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Weekly Industry Update: August 28, 2016

By Vy Phan

August 28, 2016

Last week saw the final registration and approval for River North Marketplace Lending Corp, a non-listed, closed-end, 1940 Act fund fully-dedicated to the marketplace lending sector. Registration docs can be found here. With a target offering size of $1 billion, the fund has a broad mandate, with objectives to invest across the marketplace lending (MPL) sector via loans, funds, securities, as well as equity of lending platforms themselves. This is an exciting and welcome development—presaging the launch of several other funds currently in the pipeline and signaling the maturation of another major funding source for marketplace lending platforms. For our deep-dive topic this week, we take a closer look at the MPL student loan segment, comparing collateral characteristics and financing costs among leading platforms and players. SoFi is the Most Active Platform The online student loan sector continues to grow rapidly, with total origination to date now exceeding $10 billion. The majority of this volume is student loan re-finance, focused on high-credit quality borrowers with advanced degrees. SoFi leads this segment, with $7 billion originated since its launch in September 2011. Interestingly, more than other segments, securitization plays a major role in financing student lending. All leading platforms rely on it heavily, with over 50% of originated loans financed through the ABS markets (Exhibit 1). Exhibit 1: Origination Volume: EX 1 Source: PeerIQ, DBRS, Securitization Prospectus All leading platforms focus on high quality borrowers, with weighted average credit scores in recent securitizations ranging from 767-778 (Exhibit 2). We do observe that the weighted-average free cash flow for DRB borrowers tends to be much higher. Student refi borrowers typically have excess cash flow after servicing their debt. We also observe similar weighted average coupon of the loans, suggesting competitive pricing for similar borrowers across the platforms. Exhibit 2: Collateral Characteristics: EX 2 Source: PeerIQ, DBRS, Securitization Prospectus SoFi has a Significantly Lower Financing Cost Each platform has a mix of different sources of capital—securitization, warehouse funding, retail deposits and others. Here, we use securitizations as a proxy for overall financing cost of the collateral. We look at the Senior Floating Coupon tranches of the recent securitizations by SoFi, Earnest, DRB, and CommonBond. These tranches have a standard interest rate benchmark of 1-Month LIBOR; they are also structurally similar across all platforms. Investors can use spread over 1mo LIBOR to gauge relative value and risk across various shelves. Exhibit 3: Financing Cost of Senior Floating Coupon Tranche: EX 3 Source: PeerIQ, DBRS, Securitization Prospectus SoFi has a much lower financing cost than other lenders in this category (1.10% as compared to 1.80%-2.20%). This lower cost is due to many factors. Structurally, SoFi benefits from high over-collateralization, as well as a lower WAL. This lower WAL of SoFi is due to several features that allocate payments to subordinate tranches differently as compared to structures used by other platforms. Further, SoFi also benefits from the strong history of repeat issuance and good execution, thus enjoying the confidence, as well as broad participation, from ABS investors. The implementation of a robust, routine securitization platform, with the benefit of great data management and analytics for enhanced investor confidence, will be a major driver in driving funding costs lower. Upcoming conferences PeerIQ will be attending: PeerIQ Mentions: Industry Update: Lighter Fare: