Bloomberg First Word by Charles Williams (June 15, 2016)

Current spread levels in marketplace lending ABS reflect increased sponsor and servicing risk in the sector, Wells Fargo analysts John McElravey and Ryan Brinkoetter wrotein research note yesterday.

  • Investors with interest in sector should stay higher in
    capital structure as large amounts of CE based on
    subordination, OC, reserve accounts and excess spread should
    help protect from deterioration in collateral performance
    under adverse credit scenarios
  • “If traditional unsecured consumer loan performance would
    be a useful proxy for marketplace loan performance, then
    default rates have the potential to reach 2-3 times their
    baseline levels during recessionary environments, as
    displayed by credit card ABS charge-off rates during the
    last economic cycle”
  •  Although the MPL channel for consumer credit does seem
    to be new and different, the ABS credit performance
    trends generated so far appear to be familiar and
    ordinary, analysts say
  • Rapid growth trends experienced by the industry over the
    past few yrs may not be sustainable as competition has
    increased, credit performance becomes more transparent (and
    possibly weaker), and funding conditions tighten
  •  “We would not be surprised to see some consolidation in
    the industry with larger, more entrenched platforms with
    stronger credit performance making it through the next
    business cycle”
  •  Due to various risks, senior MPL bonds recommended; they’re
    typically structured with short avg lives, and deals delever
  •  Leading marketplace lenders operate under a “capital-lite”
    strategy where they do not retain direct interest in loans
    they originate
  •  Instead, most deals so far have been sponsored by loan
    aggregators who tend to be institutional investors that
    buy and securitize portfolio of loans from one lending
    platform in order to boost returns through leverage and
    cheaper capital market funding
  •  Continued access to ABS market by loan aggregators or
    lenders themselves will probably prove highly beneficial for
    marketplace lenders to continue to grow their platforms
  •  Growth in marketplace lending has occurred against backdrop
    of increased regulatory oversight for traditional lenders;
    moderation in underwriting standards in unsecured personal
    loans by banks and rising demand for personal loans by
    consumers have led borrowers to other lending channels
  •  Increased regulatory oversight could erode considerable
    competitive advantage the industry currently enjoys