chase & Co. and Credit Suisse Group AG, said Goldstein. That agreement should lead to additional securitizations. James Paris, who left his role as a managing director at BMO Financial Group this month, will help lead that effort when he starts next month.

Avant plans to use securitization and whole loan sales to fund about half its lending business, but it also operates like a more traditional finance firm by holding the rest of its loan on balance sheet, said Goldstein.