Lending IPOs Find Cautious Investors Amid Consumer Credit Fears

At a time when companies from almost any sector can successfully go public, one glaring exception is the consumer credit space.

China Rapid Finance Ltd. on Friday became just the second consumer lender this year to list in the U.S., following Elevate Credit Inc. earlier in April. Although they do business on opposite sides of the world, the duo has much in common: Both face investor questions about the reliability of their borrowers, both begin trading amid a particularly iffy time in the credit cycle and -- perhaps consequently -- both slashed their IPO price days before going public.

"At this point in the credit cycle, its hard to sell something like this," Bloomberg Intelligence analyst David Ritter said. "These borrowers are people who have no credit or who have had credit trouble."

Most Chinese borrowers do not have a credit history, but China Rapid Finance says it lends to customers it believes are prime or near-prime. Elevate Credit focuses on subprime borrowers in the U.S. and U.K. Despite different customer bases geographically and economically, both businesses require a stockpile of investors who remain willing to finance loans to those with poor or nonexistent credit history.

"If they run into credit problems, there’s generally no commitment on the part of the investor," Ritter said. "When the LendingClub scandal hit last year, the supply in the credit market just pulled back. If you think about it, that’s what happened in the credit crisis. The originators didn’t really have a stake in the game, then all of a sudden the credit crisis hit and investors pulled out."

When LendingClub Corp. went public in 2014, some hailed the event as the dawn of a new era for finance. Shares have since fallen 60 percent from the IPO price.

Now, consumer lenders find themselves talking a little less about their blossoming business and more about their survival strategy.

"One of the key features of our model is we’re issuing shorter loans, so there is less risk," China Rapid Finance CEO Zane Wang said. "We should be able to re-price our loans because the duration is very short. We have the skill and infrastructure in place so we can re-position accordingly."

Chinese government policy is very supportive of private capital in the consumer lending space, because it understands that banks won’t be able to capture that market, Wang added.

"China Rapid Finance is coming to the market during a turbulent time in the China peer-to-peer industry as regulators roll out more controls to clean up what has so far been chaotic growth in the past few years," MCM Partners analyst Ryan Roberts wrote in a note on the stock’s first initiation, a buy rating. "The company reduced the pricing range by about 40 percent, which we suspect reflected tepid demand from backers," the note said.

On April 26, Capital One Financial Corp. reported first quarter earnings that were hurt by bad credit-card loans. The next morning, China Rapid Finance cut its IPO offer range.  Both China Rapid Finance and Elevate Credit, which halved its proposed IPO price a few weeks ago, remain below the initial offer ranges set about ten days before their respective listings.

Both recent IPOs are now trading up from their reduced offering prices by nearly 25 percent. MCM says the IPO valued China Rapid Finance at 4.7 times its book ratio. William Blair on Monday said that Elevate Credit is trading at 7.5 times its 2018 estimated earnings per share.

When Synchrony Financial shares fell 16 percent on Friday, Susquehanna analyst Jack Micenko said he doubted credit was going off a cliff, but referenced a "seasoning" of credit expansion to non-prime customers. In a note published on Monday, Deutsche Bank analyst David Ho said we are in a "benign credit normalization stage" of the U.S. consumer credit cycle. "We show how US aggregate consumer leverage is under-stated, and has accelerated much more rapidly for low to middle income households. This is driving faster credit normalization for these segments," he wrote.

Going public at any price represents a sort of victory in this industry. Social Finance Inc. has reportedly spent years waiting for the right time to go public, while LoanDepot Inc. pulled a 2015 IPO attempt after weak investor demand, and Prosper Marketplace Inc. has also faced setbacks. Chinese peer-to-peer lender Dianrong.com has recently been said to be considering an IPO in New York or Hong Kong.

"What’s more likely than IPOs is you’ll see more partnerships between banks and these online lenders to help drive their business," Ritter said.

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