More than three thousand securitization professionals descended on the Fontainebleau Hotel in Miami for ABS East.
Steve Eisman delivered a keynote which charmed (and sometimes chided) the audience with his first return to the conference since 2007. Several media reports seized on Eisman’s comments regarding marketplace lending. A portfolio manager, pleased at the satirical remarks, commented, “I hope the negative headlines stay forever,” while gingerly snapping up loans at wider spreads and more favorable terms.
In this week’s newsletter, we provide a “mark-to-market” from Q1’s ABS West to present day (and link to PeerIQ real-time analysis along the way).
A “Mark-to-Market” from ABS West
This past February, at ABS West, conversations centered on deteriorating collateral performance and liquidity concerns.
A steady flow of negative headlines–Madden-Midland, negative ratings actions, San Bernadino, platform layoffs, and global slowdown concerns–weighed heavily on investor sentiment.
Two events marked the peak of investor apprehension:
- In the bond market, the pricing of CHAI 2016-PM1 (PeerIQ analysis here) where Mezzanine bonds delivered greater returns than the whole loans themselves.
- In the equity market, investor capitulation after the Lending Club May 9th disclosures.
Turning of the Tide
Global credit markets began to firm in April. Lending Club tightened DTI criteria, elevated the role of the capital markets function, and strengthened leadership on the board and executive team.
In May, the US Treasury report published “Opportunities and Challenges in Marketplace Lending”–a constructive regulatory development. Treasury acknowledged the role of securitization in funding growth, and consistent with the PeerIQ RFI, recommended the need for standardized reps & warranties, consistent reporting standards for loan origination data, loan securitization transparency, and consistent market-driven valuation standards.
SoFi achieved a AAA rating for an MPL bond and cracked open the MPL ABS investor market to global investors via its hands-on marketing approach.
PeerIQ observed that secondary ABS spreads continued to tighten despite volatility in the equity markets. PeerIQ also observed in the Q2 tracker that the combination of stricter underwriting, higher coupons, and tighter secondary ABS spreads meant the conditions for securitization were strong.
In June, SoFi brought to market its first rated personal loan deal which executed extremely well as compared to personal loan deal, CHAI 2016-PM1. (We contrast both deals here).
Marlette followed in the wake of successful issuance and achieved a double-digit increase in IRR. Avant returned to market with a deal whose mezzanine bond was multiple times over-subscribed. Lending Club introduced a branded shelf potentially signaling a goal for repeat, standardized issuance. Prosper released a 10-K alongside news of a $5 Bn loan purchasing consortium.
Where do we go from here?
We are gratified to see our founding thesis take hold—the secular transition of consumer and SME credit to the capital markets. It is now generally accepted that securitization is essential to delivering low-cost, scaled, permanent capital to fund the category growth.
Looking back to media coverage from ABS East coverage nine years ago, we see the same challenges then as today: the need for greater transparency, disclosure, liquidity, and investor confidence.
Solutions–including standardization, market-driven valuation, and promoting investor confidence via third party solutions–are the key topics of the day.
We look forward to sharing our outlook at upcoming conferences and in next week’s newsletter.
Thank you for your continued support.
Conferences:
- American Banker Marketplace Lending and Investing Conference on September 27-28 in New York. PeerIQ COO, Kevin Reed, will speak on the 3:20pm panel on Wednesday, September 28, “Stabilizing Your Portfolio for the Long Haul.”
- Context Summits 2016 Alternative Lending Summit on September 28 in Dana Point, CA.
- LendIt Europe on October 10-11 in London.
PeerIQ Mentions:
- PeerIQ Entering the Valuation Business (AB Alert, 9/23/16) PeerIQ reportedly ramping up valuation business.
Industry Update:
- New True Lender Case Provide Support for the Bank Partnership Model (Pepper Law, 9/22/16) In the latest “True Lender” case, court dismisses “predominant economic interest test” and acknowledges broader public policy considerations.
- Europe’s First ABS of Peer-to-Peer Consumer Loans Nears Sale (Bloomberg, 9/21/16) Zopa plans Europe’s first peer-to-peer consumer loan ABS Sale.
- Sofi Plans to Offer Life Insurance by the End of the Year (Bloomberg, 9/21/16) SoFi will expand beyond student loans by offering a life insurance product.
- Jack Ma’s Finance Business May Be Worth More Than Goldman Sachs (Bloomberg, 9/20/16) Alibaba, owner of data-rich subsidiary Ant Financial, is considering an IPO in Hong Kong next year.
- Marshall Wace Unit Launches Private Equity Version of Loans Fund (Reuters,9/23/16) Marshall Wace Eaglewood is raising money for a private equity version of its billion-dollar investment trust that invests in peer-to-peer and marketplace lending loans.
- LoanDepot Pool Hits Loss Trigger (AB Alert, 9/23/16) Losses in a pool of personal loans securitized by Jefferies have breached a pre-set limit—losses reinforce need for 3rd party curve generation.
- The Fall in Interest Rates: Low Pressure (Economist, 9/24/16) Low rates pressuring pension obligations. We expect pensions to tilt to alternative lending for yield enhancement.
Lighter Fare:
- The Thrill of Losing Money by Investing in a Manhattan Restaurant (New Yorker, 9/9/16) Author argues Manhattan restaurants are the original example of the “business model” of investor capital subsidizing.