Bloomberg by Noah Buhayar (April 12, 2016)

Citigroup Inc. is no longer buying debt from Prosper Marketplace Inc.’s platform to package into bonds, halting a key alliance in the growing market for securities backed by online consumer loans.

The decision, disclosed by a person familiar with the situation, comes after investors demanded higher yields in Citigroup’s most recent sale of the securities. The average weighted spread for a batch sold in late March almost doubled to roughly 500 basis points, compared with the previous offering in December, according to a report at the time from loan-data firm PeerIQ.

Prosper is learning lessons this year as it works with Wall Street firms creating bonds, its president, Ron Suber, told an industry conference in San Francisco on Monday. “When we don’t have alignment with our investors, when groups sell our loans into the market no matter what, if the market’s not ready, it’s not good,” he said.

Citigroup was one of the first major U.S. banks to link up with so-called peer-to-peer lenders like Prosper, which matches borrowers with individuals who want to fund them. The agreement gave the New York-based bank access to Prosper’s loans to securitize, including a deal last year that created about $377 million of bonds.

Goldman Talks

Prosper is in talks with firms including Goldman Sachs Group Inc. on potentially replacing Citigroup, the Wall Street Journal reported Tuesday, citing unidentified people familiar with the matter. Sarah Cain, a spokeswoman for San Francisco-based Prosper, and Rob Julavits at Citigroup declined to comment on the halt, which was reported earlier Tuesday by Reuters. Michael DuVally, a Goldman Sachs spokesman, declined to comment on the reported talks.

The pioneering partnership with Citigroup already had been drawing attention in the bond market this year. Moody’s Investors Service put the riskiest slice of the December deal on review for a downgrade in February, along with two tranches of peer-to-peer securitizations from earlier in 2015. “Charge-offs have been coming in at a higher rate than expected, very simply,” Amy Tobey, a senior credit officer at Moody’s, said by phone at the time.

That spurred Prosper to defend the quality of loans it helps create. They exhibit “solid and consistent credit performance,”  Chief Operating Officer Josh Tonderys said in February. “We take pride in our ability to accurately forecast our loan performance and are always looking at the current environment and calibrating our loss rates appropriately.”

Still, the jump in yields for last month’s offering provided evidence investors share concerns about the emerging class of bonds. Losses on unsecured consumer loans can be more severe than other kinds of household debts because they typically are not secured by collateral and lack guarantees against failure to pay.

SEC’s Interests

Prosper is a pioneer of peer-to-peer, or marketplace, lending. Potential borrowers apply for a loan through its website and, if approved, Prosper assigns them an interest rate. Investors then work through Prosper to fund the loans they want to buy. Citigroup, which had invested in the loans, began securitizing the debt and reselling it with credit ratings last year. The bank wasn’t getting a discount when buying loans from Prosper, according to the person.

The U.S. Securities and Exchange Commission is taking a broad look at how loans are created by Internet platforms and ultimately packaged by financial firms into bonds, Chair Mary Jo White said in a speech on March 31. That includes examining information that investors get in offerings, such as descriptions of underlying loans and borrowers, she said.

[Original article available here.]