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
quickly
- 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