Tuesday, March 13, 2012

Discounted Notes on Lending Club's FolioFN

On Peter Renton's blog post Changes Today to the Lending Club Trading Platform on SocialLending.net, user @stilltrackin noted that discounted Notes seemed to be harder to find as of February 2012. After I started using my Chrome browser extension I added discounted Notes to my buying strategy. I hadn't been buying discounted Notes for around 6 months and noticed that they seemed to be a bit thin.

When I view Notes, I filter out Notes with principal less than $15 or more than $25, Notes from the same Loan and Notes with less than 16% Yield to Maturity. With those filters, in 1,300 of the most discounted Notes (22 pages at 60 each), I only found 42 that met that criteria and were marked up less than 3%. There seemed to be a pattern so I threw the values into a spreadsheet and came up with this graph, which shows Yield to Maturity on the Y-axis and the discount on the X-axis.
Remember that this is a selection of what I consider premium Notes (see the criteria I mentioned above). It is interesting that there are a handful of Notes right around par and then nothing until around 2%. It is possible that someone is rapidly snatching up everything under 2% markup. 

Now let's look at the Notes from 14% to 16% Yield to Maturity. There are 59 Notes in the same 1,300 or so Notes that have this Yield to Maturity. In this range there is nothing below 1% available. The distribution looks very different than the 16%+ distribution. I stopped at 14% because the number of Notes starts getting larger the smaller Yield to Maturity you get.
If you stack the two graphs you can start to see a boundary of Discount for each Yield to Maturity. I think this is the balance between two Lending Club investment philosophies, Yield to Maturity vs Discount. 19% Y2M Notes seem to sell well at a markup of 2% or less because both types of investors are looking for them (has a low Discount and a high Yield to Maturity). It seems 15% is the low end for markups as high as 2%. I would need more data to be sure (note the three near-zero markup 18.5% Y2M Notes).

This will be one of the things I will start tracking and posting about. When I have more time, I'll delve more into the lower Yield to Maturity Notes.

What are your thoughts?

Update 03/13/2012 @ 12:17pm Central

So I pulled data from the top 1,200 discounted Notes with Yield to Maturity of 6%+. The data is in the graph above. There are a little over 600 Notes from unique Loans that have never been Late, over 6% Yield to Maturity and under 3% markup. The blank spots to the left of the graph probably indicate good markups for quick sales, as there is little competition in that area.

What conclusions do you draw from the chart above?


  1. Fascinating post Marc, thanks for delving into this topic. Looks like a sellers market for high yield notes.

    1. I only buy discounted notes, so I can vouch for the truth in this data. The cash has been piling up in my account, because it has been nearly impossible to find high-quality notes at a discount. Before February, I would run a search of all "never late" notes, and there were literally several hundred discounted notes to choose from. Now, I see thirty discounted notes on a good day. I'm struggling to understand what has fundamentally changed. The facts that a) the filter function is terrible, and b) you have to click three times to get all the available data for each note, should provide an obstacle for anyone trying to buy notes in bulk - unless they forego the necessary inspection of payment history, credit score, and borrower details. The strangest aspect, is that it has happened so suddenly, which makes me wonder if there is some sort of new tool that mines loan data and alerts potential buyers, in real time, of new high-quality loans available on the trading platform.

  2. Marc,

    Thanks for the post. Very interesting. Can you explain why people would buy notes at a markup in the secondary market rather than just buying new notes through lendingclub? In general, is the idea that the people who do this are willing to pay a markup to see that a debtor has a history of payment on a Lendingclub loan?

    If that's the case, I'm curious if you know of any standard measure or metrics to evaluate the value of the prior payments as an indicator of future payments. In other words, what is a reasonable markup given a successful stream of prior payments and a given YTM?


  3. Dave the answer to your question may be that some people are not able to buy directly from Lending Club based on their state laws and therefore can only buy on the secondary market. I for one know this because I live in a state like this. Why it is acceptable to buy on the secondary market and not through initial offering is beyond me.

  4. Interesting... I wasn't aware some states prohibit it. Thanks for the answer.

  5. i found this in a google search. i really like your blog. hard to find something both informative and easy to read.

    Discounted Note

  6. I am trying to pull data from foliofn, how does it work ?

  7. I was using a hand crafted Chrome Browser Plugin that scraped the data from each screen as I viewed it.