The economic picture and outlook for the US consumer continues to improve. US Q2 GDP was revised upward to an annualized growth rate of 3%—the fastest in two years. Hurricane Harvey may trim Q3 growth, reconstruction efforts are expected to drive expansion in the following periods. (Note: investors interested in using PeerIQ analytics to assess the impact of Harvey on their loan portfolio should reach out.)
On the regulatory front, US Rep. Maxine Waters, requested that the FDIC hold a public hearing on SoFi’s bank charter application to establish an Industrial Loan Company. We attach the letter from Rep. Waters to the Chair of the FDIC. Rep. Waters appears focused on i) discussion on updated and “outdated” regulatory framework, ii) consumer protection, and iii) financial inclusion.
In other news, Transunion released a study exploring millennial’s credit preferences. They discovered that this generation is using credit cards less and at the same time using personal loans more—due primarily to the growth in online lending. The biggest segment of online lending is still unsecured consumer loans. And with millennials now coming into their peak borrowing years this will provide a significant tailwind for the industry in the US.
PeerIQ was also named one of the top 9 companies using big data to disrupt financial services. The selected companies are noted for their progress working with big data to transform the landscape of the financial services sector to be more forward thinking and better prepared for the future.
We focus this weeks newsletter on the recent OneMain securitization and benchmark it to other near-prime consumer installment deals.
Overview of OMFIT 2017-1 and 2017 Consumer Lending Deals
OneMain priced OMFIT 2017-1 earlier this week, making it the first deal on the OMFIT shelf in over a year, and OneMain’s second consumer lending deal of 2017. In our recent earnings overview, we highlighted OneMain Financial as the pack leader across non-bank lenders. And it shows – initially slated for $639 Mn, OneMain increased the deal size by almost 50% to $947 Mn due to strong investor demand. OneMain differentiates via their high touch approach, unique distribution channels, and strong servicing, and decades of historical underwriting data.
This is also the first OMFIT deal with a 30% secured collateral requirement and the first time either OneMain or Springleaf have issued a floater. Credit Suisse, Barclays, and Goldman Sachs co-lead the deal.
Source: Kroll Bond Ratings Agency, PeerIQ
As seen in the KBRA Loss Range above, OneMain Financial continues to deliver some of the safest bonds in the consumer lending space. For instance, the KBRA net loss range is 115 bps better (6.85% to 8.85%)–a lower loss-rate than even the super-prime borrowers in SoFi’s SCLP 2017-4 (not shown). Overall, both of OneMain’s recent bonds had loss ranges expectations well below the rest of the cohort.
While many companies are moving towards low-touch digital servicing and marketplace lending, OneMain is leveraging its vast retail branch footprint to reach borrowers and communities. They are also differentiating via verification of full income, employment, and collateral on all of their loans. Furthermore, their ability to service loans locally results in high-touch relationships with borrowers, which ultimately shows up in lower losses and higher recoveries.
OMFIT 2017-1 vs Springleaf and OneMain Legacy Deals
OMFIT is a weighted average of OMFIT 2015-1, OMFIT 2015-2, OMFIT 2015-3, OMFIT 2016-1, OMFIT 2016-2, and OMFIT 2016-3
Source: PeerIQ, OneMain Financial, Kroll Bond Ratings Agency
OneMain and Springleaf completed integration in Q1’17, 1.5 years after the Springleaf acquired OneMain from Citigroup in 2015. This is the first deal to include loans from both legacy firms. Although all branch offices were rebranded under ‘OneMain’, the combined firm has adopted Springleaf’s risk model and underwriting procedures. As you can see in the table above, OMFIT 2017-1 has characteristics of both SLFT and OMFIT shelves.
OMFIT 2017-1 is similar to OneMain’s legacy bonds with regards to loan balance and WAM, but shares more similarities to legacy Silverleaf on FICO scores, % secured, and target overcollateralization. We do not expect any more deals to use the SLFT shelf and all consumer finance deals to use OMFIT going forward.
Capital Structure and Pricing
Note: Class A-1 and A-2 are both senior tranches in OMFIT 2017-1
Although OMFIT 2017-1’s structure is much closer to SLFT 2017-A than OMFIT 2016-3, its senior tranche has a much shorter WAL than both. OMFIT 2017-1’s A-2 floater pays LIBOR + 80bps with no floor or cap. This introduces a layer of interest rate risk because the underlying loans are not variable rate. At the same time, the floater enables investors to guard against rising rates. ABS investors use the PeerIQ analytics platform to model the underlying collateral and assess the ability of the collateral to cover the A-2 coupon under various rising rates scenarios.
Amortization Triggers and Revolving Period
Source: OneMain Financial, PeerIQ
Unlike many of the other bonds we have looked at in previous blogs, OneMain uses an Annualized Net Loss trigger (“ANL”) rather than a Cumulative Net Loss trigger (“CNL”). An early amortization event will be triggered if OMFIT’s ANL is greater than 17% for any rolling 3-month period. As you can see in the chart below, OneMain typically has a generous cushion between its 1-month ANL and the 17% trigger. PeerIQ’s analytical tools offer both issuers and investors the ability to incorporate realistic loss and prepayment assumptions in their bond analysis.
All of OneMain’s securitizations have revolving periods. During the revolving period OneMain can redeploy capital to new and returning borrowers. A CNL trigger would not be appropriate for these securities because CNL uses original balance as the denominator. CNL could overstate losses depending on how much capital is redeployed during the revolving period.
PeerIQ in the News:
- Big Data in Financial Services: 9 Companies to Watch (CIO, 8/29/17)
- Debate on Regulatory Reform (PeerIQ), Rated: A (LendingTimes, 8/28/17)
- U.S. Second-Quarter Growth Revised to 3% in Momentum Boost (Bloomberg, 8/30/17) U.S. second-quarter growth was revised upward to the fastest pace in two years on stronger household spending and a bigger gain in business investment.
- SoFi Sees Consumer Loans Growth (AltFi Credit, 8/29/17) SoFi has reached a milestone with more than $5 Bn dollars in credit card debt refinanced via its SoFi Personal Loans.
- Digitalization Among Factors Pushing Millennial Credit Preferences Toward Auto and Personal Loans (Nasdaq, 8/30/17) New TransUnion study explores Millennial and Generation X credit dynamics, revealing that millennials’ appetite for auto and personal loans has grown at a faster rate than Gen X borrowers at the same age points.
- Apple is Now Partnering with WeChat Pay in China (CrowdFundInsider, 8/29/17) Apple added WeChat Pay, part of Tencent, for payments in its App store and online music.
- Verisk Buying Credit Analytics Firm LCI for $151M (SmallBusinessLending, 8/25/17) In a $151 Mn cash deal, Verisk Analytics will acquire LCI, an industry-leading provider of risk insight, prediction, and management solutions for banks and creditors.
- SoFi’s bid for deposit insurance draws fire from top House Democrat (American Banker, 8/25/17) US Rep. Maxine Waters (D-CA), a member of the Committee on Financial Services, wants the FDIC to hold at least one public hearing on SoFi’s bank charter application to establish an Industrial Loan Company (full letter here).
- Amazon is a Threat to Banks – Just Not in the Way You Think (Tearsheet, 8/28/17) Amazon may not want to displace banks who are some of be its best AWS customers, it is far more likely it will focus on what it currently has: access to affluent millennials.
- Online Lending Shakeout Claims New Victim as Bizfi Sells Assets (Bloomberg, 8/31/17) Bizfi, sold the servicing rights to its $250 Mn loan portfolio comprised of 5,200 merchants to Credibly.
- Ford Motor Credit tests AI’s ability to spot overlooked borrowers (American Banker, 8/31/17) Ford Motor Credit shares ZestFinance’s ideal of helping people with thin credit files, such as millennials and the underbanked, get access to credit through the use of an AI model to predict creditworthiness more accurately than traditional models.
- Funding Circle Kicks Off £12m Marketing Drive to Become First Choice for SMEs (P2P Finance News, 8/30/17) Funding Circle is planning to spend £12 Mn on marketing across large media channels and specialist avenues, to become “the first choice for business borrowers and investors globally”.
- Has the Marketplace Lending Sector Fully Recovered in the USA? (AltFi, 9/1/17) Peter Renton describes the recovery of the MPL industry from last year’s setbacks.
- Rules Relax, Rates Rise and Some New Banks Start Up in the U.S. (Bloomberg, 8/31/17) The prospect of higher rates and an easier regulatory process has led to three government-insured banks opening their doors this year, while another three got approval to start in June—more lenders than have opened in the past six years combined.
- Finance Geeks Will Love this New Movie About the Tulip Bubble (Bloomberg, 9/1/2017) Tulip Fever, a film set in 17th century Amsterdam, is premised on the tulip-bulb mania.