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Trade finance – road map to an investor asset class

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Trade finance – road map to an investor asset class

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Trade finance – road map to an investor asset class

  1. 1. This document is confidential and intended solely for the use of the person to whom it is given or sent and may not be reproduced, copied or given, in whole or in part, to any other person. Trade finance – road map to an investor asset class June 2015
  2. 2. CONFIDENTIAL Disclaimer This information is confidential and is intended solely for the information of the person to whom it has been delivered. This information is for discussion purposes only and is being furnished to you on a confidential basis to provide summary information regarding Fermat Capital Management and the investment advisory services it offers. This information is strictly confidential and may not be reproduced or transmitted, in whole or in part, nor may its contents be disclosed to any third parties, without the prior written consent of Fermat Capital Management. All information should be read in conjunction with the endnote herein which is an integral part of this Presentation. The information contained herein is believed to be accurate as of the date of issue of this presentation. No representation or warranty is made as to its continued accuracy after such date. Performance information is calculated on the basis of unaudited numbers and includes the reinvestment of net earnings. All performance numbers are net of management fees and expenses. Individual returns for each investor will vary because of, among other things, the timing of such individual’s investment and leverage and risk profile differences. Past performance is not necessarily indicative of future results. Any investment decision in connection with Fermat’s funds should be made based on the information contained in the relevant Offering Memorandum of the corresponding fund. Nothing contained herein constitutes an offer to sell, or the solicitation of an offer to buy, an interest in any fund. Such an offer or solicitation may only be made by delivery of an Offering Memorandum and subscription documents that contain a more detailed description of all the material terms of such an investment, including discussions of certain specific risk factors, tax considerations, fees and other matters relevant to prospective investors in that fund. The information herein is not intended to provide, and should not be relied upon for, accounting, legal or tax advice or investment recommendations. You should consult your tax, legal, accounting or other advisers about the matters discussed herein. Notwithstanding the foregoing, any investor in a fund (and each employee, representative or other agent of such investor) may disclose to any and all persons, without limitation of any kind, the tax treatment and tax structure of (i) such fund and (ii) any transactions described herein, and all materials of any kind (including opinions or other tax analyses) that are provided to the investor relating to such tax treatment and tax structure. Any offer of an alternative investment may only be made by a prospectus or offering memorandum that contains important information regarding the fund’s investment objectives and strategy, as well as attendant risks, fees and expenses. For more information, including a full discussion of associated risks, please review additional fund documentation. For Investors in the US—Funds may not be registered under the US Securities Act of 1933, as amended (the “1933 Act”) or the securities laws of any US State. Such shares may only be offered or sold directly or indirectly in the United States or to any person in reliance on exemptions from the 1933 Act and such laws. In addition, funds may not be and will not be registered as an investment company under the Investment Company Act of 1940, as amended. Certain hedge funds, private equity, and private real estate funds are available only to investors who qualify as “Accredited Investors” as defined in the Regulation D under the 1933 Act, and “Qualified Purchasers” as defined in Section 2(a)(51) of the Investment Company Act of 1940. An investment in hedge funds and other alternative investments is speculative and involves a high degree of risk, and is suitable only for “Qualified Purchasers.” No assurance can be given that a hedge fund’s investment objectives will be achieved, or that investors will receive a return of all or part of their investment. Investments in hedge funds and other alternative investments are suitable only for persons who can afford to lose their entire investments. Before investing, prospective investors should carefully consider these risks and others, such as lack of transparency, higher fees, illiquidity, and lack of registration. June 2015 Proprietary & Confidential Page 2
  3. 3. CONFIDENTIAL Agenda ●  About Fermat ●  Background on presentation ●  About investment market and about banks ●  About trade finance in context of investment market ●  Ways forward June 2015 Proprietary & Confidential Page 3
  4. 4. CONFIDENTIAL About Fermat ●  Founded in 2001, Fermat now manages assets of USD 4.6bn** ●  Team formed of cat bond and insurance-related financial, legal and risk modeling experts ●  Managing Principals have over 45 years combined experience in ILS and cat bond markets ●  Experience of every major natural event and period of financial market turmoil since inception of the market ●  Acknowledged for their development of pricing, structuring and analysis of cat bonds ●  Has regularly advised U.S. government and insurance industry bodies ●  Launched trade finance investment strategy 2015 June 2015 Proprietary & Confidential Page 4
  5. 5. CONFIDENTIAL Point of view pending market impacts : rates low longer / long time ●  Banks given Basel RWA and capital position reduce exposure to TF (as well as SME, EM, IB and others) –  GE / RBS / JPMC –  Portfolios age quickly / not easily sold –  EM low rated bank funding challenges & HY ●  Corporate issuance slows with rate increases –  Record IG issuance / high cash levels –  Solvency declines with rate increases –  HY first (2 year lag?) and lower IG second (mark to market and other issues) ●  Insurance and pension challenges with long low rate environment (continuing) –  Underwriting profit challenged if competitors write at low profit level while investment income challenged –  Business line changes & M&A –  Increased pension funding (solvency issues) ●  Asset construction and access for managers –  Resetting credit & equity pricing –  Fixed rate & financials overweighting –  Allocation changes with different growth and interest rate environments –  Private placement access ●  Fiscal / legislative challenges –  Balanced budgets –  Tax reform (cash?) –  Infrastructure gaps ●  Central banks –  Interest rates vs. employment / inflation / legislation –  Non bank solvency (insurance and pensions) –  Removing cash from banking system ●  Incentives to change (more likely dis-incentives – talk about toward the end of the presentation) June 2015 Proprietary & Confidential Page 5
  6. 6. CONFIDENTIAL Opportunity for trade finance asset class : changed market structure ●  There is a shortage of fixed income assets –  Gap in high quality - governments and corporate – and short duration and floating rate ●  Gap function of –  Low interest rates / little floating rate debt (hedge against rising interest rates) / money supply creation/longer duration debt issuance/central bank buying –  Re-regulation – Basel (RWA, high quality assets holdings and managing liquidity) among many ●  Trade finance can be an attractive asset class and fill gap –  High quality/asset backed/floating rate –  If offered with premium to public debt highly desirable ●  Investment required by the sell side to realize –  Securities creation / bonds / private placement / education to generate investment by buy side in asset management product / raising money ●  Paths –  Invest / transition to “lighter balance sheet model (more brokerage)” –  Partner with asset management June 2015 Proprietary & Confidential Page 6
  7. 7. CONFIDENTIAL Why? : investment market = large opportunity June 2015 Proprietary & Confidential Page 7 Sources: McKinsey, BIS, IMF, World Bank, Analysis Trade Finance as Investment Assets ●  Single issue (purchase or participation) –  Investment grade –  High yield ●  Securitization ●  Securities ●  ECA issue (purchase or participation) Trillions $0 $10 $20 $30 $40 $50 $60 Stock Market (Capitalization) Public Debt Securities Financial Institutions Bonds Non financial Corporate Bonds Securitized Loans Non Securitized Loans Global Fixed Income & Equity Assets
  8. 8. CONFIDENTIAL Market large but will be even larger : can banks be? June 2015 Proprietary & Confidential Page 8 Billions Sources: McKinsey, World Bank, Federal Reserve Billions $0 $5,000 $10,000 $15,000 $20,000 $25,000 $30,000 $35,000 $40,000 $45,000 $0 $2,000 $4,000 $6,000 $8,000 $10,000 $12,000 $14,000 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 U.S. Bond Market Outstandings Total (Right Axis) Municipal Treasury Mortgages Corporate Agencies Money Markets Asset-Backed Households 36% Government 28% Corporations 1% Banks 11% Insurers 11% Pensions 13% Global Fixed Income and Equity Asset Ownership = $225 Trillion
  9. 9. CONFIDENTIAL Issuance: little floating and less trading $0.0 $200.0 $400.0 $600.0 $800.0 $1,000.0 $1,200.0 $1,400.0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Corporate Debt Issuance Trends Fixed Rate Floating Rate June 2015 Proprietary & Confidential 9 Billions Billions Sources: SIFMA 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 90.0% 100.0% $0.0 $1,000.0 $2,000.0 $3,000.0 $4,000.0 $5,000.0 $6,000.0 $7,000.0 $8,000.0 $9,000.0 Corporate Debt Trading Trends Corporate Debt Trading of Total Debt
  10. 10. CONFIDENTIAL Changed : credit quality deteriorated and duration extended -100.0% -50.0% 0.0% 50.0% 100.0% 150.0% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% AAA AA A BBB BB B CCC CC-D Ratings Quality Trends 1984 - 2014 1984 2014 Change (right axis) June 2015 Proprietary & Confidential Page 10 Sources: Barclays IG Bonds, HY Bonds & HY Loans Analysis, SIFMA Years .0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 U.S. Corporate Debt Issuance Average Maturity
  11. 11. CONFIDENTIAL Bank lending : near pre-crisis levels on gross but not percentage basis $0.0 $2,000,000.0 $4,000,000.0 $6,000,000.0 $8,000,000.0 $10,000,000.0 $12,000,000.0 $14,000,000.0 $0.0 $1,000,000.0 $2,000,000.0 $3,000,000.0 $4,000,000.0 $5,000,000.0 $6,000,000.0 $7,000,000.0 $8,000,000.0 $9,000,000.0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Select Bank Accounts Borrowings (right axis) Deposits (right axis) Treasuries & Agencies Other Securities Loans and Leases C&I Real Estate - All Consumer Loans Interbank Loans Cash Assets Other Assets June 2015 Proprietary & Confidential Page 11 Millions Sources: Federal Reserve 0.00% 10.00% 20.00% 30.00% 40.00% 50.00% 60.00% 70.00% Select Bank Accounts Loans and Leases Real Estate - All Treasuries & Agencies Other Securities C&I Consumer Loans Interbank Loans Cash Assets Other Assets Linear (Loans and Leases) Linear (Real Estate - All)
  12. 12. CONFIDENTIAL Funding is changed : re-regulation and cost create ongoing pressure $0 $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 $7,000 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Repo Daily Average Volume Repo 3 per. Mov. Avg. (Repo) June 2015 Proprietary & Confidential Page 12 Billions Sources: Federal Reserve, SIFMA 0.00% 10.00% 20.00% 30.00% 40.00% 50.00% 60.00% 70.00% 80.00% 90.00% 100.00% 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Select Bank Liability Accounts Other Loans (right axis) Borrowings (right axis) Deposits (right axis)
  13. 13. CONFIDENTIAL Impact : intermediation of central banks (QE & others) 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 20032004 2005 2006 2007 2008 2009 2010 2011 2012 20132014 Percentage Treasury & Agency Holdings Federal Reserve Holdings Treasuries & Agencies 84% 86% 88% 90% 92% 94% 96% 98% 100% 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Percentage of Bond Market Holdings Federal Reserve Holdings Total U.S. Bond Outstandings June 2015 Proprietary & Confidential Page 13
  14. 14. CONFIDENTIAL All impacting rates : low / tight hurting regulated (all) investors and duration June 2015 Proprietary & Confidential Page 14 Source: BAML, Federal Reserve 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 18.0% 2010-04-21 2011-04-21 2012-04-21 2013-04-21 2014-04-21 Option Adjusted Spread Last 5 Years BBB C B BB AAA A AA 0 5 10 15 20 25 30 35 40 45 50 2012-01-02 2013-01-02 2014-01-02 2015-01-02 Select Rates 90 Day Treasury 90 Day AA Financial CP 90 Day AA Non-financial CP 1 Year Treasury Basis points
  15. 15. CONFIDENTIAL Size in product context : bank trade compared to U.S. money market funds Bank-intermediated trade finance markets (2011) (US$ billions) Stocks Annual Flows Global Estimate $1,625–$2,100 $6,500–$8,000 International Data Sources: L/Cs (SWIFT) $2,782 ICC trade Register $1,958 June 2015 Proprietary & Confidential Page 15 Sources: BIS and ICI U.S. Institutional Money Market Funds (US$ billions) Total (All) Prime 12/31/14 $1,822 $937 1/7/15 $1,798 $933 1/14/15 $1,796 $930 1/21/15 $1,796 $929 1/28/15 $1,799 $940 2/4/15 $1,786 $927 2/11/15 $1,791 $940 2/18/15 $1,781 $933 2/25/15 $1,796 $944 3/4/15 $1,779 $933 3/11/15 $1,800 $947 3/18/15 $1,779 $925 3/25/15 $1,796 $938 4/1/15 $1,752 $912 4/8/15 $1,750 $922 4/15/15 $1,719 $899 4/22/15 $1,723 $906 4/29/15 $1,722 $893 5/6/15 $1,729 $893 5/13/15 $1,728 $889
  16. 16. CONFIDENTIAL Creating new asset classes : a path well tread 1.  Increase capital markets composition and participation 1.  Generate securities 2.  Private placements 2.  Partner with investors 3.  Innovation – model evolution ●  Certain asset classes largely bypass banking channel when initially reliant (e.g. auto, vendor, etc.) ●  Markets emerged with distinct roles – originators, packagers (brokers), investors and asset managers ●  Brokerage has limitations compared to past –  Regulation –  Educated buyers / investment forms / data / valuation / settlement June 2015 Proprietary & Confidential Page 16
  17. 17. CONFIDENTIAL Need : education & investors & investment products What Is Trade Finance? ●  Asset sales (balance sheet assets) : receivables and / or inventory ●  Asset lending (balance sheet liabilities) : receivables and / or inventory ●  Operations : collateral management / control / settlement / valuation ●  Investment forms : purchases / loans / securities / private placements ●  Roles : information / agents (brokerage / fiduciary) / rating agencies Investment Products Funds UCITS Mutual funds ETFs Separate accounts Investment Assets 1.  Medium term 2.  Short term 3.  Securitization 4.  ECA / insurance June 2015 Proprietary & Confidential Page 17
  18. 18. CONFIDENTIAL 1. Medium term trade finance : HY loan investment product June 2015 Proprietary & Confidential Page 18 $0 $20 $40 $60 $80 $100 $120 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 U.S. High Yield Issuance Bonds Loans Source: Thomson Reuters LPC Collateral Billions ●  Can be structured like leverage loan market –  Get ratings –  High yield market can migrate to loan fund product –  Change is coming to this market (re-regulation / risk retention) ●  Absent ratings / greater investor education ●  Investment grade with bond or revolver markets offers no distinct path / corollary –  Transactional?
  19. 19. CONFIDENTIAL Page 19 1. Demand : there for right product (these rely on rated assets) $0 $50 $100 $150 $200 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 High Yield Funds & ETFs Manager Volume Number Guggenheim Investment Management $2,261.8 3 GSO Blackstone $1,787.1 3 Credit Suisse Asset Management $1,427.6 2 Carlyle Investment Management $1,279.8 2 Apollo Credit Management $1,263.2 2 Golub Capital $1,211.0 2 CIFC $1,127.4 2 Och Ziff Capital Management $1,076.2 2 Prudential $1,024.3 2 Onex Credit Partners $764.0 1 3i Debt Management $759.9 1 June 2015 Proprietary & Confidential Source: Thomson Reuters LPC Collateral Billions Billions 2015 League Table YTD 10% 20% 30% 40% 50% 60% Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 Apr-15 Share of Institutional Loans Outstanding CLOs Loan Funds (mutual funds & ETFs) Other 0 95 190 285 380 475 570 665 760 855 950 $0 $50 $100 $150 $200 $250 $300 $350 $400 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 CLOs Aggregate Principal Balance Number of CLOs Billions
  20. 20. CONFIDENTIAL 2. Short term trade finance : investment product ●  Investment grade market is short term focused particularly receivables ●  Short term can be structured to work in money market world –  Get ratings ●  Absent ratings –  Greater investor education June 2015 Proprietary & Confidential Page 20 Commitment to Invest Asset Sourcing • New Issues • Reverse Inquiry • Secondaries Credit Review Legal & Operational Risk Review Approval Process with NAIC Asset Acquisition • Cash Process • Documentary Process • Custody Process Administration, Valuation & Reporting Renewals, Extensions & Exits Working Capital Finance Investments (WCFI) Private Placement Credit U.S. Insurance Companies
  21. 21. CONFIDENTIAL Page 21 2. Short term credit : overwhelmingly financial and changing (fast) $0 $200,000 $400,000 $600,000 $800,000 $1,000,000 $1,200,000 $1,400,000 $1,600,000 $1,800,000 $2,000,000 2012-01-04 2012-05-23 2012-10-10 2013-02-27 2013-07-17 2013-12-04 2014-04-23 2014-09-10 2015-01-28 Select Money Markets Outstanding Large Time Deposits (U.S.) Financial CP Non Financial CP June 2015 Proprietary & Confidential Outstanding $, Millions Source: Federal Reserve Financial 89% Non Financial 11% Update on Money Market Regulations / January 2015 / Nancy Prior, President of Fixed Income - Fidelity “I oversee a team . . . $580 billion in bond and money market mutual funds. . . . None of these changes affect our funds right now, but they’re on the way . . . the Securities and Exchange Commission (SEC) issued new rules for money market funds and provided a multi-year implementation plan for those rules. When implemented, these rules will . . . .require institutional prime, also known as general purpose to price and transact at a “floating” net asset value (NAV). During periods of extraordinary market stress, the new rules also permit a prime . . . .fund to charge its shareholders liquidity fees which are payable to the fund upon redemption, and to provide for redemption gates that temporarily would halt all withdrawals. . . . . . “
  22. 22. CONFIDENTIAL 3. Structure could work : large market and ratings based $0.0 $100,000.0 $200,000.0 $300,000.0 $400,000.0 $500,000.0 $600,000.0 $700,000.0 $800,000.0 $900,000.0 2007 2008 2009 2010 2011 2012 2013 2014 European Structured Finance WBS SME RMBS Mixed CMBS CDO Other Leases Credit Card Consumer Auto June 2015 Proprietary & Confidential Page 22 $0.00 $100.00 $200.00 $300.00 $400.00 $500.00 $600.00 $700.00 $800.00 $900.00 2007 2008 2009 2010 2011 2012 2013 2014 U.S. Structured Finance Utility / Stranded Costs Timeshare Structured Settlements SBA Franchise Consumer Cell Tower Leases Student Loan Housing Equipment Credit Card Auto Millions Billions Source: SIFMA
  23. 23. CONFIDENTIAL 3. Trade finance securitization : benefits but many hurdles ●  Makes it a rated bond ●  More broadly investable by the buy side . . . but . . . ●  Securitization technology (banks and single name) –  Trade credit “lumpy” creating diversification issues –  Trade non standardized – contracts, issuers, settlement ●  Credit / liquidity support, if required, is EXPENSIVE ●  Securitization works best –  Transparent / diversified / independent / term / not needing liquidity or credit support –  Data / valuation confirmable –  Adverse selection / moral hazard mitigated ●  Achievement challenged unless –  Pooling multiple banks (TMAPS innovation) –  Industry standards –  Independent data and valuation sources June 2015 Proprietary & Confidential Page 23
  24. 24. CONFIDENTIAL 4. ECA : alternative access to like credit for investors June 2015 Proprietary & Confidential Page 24 $0.0 $2,000,000.0 $4,000,000.0 $6,000,000.0 $8,000,000.0 $10,000,000.0 $12,000,000.0 $14,000,000.0 $0.0 $200,000.0 $400,000.0 $600,000.0 $800,000.0 $1,000,000.0 $1,200,000.0 $1,400,000.0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Debt of U.S. & Agencies Financing Corporation US Postal Service FHA Export-Import Bank TVA Farmer Mac Treasury (right axis) Fannie Mae Freddie Mac Farm Credit FHLB Sallie Mae Resolution Funding Corporation Sources: SIFMA Millions Millions
  25. 25. CONFIDENTIAL Summary : merits to the assets but needs be “productized” & “investorized” ●  Investing in trade finance helps investors cope with low yields and diversify away from exposure to financials ●  Trade finance offer higher yields for comparable quality / duration ●  Trade finance provide diversification with access to “industrial” credits / issuers not otherwise available ●  Trade finance are floating interest rate investments providing rising rate protection ●  Trade finance have favorable default and recovery history ●  Trade finance offers the option to renew and extend investment – are “evergreen” 1.  Creating products needs address making asset class broadly consumable for investors 2.  Securitization can achieve this but has challenges to execute 3.  Investor education is necessary as are having trusted 3rd party managers June 2015 Proprietary & Confidential Page 25
  26. 26. CONFIDENTIAL Market response : intermediation by investors with originators June 2015 Proprietary & Confidential Page 26 Talanx, NORD/LB and Bankhaus Lampe cooperate on Alternative Investments Hannover, 20 January 2015 The Talanx Group, NORD/LB Norddeutsche Landesbank and Bankhaus Lampe are entering into a joint venture in the area of Alternative Investments. . . . . .The joint venture gives Talanx access to infrastructure loans and other alternative asset classes of NORD/LB Group. Talanx will also be able to benefit from the rating expertise of RSU Rating Service Unit GmbH & Co. KG, a wholly-owned subsidiary of the German Landesbanks. . . . . . In view of the low interest rates currently prevailing, the owners are anticipating an increasing shift in investment towards alternative asset classes . . . . Lending Club Wants to Broaden Its Membership: Deals with Google and Alibaba deliver small business customers Bloomberg April 23, 2015 . . . . Since raising $1 billion in an initial public offering in December, Lending Club has announced partnerships with two big technology companies. It will help Google extend up to $600,000 in credit to smaller companies that sell its applications, such as Gmail and Docs, that are tailored for business uses. Under an exclusive arrangement with Alibaba Group, U.S. businesses that want to buy electronics, clothing, and other items in bulk from China through the e- commerce marketplace can apply for Lending Club loans of up to $300,000. . . . . The search company, which is one of Lending Club’s early investors, is using its own money to make loans to its vendors . . . which is akin to an automaker helping its dealers buy cars to resell.
  27. 27. CONFIDENTIAL Market response : intermediation with investor warehousing / securitizing BlackRock Plans to Sell Rated Bonds Backed by Prosper Loans January 28, 2015 (Bloomberg) -- BlackRock Inc. plans to sell the first rated securities backed by consumer loans arranged through Prosper Marketplace Inc. as investors seek to profit from debt created on the peer-to-peer platform. About $281 million of the bonds may receive an investment grade of Baa3 from Moody’s Investors Service, while $45 million may be rated Ba3, the credit grader said Wednesday in an e-mailed statement. The debt is being issued by a vehicle called Consumer Credit Origination Loan Trust 2015-1 created by a unit of BlackRock on behalf of funds and accounts it manages. . . . . The companies’ main products are unsecured consumer loans for as much as $35,000 and as long as five years. BlackRock, on behalf of its clients, plans to at least initially hold onto an additional $18.2 million of junior securities tied to the loans, The money manager, which also invested customer funds in Prosper itself, has been buying “a cross-section of all loans originated through the Prosper platform” since November 2013, according to the report. . . . . . . . . . Social Finance Inc., another marketplace lender that has focused on student loans, sold $313.8 million of securities backed by borrowing this month, its largest offering yet. June 2015 Proprietary & Confidential Page 27
  28. 28. CONFIDENTIAL Market response : investing to figure it out Goldman to Emphasize Digital Banking Services – May 5, 2015 WSJ The Wall Street bank announced Monday in an internal memo that Harit Talwar, who formerly oversaw the card business at Discover Financial Services, will help lead an effort to use technology to lend to consumers and small businesses. In a firmwide memo reviewed by The Wall Street Journal, Chief Executive Lloyd Blankfein and Chief Operating Officer Gary Cohn identified “digitally led banking services to consumers and small businesses” as an “area of opportunity.” “The traditional means by which financial services are delivered to consumers and small businesses is being fundamentally re-shaped by advances in technology,” the memo continued.. . . Mr. Talwar, who will join Goldman as a partner, previously worked at Discover for 15 years, where he most recently served as chief marking officer and executive vice president of card programs. June 2015 Proprietary & Confidential Page 28
  29. 29. CONFIDENTIAL Final word : corporates, banks, and insurance & incentives Incentives to change ●  Medium - long term challenges versus ROE / short cycles ●  Corporate – bank relationships ●  Regulatory restrictiveness (Basel, Dodd Frank, CRDIV, Solvency II, etc.) ●  Reform opportunities missed or unsuccessful ●  World of lower leverage and higher funding cost ●  Asset shrinkage = relationship shrinkage ●  Needs of and for investors ●  Needs of and for products ●  Investment needs to come from somewhere ●  Venture capital is investing June 2015 Proprietary & Confidential Page 29 Banks / insurance / corporates need consider consequences and trade offs of short term versus medium and long term for capital access
  30. 30. CONFIDENTIAL Recommendations : “sell side” opportunity ●  Needs product development beyond brokerage by banks (and not for banks) ●  Needs educated investors to invest in products to buy ●  Needs investment partnerships ●  Think short term funds ●  Think CLOs with independent managers ●  Think about how to support and finance transitions to meet your needs June 2015 Proprietary & Confidential Page 30

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