Financing headlines dominated the news cycle this past week. OnDeck, an SME lender, amended its asset-backed revolving credit facility with Deutsche Bank to extend the facility’s maturity date to March 2019 and increase the borrowing capacity to $214 Mn. Further, Fundation, a leading credit solutions provider for small business, secured an asset backed credit facility from MidCap Financial.
SoFi is reportedly launching a risk retention fund, consistent with PeerIQ’s prediction last month that we should expect to see a growth in risk retention solutions such as manager affiliated risk retention vehicles.
On the securitization front, SoFi 2017-B priced on March 22nd. The $461 Mn deal was rated by S&P, Moody’s, and DBRS, and led by Bank of American Merrill Lynch, Deutsche Bank and Goldman Sachs.
We are excited to see continued growth in non-bank lending outside installment loans. Fair Square Financial, founded by a strong team of Cap One and Bank of America executives, is launching a consumer credit card business under the brand name “Ollo” that seeks to tap into an underserved sector of the US Market. Credit card debts are structurally less risky than installment loans as credit card issuers can manage their credit exposure by dialing up or down borrowers’ credit limits. Additionally, credit cards likely appear higher on the consumer’s priority of payments than installment loans due to their convenience and other benefits.
This week we highlight Marlette Funding Trust 2017-1 (MFT 2017-1) that closed on March 23rd.
Marlette Funding Trust 2017-1 (MFT 2017-1)
Marlette is a balance sheet lender that originates unsecured consumer loans via the Marlette Best Egg Platform. Loans issued through the Marlette platform are originated by Cross River Bank (CRB). CRB and Marlette retain a share of loans issued through their online platform addressing potential “skin in the game” and true lender concerns. Since March 2015, the Marlette Best Egg Platform has originated over $3 Bn of loans.
Marlette has a strong capital market team led by ex-DB banker Karan Mehta and uses securitization as a funding channel. Citi Held for Asset Issuance 2016-MF1 (CHAI 2016-MF1), closed on March 4, 2016, was the first deal from the Marlette Platform which executed in challenging market conditions; Marlette Funding Trust 2016-1 (MFT 2016-1), closed on August 2, 2016, and was the second deal and first under the MFT shelf. MFT 2017-1, backed by $333 Mn of consumer loans, represents its third and the largest ABS transaction (Exhibit 1), led by Goldman Sachs, Deutsche Bank and Citigroup. Due to high demand, MFT 2017-1 was upsized by 18%, from $257 Mn to $304 Mn before pricing last Friday.
In a sign that regulatory uncertainty continues, the Marlette transaction did not include any loans from Colorado. Most recently, in February, Colorado state regulators filed a complaint against Marlette and demanded various remedial actions including refunding any excess charges to Colorado residents. Originators relying on the partner-funding bank model to impacted markets (such as NY, CT, VT) are structuring transactions to mitigate regulatory risk.
Exhibit 1 Deal Comparison
As compared to the most recent near-prime deal ARCT 2017-1, the collateral in MFT 2017-1 contains loans made to borrowers with comparable average loan balance (approximately $11.8k vs $11.9k) and average borrower interest rate (14.76% vs 15.27%). However, the Kroll base case cumulative net loss rate for MFT 2017-1 is 3.8 percentage points lower than that of ARCT 2017-1. The deal is backed by 23,660 loans with average FICO of 715, which is significantly higher than 688 from ARCT 2017-1.
Seasoning is an important consideration for investors. The average conditional default rates (CDRs) typically peak in the first twelve months for consumer loan pool. MFT 2017-1 collateral pool has 11 months of seasoning compared to 3 months in SCLP 2017-1.
Investors in MFT 2017-1 further benefit from credit enhancement consisting of over-collateralization, subordination, reserve accounts, and excess spread. Credit enhancement provides note holders with protection against losses and delays in scheduled payments. For this deal, the A, B and C tranche have a total credit enhancement of 27.5%, 18.0% and 9.1%, respectively.
Marlette Deal Pricing Continues to Tighten
MFT 2017-1 is priced about 30 basis points tighter across the capital structure as compared to ARCT 2017-1, the most recent unsecured consumer loan ABS backed by LendingClub’s collateral pool. From a term structure perspective, Exhibit 2 shows flattening of the credit curve: the A tranche is priced 95 basis points tighter than the B tranche; and the B tranche 250 basis points tighter than the C tranche. This flattening behavior illustrates “risk-on” investor behavior as the search for yield intensifies. Compared to other Marlette deals, the credit curves have shifted downward and flattened.
Exhibit 2 Recent Personal Loan ABS Pricing Spreads
Marlette Funding Trust 2017-1 Cumulative Net Loss Trigger is Defined as Step Function
Besides credit supports, senior tranche investors have additional structural protection in the form of cumulative net loss rate triggers, which lead to accelerated repayment of principal in the event of worse-than expected collateral performance. Exhibit 3 shows several cumulative net loss (CNL) trigger profiles in recent personal loan ABS deals.
Unlike the smoothed curve function exhibit from ARCT 2017-1, the SoFi unsecured consumer loan deals typically have a “step function” like CNL profile, starting at 3% and peaking at 7%, resembling a step function. Marlette also applies the same approach as SoFi, albeit with different levels, from 4% to 14% after two of seasoning (4% for 6mo, 7% for 6mo, 10% for 6mo, 12% for 6mo, and peak at 14%).
Such CNL trigger profiles represent the first order approximation of loss timing curve. If the CNL triggers are set too tight, the triggers have elevated risk of being breached, leading to reputational hazard to the issuer; if too wide, the original bond rating may be challenged and the senior bond holders may not receive the structural protection they expected.
Exhibit 3 Recent Personal Loan ABS Cumulative Loss Triggers
Multi-Seller Trend Continues
Last summer, PeerIQ predicted the rise of multi-seller deals as issuers seek to create a reliable path to liquidity for whole loan investors, drive standardization, and reduce execution costs and risks. The most recent Marlette transaction is notable in that 7 loan sellers vended loans into the deal. Affiliates of Goldman Sachs and partner funding bank Cross River Bank contributed loans comprising 45% of the transaction.
Greater Focus on 3rd Party Data & Analytics
In the wake of increased uncertainty in loss and prepay timing, issuers and investors alike are increasingly incorporating third party data and analytics, including tools offered by PeerIQ, to drive decision making and improve investor confidence.
We continue to believe that the market participants that apply a robust analytical approach to model cashflows, economics and optimize deal structures will improve outcomes for all parties involved.
- 2017 Security Traders Association of New York Capital Market Conference and Dinner on March 30 in New York. Ram Ahluwalia will speak on the FinTech Disruptors panel at 11:10AM.
- CEO, Ram Ahluwalia will discuss Bank and Non-Banks: Competition or Partnership at a LendingTimes event on, April 18 at 6:00 PM.
- FRALLC’s Bank/Alternative Lender Strategic Partnership Summit on May 10-11 in New York. Ram will speak on the “Tapping Secondary Markets: Securitization & Liquidity” panel on Tuesday May 11 at 2:00PM
PeerIQ in the News:
- Ram Ahluwalia, Founder and CEO, PeerIQ by WFT (Wharton FinTech Podcast, 3/22/17)
- PeerIQ is nominated as a finalist for Global Capital’s US Securitization Awards! PeerIQ is nominated for the Overall Best Securitization Data Provider. Cast your vote for PeerIQ here!
- Honeymoon’s Over for Peer-to-Peer Lending (Bloomberg, 3/24/17)
- Mortgage Lender Touts Automated Process (AB Alert, 3/22/17) Startup mortgage lender, Better Mortgage, had digitized the origination process, passing on savings to borrowers and investors.
- Prosper Reports Wider Loss on Loan Slowdown (WSJ, 3/24/17) 2016 losses drive Prosper to shift its strategy to reach profitability.
- Marlette Prices Latest Deal Tight Even as Firm Preps Layoffs (Global Capital, 3/20/17) Goldman Sachs, Deutsche Bank and Citi increased Marlette’s original deal size from $257.43 Mn to $304.47 Mn before pricing last Friday.
- OnDeck Announces Extension and Upsize of Revolving Credit Facility with Deutsche Bank (OnDeck 3/22/17) OnDeck amended its revolving credit facility with Deutsche Bank with March 2019 new maturity and upsizing it to $214 Mn.
- Standard Chartered Opens Up to AliPay (Finextra, 3/22/17) Standard partners with China’s Ant Financial to enable online and mobile top-ups to AliPay users in Hong Kong.
- Online Small-Business Lending Is Set to Bounce Back (Entrepreneur, 3/22/17) Fintech loan originations are expected to surge in 2017.
- Goldman Mortgage-Bond Veteran Michelle Gill Poached by Private Equity Firm (WSJ, 3/24/2017) Industry leader Michelle Gill joins TPG’s special situations group.
- US Takes Another Step Toward Regulating FinTechs (Business Insider, 3/17/17) CFTC Acting Chairman Chris Giancarlo is reviewing regulations to improve national competitiveness and opportunities for FinTech.
- Online Lender Kabbage Said to Seek Funds for Potential Acquisitions (Fortune, 3/23/17) Kabbage is reportedly raising capital in part to fund M&A.
- Google’s AI Explosion in One Chart (MIT Technology Review, 3/25/17) Surging investment in machine learning and the ensuing arms race.