Back Cross River Intelligence Archives

Weekly Industry Update: June 26, 2016

By Vy Phan

June 26, 2016

Last week, Social Finance (SoFi) priced its first rated unsecured consumer loan deal SCLP 2016-1. Class A tranche is $379.8 million with initial OC of 25% (targeted OC of 31%) and rated A by Kroll. The deal co-lead managers were Deutsche Bank and Citi. The underlying loans of SCLP 2016-1 are from prime borrowers with lower coupon rates and higher incomes relative to its peers, such as recent CHAI transactions backed by Prosper loans. Kroll’s base case loss expectation is about 7.50% to 9.50%, which is also lower than the recent transactions off the CHAI shelf. Peer Comparison – Collateral Pool Picture1 Source: PeerIQ, Kroll Bond Rating Agency Peer Comparison – Initial Pricing The B-tranche (BBB-rated) of the most recent CHAI-Prosper deal 2016-PM1 was priced 700bps over Treasury with 27% credit subordination. By comparison, the A-tranche of this SoFi deal was priced at 237.5bps over swap rate with 25% credit subordination. These two tranches have similar subordination and weighted average life, but are priced significantly different for a number of reasons. The SoFi transaction printed during favorable market conditions and was well-timed ahead of Brexit volatility. Additionally, a number of collateral considerations are at play. The SCLP 2016-1 collateral pool has 1) the lowest base case loss range 2) the larger pool size (500mm), 3) the highest average FICO scores (~736), 4) higher average incomes, and 5) the highest home ownership level (~80%). SoFi also removed loans that had missed any of first three payments before including in the collateral pool of SCLP 2016-1. Marketing Process The WSJ reported that SCLP 2016-1 was three times over-subscribed with 28 investors indicating interests. 24 current student loan ABS investors participated in the consumer deal. SoFi is not solely reliant on dealers for marketing support. It functions as a co-manager and maintains direct relationships with its investor group. Cumulative Loss Estimates SoFi started originating consumer loans in 2015 and has only 13 months of performance data, which makes estimating cumulative losses challenging for investors and ratings agencies. Under Kroll’s base loss rate, the SoFi A tranche (A-rated, Kroll) has a breakeven cumulative net loss multiple of 4.06x vs the B-tranche (BBB-rated, Kroll) from CHAI 2016-PM1 a 2.8x, both with mid-twenty credit subordinations. We perform a quick “back of the envelope” check on Kroll’s loss expectation. Here, we use the credit performance of fully seasoned 36-month 2012 vintage loans from LendingClub as a rough proxy. We estimate a 4.8% cumulative loss rate adjusting SCLP 2016-1 FICO distribution to LendingClub loans loss rate. We double the 4.8% to account for longer weighted original term of the SCLP collateral as compared to the LendingClub collateral, but ignore a number of collateral specific characteristics such as higher credit quality and incomes in the SoFi deal. Kroll’s loss expectation of 7.50% to 9.50% seems to be reasonable given this sanity test. Investors should incorporate a broader dataset and employ PeerIQ loan-level credit model to properly project loss rates. Risk Retention Unlike other marketplace lenders, SoFi uses its balance sheet to initially fund loans and has multiple channels of distribution. The WSJ reported SoFi retained 5% of aggregate credit risk of the transaction under Dodd-Frank risk retention rule. Risk retention allows SoFi to demonstrate "skin in the game" and satisfy risk retention obligations while also maximizing capital velocity and shareholder value creation. Conferences: Industry Update: PeerIQ Mentions: Lighter Fare: