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IEG Holdings (IEGH) Launches Tender Offer for up to 4.99% of LendingClub (LC)

01/08/2018
By Steven Ralston, CFA

OTC:IEGH
NYSE:LC

Summary
 
· On January 5, 2017, IEG Holdings (OTC:IEGH) launched a tender offer for up to 4.99% of LendingClub (NYSE:LC).
- Management believes it can convert LendingClub from a broker of loans into a balance sheet lender
- If less that 4.99% is acquired, management believes any acquired LendingClub’s shares would be a solid short-term investment, which could be liquidated similar to the OneMain Holdings transaction last year, adding to IEG’s shareholder equity.
· In 2017, cumulative loan volume increased 14.9% to $16,209,023.
· During 2017, IEG Holdings completed a tender offer for shares of OneMain Holdings (OMF) and issued Series H preferred stock, which together provided over $4.69 million in capital.
· On December 31, 2017, all Series H preferred stock automatically converted into common stock. As a result, the company had 17,463,449 shares of common stock outstanding at year-end.
· In late December, IEG Holdings announced it formed a 100%-owned subsidiary, Investment Evolution Crypto, to evaluate the feasibility, including the legalities, economic risks and potential benefits, of accepting crypto-currencies (such as bitcoins) as a form of repayment of customer loans.
 
Tender Offer for LendingClub Corporation
 
On January 5, 2017, IEG Holdings announced a tender offer for LendingClub Corp. (NYSE:LC) on an exchange basis of 13 shares of IEGH for each share of LC. The tender offer is for up to 20,701,999 common shares of LendingClub Corp., which represents approximately 4.99% of LendingClub's outstanding shares.
 
Having brokered over $26 billion in loan originations, LendingClub Corp. is the largest domestic online marketplace connecting borrowers (primarily consumers and small business owners) and investors (banks, managed accounts, institutions and self-directed individuals), who are looking for a competitive yield. LendingClub is one of the leaders in FinTech with its highly scalable, capital-light, P2P (Peer-to-Peer) lending platform and operates fully online without any branch infrastructure. LendingClub generates revenues from transaction fees, loan servicing fees and management fees from funds managed by LCA (a registered investment advisor and a wholly-owned subsidiary of LendingClub).
 
LC hosted its first Analyst Day on December 7, 2017. The company discussed its new fifth generation credit model (G5); also LC lowered guidance for revenue and Adjusted EBITDA for the second time. In reaction, LC declined to $3.29 intraday. Overall in 2017, LC stock declined 21% to $4.13. LendingClub completed its initial public offering (IPO) on December 11, 2014 at $15.00 per share.
 
Last year, on June 28, IEG Holdings offered (via a letter to LendingClub management) two shares of IEGH stock for each share of LC (which was at a discount to market price of LC) for up to 9.99% of LC’s common stock. A few days later, on July 2, 2017, IEG Holdings launched a tender offer for up to 40,345,603 shares of LendingClub common stock (LC) on an exchange basis of four shares of IEGH for each share of LC,. Subsequently, on August 1, 2017, IEG Holdings terminated the tender offer.
 
After LendingClub’s stock declined to $3.29 intraday on December 7th and after receiving legal advice from Baker & McKenzie LLP, Paul Mathieson, CEO and sole Director of IEG Holdings, decided to initiate another tender offer for up to 4.99% of LendingClub's outstanding shares.
 
IEG’s management believes that “changing Lending Club’s business model to a balance sheet lender model would enable the company to generate significantly higher gross margins, provide significantly higher long duration cash flow from customers, build increased customer goodwill with customers and enable increased customer refinancing.” It is expected that at least two years will be required and more than $50 million to transform LendingClub from a broker of loans to a balance sheet lender. Initially, IEG intends to utilize LC’s cash-on-hand, then customer principal and interest repayments of newly underwritten loans and finally seek additional debt/equity capital funding.
 
Obvious challenges include the acquisition/maintenance of individual state licenses, upgrading the underwriting systems, sourcing capital to fund loan originations and hiring underwriting and debt collection staff for internal debt collection. The benefits would be lowering costs (consequently increasing gross margins), tightening underwriting standards (thereby reducing default risk), increasing the duration of unsecured loans (subsequently reducing the company’s dependence on brokering new loan during periods when underwriting risk levels rise) and reducing regulatory risk by obtaining individual state licenses instead of utilizing the third party services of a Utah-based bank.
 
If IEG Holdings can acquire 4.99% of Lending Club’s outstanding shares, IEG’s management believes it could exert influence and pressure LendingClub’s Board to convert into a balance sheet lender. However, if less that 4.99% is acquired through the tender offer, IEG’s management believes that the acquisition of LendingClub’s shares would be a solid short-term investment. Potentially, IEG Holdings could liquidate its acquired LendingClub shares similar to the OneMain Holdings transaction last year, adding to IEG’s shareholder equity.
 

 
Investment Evolution Crypto, LLC Subsidiary
 
On December 22, 2017, IEG Holdings announced the formation of a 100%-owned subsidiary, Investment Evolution Crypto, LLC, which will evaluate the feasibility, including the legalities, economic risks and potential benefits) of accepting crypto-currencies (such as bitcoins) as a form of repayment of customer loans. At present, Investment Evolution Crypto is only in planning stages of exploring this potential business opportunity.
 
Cumulative Loan Volume Growth
 
On January 2, 2018, IEG Holdings Corporation announced loan growth figures for the fourth quarter of 2017 and cumulative loan volume since January 2015. During the fourth quarter, IEG generated $960,000 in new consumer loans, representing 12.3% sequential growth over the $855,000 in loans originated in the third quarter. Loan origination growth has begun to accelerate again as the company resumed marketing and advertising expenditures during the third quarter. In 2017, cumulative loan volume increased 14.9% to $16,209,023 from $14,109,023 at the end of 2016.
 

 
Series H Preferred Stock
 
Between October 30th and December 28th, IEG Holdings issued 1,292,089 shares of Series H preferred stock, which provided gross proceeds of $1,292,089. All Series H preferred shares were automatically converted into common shares on 4-for-1 basis on December 31, 2017. As a result, the company had 17,463,449 shares of common stock outstanding at year-end.
 
IEG Holdings Corp. is a consumer finance company that offers unsecured consumer loans (under the brand name “Mr. Amazing Loans”) to individuals in 20 states via an online platform (mramazingloans.com). The company provides $5,000 and $10,000 personal consumer loans over a term of five years in Alabama, Arizona, California, Florida, Georgia, Illinois, Kentucky, Louisiana, Maryland, Missouri, Nevada, New Jersey, New Mexico, Ohio, Oregon, Pennsylvania, Texas, Utah, Virginia and Wisconsin.
 
Through the effective execution of management’s business plan, including generating loans via an online platform with effective marketing support and the pursuit of additional state licenses, IEG Holdings has achieved impressive growth of its loan portfolio. The company also benefits from a disciplined underwriting process. During 2017, IEG Holdings completed a tender offer for shares of OneMain Holdings (OMF) and issued Series H preferred stock, which together provided over $4.69 million in capital.
 
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