Last week saw the final registration and approval for River North Marketplace Lending Corp, a non-listed, closed-end, 1940 Act fund fully-dedicated to the marketplace lending sector. Registration docs can be found here. With a target offering size of $1 billion, the fund has a broad mandate, with objectives to invest across the marketplace lending (MPL) sector via loans, funds, securities, as well as equity of lending platforms themselves. This is an exciting and welcome development—presaging the launch of several other funds currently in the pipeline and signaling the maturation of another major funding source for marketplace lending platforms.
For our deep-dive topic this week, we take a closer look at the MPL student loan segment, comparing collateral characteristics and financing costs among leading platforms and players.
SoFi is the Most Active Platform
The online student loan sector continues to grow rapidly, with total origination to date now exceeding $10 billion. The majority of this volume is student loan re-finance, focused on high-credit quality borrowers with advanced degrees. SoFi leads this segment, with $7 billion originated since its launch in September 2011.
Interestingly, more than other segments, securitization plays a major role in financing student lending. All leading platforms rely on it heavily, with over 50% of originated loans financed through the ABS markets (Exhibit 1).
Exhibit 1: Origination Volume:
Source: PeerIQ, DBRS, Securitization Prospectus
All leading platforms focus on high quality borrowers, with weighted average credit scores in recent securitizations ranging from 767-778 (Exhibit 2). We do observe that the weighted-average free cash flow for DRB borrowers tends to be much higher. Student refi borrowers typically have excess cash flow after servicing their debt. We also observe similar weighted average coupon of the loans, suggesting competitive pricing for similar borrowers across the platforms.
Exhibit 2: Collateral Characteristics:
Source: PeerIQ, DBRS, Securitization Prospectus
SoFi has a Significantly Lower Financing Cost
Each platform has a mix of different sources of capital—securitization, warehouse funding, retail deposits and others. Here, we use securitizations as a proxy for overall financing cost of the collateral. We look at the Senior Floating Coupon tranches of the recent securitizations by SoFi, Earnest, DRB, and CommonBond. These tranches have a standard interest rate benchmark of 1-Month LIBOR; they are also structurally similar across all platforms. Investors can use spread over 1mo LIBOR to gauge relative value and risk across various shelves.
Exhibit 3: Financing Cost of Senior Floating Coupon Tranche:
Source: PeerIQ, DBRS, Securitization Prospectus
SoFi has a much lower financing cost than other lenders in this category (1.10% as compared to 1.80%-2.20%). This lower cost is due to many factors. Structurally, SoFi benefits from high over-collateralization, as well as a lower WAL. This lower WAL of SoFi is due to several features that allocate payments to subordinate tranches differently as compared to structures used by other platforms. Further, SoFi also benefits from the strong history of repeat issuance and good execution, thus enjoying the confidence, as well as broad participation, from ABS investors. The implementation of a robust, routine securitization platform, with the benefit of great data management and analytics for enhanced investor confidence, will be a major driver in driving funding costs lower.
Upcoming conferences PeerIQ will be attending:
- ALTFI Global Summit 2016 in New York on September 14.
- IMN’s ABS East Conference in Miami on September 18-20.
- American Banker Marketplace Lending and Investing Conference on September 27-28 in New York.
- Context Summits 2016 Alternative Lending Summit on September 28 in Dana Point, CA—more coverage here.
PeerIQ Mentions:
- Lessons Learned From Recent MPL Industry Events in US (Caijing.com, 8/16)
Industry Update:
- Online Lender SoFi Hires Former Wells Fargo Consumer Risk Chief (Bloomberg, 8/26/16) SoFi hires new Chief Risk Officer.
- Lending Club Bolsters Investor Group with Two Senior Hires (LendingClub, 8/24/16) LendingClub adds to the Institutional Capital Management and Institutional Investor Strategy teams.
- Silicon Valley Lender Raises Nearly $50 Million for Subprime Credit-Card Push (WSJ, 8/22/16) LendUp raises $47.5 million in equity to expand into credit card business.
- Factom CEO: Blockchain-based Transparent Mortgages Can Restore Trust in Markets (FinanceMagnates, 3/3/16) Collateral like titles secured by Blockchain can restore trust in mortgage markets.
- Not Shady At All: Perspective on Repeat Borrowers at Lending Club (LendAcademy, 8/22/16) A rebuttal on previous article criticizing loans as shady; repeat borrowers performed better.
- The New US Fintech Index: KFTX (DailyFintech, 8/16) KBW and Nasdaq launched index consisting of 49 Fintech companies including Square, PayPal, LendingClub.
Lighter Fare:
- Eleven Reasons To Be Excited About The Future of Technology (Medium, 8/18/16)