Several marketplace lending ABS deals are coming to market amidst favorable market conditions and impending risk retention rules.
P2P Global Investments, a UK UCIT investing in marketplace lending loans, sold £114 M ($167.36 MM) of rated notes backed by Zopa loans. The senior bond of the deal—Marketplace Originated Consumer Assets (MOCA 2016-1)—was rated Aa3/AA by Moody’s and Fitch respectively.
Noteworthy is that the deal’s senior note has the highest rating afforded to any marketplace lending transaction from Fitch. Moody’s assigned a cumulative loss estimate of 7% and expected recoveries of 5%. We show deal structure and pricing below:
The MOCA 2016-1 senior bond priced 75 bps better than April SBOLT 2016-1 deal consisting of Funding Circle loans. Investors noted the quality of the data as a factor explaining the price difference as well as market conditions. PeerIQ also notes the substantial variation in agency provided cumulative loss and recovery estimates on SBOLT 2016-1 in our prior newsletter underscoring the need for specialized capabilities to evaluate this unique asset class.
It was also reported that Prospect Capital, a NYC-based Business Development company, is working with Morgan Stanley to bring a $150 MM unrated offering consisting of seasoned Lending Club loans to market under the Murray Hill Marketplace Trust 2016-LC1 shelf.
Valuation of Seasoned Loans
Seasoning is an important consideration for investors and an increasing theme in recent ABS transactions and secondary pool sales. PeerIQ expects this trend to grow particularly as originators incentivize contributed collateral “club deals” to achieve standardization while also providing a quarterly path to liquidity for whole loan investors.
Sophisticated loan-level analytics are required to accurately value seasoned loans contributed to the collateral pool. Aged portfolios offer greater clarity to loan performance. However, there are other analytical considerations. The average conditional default rates (CDRs) are lower in the first twelve months of consumer loan pool than CDRs in the pool seasoned beyond twelve months. Therefore, seasoned unsecured consumer loans pool tend to have higher cumulative net losses as a percentage of deal balance. As the loans season, the conditional prepayment rates (CPR) tend to be elevated as well.
The price of a seasoned loan is the present value of projected loss-adjusted cashflow for the remaining balance of the loan, discounted at an appropriate rate. We show below the price behavior of a typical 60-month loan over its life while holding the discount factor constant:
As losses ramp up, the loan price drops; and then price exceeds par as risky loans approach maturity. This behavior results from positive survival bias of a loan given its remaining principal balance.
Specifically, in the early life of a loan, the credit loss projection ramps up and dominates the loan coupon—the loan price drops below par. As the loan seasons and survives over time, the credit risk on the remaining principal balance decreases. This survival bias of the credit risk profile leads to certain high credit risk loans valued above par.
For a higher coupon loan, the interest return or carry of the loan dominates loan pricing—the loan price exceeds par. At maturity, if the loan has not experienced any credit impairment, the price of the loan will be par; this leads to a “pull-to-par” profile.
Securitization Tracker Update
We look forward to releasing the Q3 securitization tracker this week. As origination volumes have slowed in certain areas, and as ABS markets started with a slow Q1, readers are asking what is the state of the ABS market? You may be surprised.
Stay tuned as we share volumes, pricings, and our outlook this week.
Thank you for your readership and support.
Conferences:
- CEO, Ram Ahluwalia, will speak on a panel entitled, “The State of the Industry in the USA” at LendIt Europe on October 10-11 in London.
- Money2020 on October 23-24 in Las Vegas.
PeerIQ Mentions:
- The Evolution of the Marketplace Lending Ecosystem (AltFi, 9/27/16) Video coverage of AltFi 2016 panel regarding need for 3rd party validation and data standardization. Ram’s comments start at the 8:40 mark.
- In an Increasingly Intermediated Industry, What’s the Real Value-add of a Marketplace Lending Platform? (AltFi, 9/28/16)
Industry Update:
- Prospect Revives Consumer Loan Deal (AB Alert, 9/30/16) Prospect Capital will soon be able to price a long-delayed securitization of Lending Club loans, signaling renewed investor confidence in marketplace lending.
- LendingClub Fund Has First Negative Month on Valuation Fix (Bloomberg, 9/26/16) LendingClub Advisor’s new valuation framework is more responsive to changes in each individual loan’s delinquency status.
- Debut Securitisation for Zopa Loans (FT, 9/26/16) Europe’s first securitization backed by unsecured consumer loans from an online platform (Zopa) priced on Monday.
- LendingClub Founder Renaud Laplanche is Coming Back to Disrupt (TechCrunch, 9/28/16) Laplanche will make his first public appearance since leaving LendingClub to talk about the past year, and what the future may hold for both him and LendingClub at Disrupt London.
- Prosper Closing Down Their Secondary Market for Retail Investors (LendAcademy, 9/29/16) Starting on October 27, investors will no longer be able to buy or sell notes on the Prosper trading platform.
- Promontory Financial Group Signs Up With IBM (WSJ, 9/29/16) Promontory’s expertise combined with Watson, IBM’s artificial intelligence computer system, is expected to help banks meet ever-rising regulatory expectations.
- Goldman Sachs Gives a Glimpse Into Its New Lending Plans (WSJ, 9/27/16) Goldman Sachs discusses plans to tap into an underserved market for unsecured loans.
- Update on Where Lending Club Stands, What We’re Working on, Where We’re Headed (LendingClub, 9/29/16) Message from LendingClub Chief Capital Officer, Patrick Dunne, outlining LendingClub’s recent achievements and goals for the future.
Lighter Fare:
- 9 Tricks To Appear Smart in Brainstorming Meetings (TechCrunch, 9/30/2016) Comedian Sarah Cooper explains how to “go meta” and think big.