SCI (March 31, 2016)
In its latest monthly update, PeerIQ suggests that the recent CHAI 2016-PM1 print illustrates the thawing that has occurred in the US securitisation market over the last month. Spreads across the transaction’s capital structure are almost double those of the CHAI 2015-PM3 deal from December (see SCI’s new issue database), but this is said to be reflective of increased financing costs across the market.
“Deals are getting done, albeit at higher financing costs,” the firm notes. “We have an improved macro picture today, compared to the time of ABS West in late-February. This is a positive for institutional investors who are looking for the best value in credit spread products, which are still leaning towards their wider end of the historical range.”
The pricing of the 2016-PM1 marketplace lending ABS has been widely debated in the context of the lack of a Moody’s rating (Fitch and Kroll rated the deal) and the agency’s review for possible downgrade of the class C tranches of three previous deals from the shelf (SCI 25 February). However, PeerIQ states that analysis of the CHAI programme in fact provides an insight into how much financing costs have increased over time for marketplace lending.
Citi has brought four CHAI transactions securitising Prosper loans. Coupons gradually increased (by around 100bp) from the first deal (which was launched in July 2015) to the third.
“Higher financing costs imply lower margins for institutional investors, who will demand a commensurate step-up in rates to earn the same net return. This is exactly what happened in CHAI 2016-PM1 and why we see platforms responding by raising rates accordingly. Today, the securitisation market is offering yields to institutional investors that in some cases are more attractive than funding the whole loans themselves,” PeerIQ notes.
The firm adds that while platforms that do not fund via the ABS markets may feel they are isolated from the effects of wider credit spreads or may believe that superior underwriting is sufficient to attract capital, such views are incorrect. “Consider a platform that has a 2%-3% reduction in cumulative credit losses as compared to another platform for a similar risk cohort. All things being equal, the investor is still better off buying ABS where they enjoy 12% in credit enhancement, as in the recent CHAI deal. Smaller platforms that have not performed a securitisation must increase the net returns of their loans (after financing costs and expected charge-offs) to compete for investor attention.”
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