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LendingClub Fund Has First Negative Month on Valuation Fix

  • Swings may increase under new methodology, CEO says in letter
  • Fund oversaw about $700 million at the start of the month

A LendingClub Corp. investment fund that’s struggled with withdrawals this year posted a negative return for August, the first decline in its five-year history, after overhauling how it values holdings and incurring losses on riskier debts.

The LC Advisors Broad-Based Consumer Credit Fund ended the month down 0.49 percent, cutting this year’s net return to 1.24 percent, LendingClub Chief Executive Officer Scott Sanborn told stakeholders in a letter and report Friday. It marks the fund’s first drop since it opened in 2011. The worst month had been June, when it broke even amid a surge in redemption requests.

LendingClub has been trying to assuage loan investors spooked by the surprise resignation of the company’s founder in May and an uptick in write-offs. The fund buys unsecured consumer loans arranged on the company’s online platform. In June, the investment vehicle was forced to limit redemptions after stakeholders asked to pull out $442 million, or 58 percent of assets under management.

But in the case of the August slump, key developments had already been signaled, with the largest hit coming from a one-time adjustment as the firm improved how it values holdings, Sanborn wrote in the letter. He became CEO in May after the company disclosed that employees had altered loan documents sent to an investor and that the prior CEO had failed to publicly disclose his interests in a fund that LendingClub was considering investing in. These events triggered a leadership shakeup, and sparked a grand jury subpoena from the U.S. Justice Department and a separate probe by the Securities and Exchange Commission. Sanborn is also acting president of the LC Advisors subsidiary.

A spokesman for San Francisco-based LendingClub declined to comment beyond the letter. LendingClub’s shares fell Monday, trading at $6.08 at 2:05 p.m., down about 3 percent.

Swings Possible

The LendingClub fund, overseeing about $700 million at the start of the month, had disclosed plans earlier in the summer to overhaul how it tracks assets. It enlisted outside valuation firm Duff & Phelps Corp. and shifted methodology to forecast how debts will perform individually, rather than in groups. August marked the first month under the new system, resulting in a one-time 0.95 percent reduction to returns, Sanborn wrote.

In the future, “investors should expect more movement in fund returns month-over-month because the new methodology is more responsive to changes in each individual loan’s delinquency status,” he said.

Certain loan write-offs continued to exceed projections, reducing the fund’s return by 0.79 percent in August, Sanborn said. Many of the problem debts were five-year loans with risky grades -- part of a category LendingClub has been taking steps to address. The company said in April, for example, that it was boosting interest rates for riskier loans, and that after seeing certain “pockets” underperform, it would curtail lending to such borrowers.

“Performance of new loans purchased by the fund should benefit from these increased interest rates and targeted credit tightening,” Sanborn wrote in the letter.

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