WSO CDO Quarterly Update: Q2-2011

Our Lending Club CDO had another good quarter without a single late payment (and no defaults, obviously). I've posted the actual results after the jump, but in a nutshell we're making a steady 11.87% and we've collected a little over $14 in interest on our initial $250 investment over the past six months.

Here's where things get interesting. Outside the WSO CDO, I actually have a good deal more invested with Lending Club, and I buy a few more notes each week. I'm pretty hands-on with the portfolio, because I know defaults can kill your NAR (Net Annual Return) pretty quickly. So during the past quarter, I had my first loan go late on a payment.

Before I go into what I did, let me explain a couple things about how Lending Club has changed over the past six months to a year. First and foremost, the number of investors has exploded. Where it used to take up to a week for a loan to get funded, it is now rare to see a loan take more than a day to be fully subscribed. You could look at this as a negative, because there's a great deal more competition for the best loans, but overall it's a good thing because the market has become much more liquid.

That liquidity has obviously spilled over into the secondary market for these loans as well. Before, you could list one of your notes for sale on the secondary market and you'd get an email six weeks later informing you that your listing had expired. That isn't the case any longer.

I had a note go into the Grace Period on me this past quarter. That means that for some reason the monthly payment wasn't made on time. I think there's a 10-day grace period before the borrower is charged a late fee, but I wasn't taking any chances.

It is my somewhat paranoid view that everyone who borrows from me is a sketchy individual looking to screw unwary investors. Now, I know that isn't even close to reality, but it's that kind of thinking that has kept me in the black year after year. So I'm gonna bail on a borrower at the first sign of trouble.

In this case, as soon as the note went into the grace period I listed it for sale on the secondary market. I'd paid $25 for the note and had received two payments totaling $1.68. At the time of the initial investment, the note was graded C-3 and was paying 13.43%. I knew it would look like the note was heading for default, so I knew I had to discount the note to get it sold.

I listed the note for $22 and it sold in a couple hours. So I paid $25 for it, collected $1.68 in payments, sold it for $22, and paid a $.22 transaction fee to get it done. Overall, I lost $1.10 on the note, but saved myself from a default that could have cost me $23.32.

There's actually a funny ending to that particular story. The secondary market lets you see what happens to the note you sold for at least a month after you sell it. So I got curious. It seems my borrower's note went into the grace period because he was paying it off in full. DOH! So I just cost myself a little over a buck by being too quick on the trigger finger. Still, I'd do the same thing again, and will each time it happens. I think it's better to be safe than sorry when it comes to private borrowers and non-recourse loans.

Anyway, here are the quarterly results for the WSO CDO for the second quarter of 2011:

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