WSJ by Telis Demos (July 15, 2016)
Ratings firm cites ‘the absence of substantial deterioration’ of the online loans
Moody’s Investors Service delivered some much-needed good news for the online-lending industry, saying it wouldn’t downgrade a bundle of Prosper Marketplace Inc. loans, as it had warned it might do earlier this year.
The ratings firm said in February that it was watching a Citigroup Inc. securitization of Prosper loans for the possibility that the loans might go bad at rates higher than initially expected, which could force it to lower its rating on some of the notes. It raised its forecast of future losses to around 12% from as low as 8% of the money lent.
But on Thursday, Moody’s said “the absence of substantial deterioration” of the loans was a major reason it decided not to downgrade the notes. It said this “reduces the likelihood of extreme underperformance.” The notes in question will keep their initial rating of Ba3, or three levels below investment grade. Higher-grade parts of the deal weren’t on review for downgrade.
“We’re pleased to see that Moody’s has confirmed their rating,” said a Prosper spokeswoman. She said Moody’s increased loss expectation “was not a reflection of the loan quality … but rather represented an adjustment to estimates that were too low from the onset.”
Prosper, like peers LendingClub Corp. and Avant Inc., and others, has been struggling to overcome a sharp pullback in investor appetite for online loans.
These venture-funded lenders, unlike the traditional banks they are aiming to disrupt, don’t make loans out of deposits or their own capital but instead seek to immediately sell their loans to investors, who range from individuals to big hedge funds and pension funds. Investors have expressed a range of concerns about these online loans, including questions about the transparency of data on the loans following the forced resignation of LendingClub CEO Renaud Laplanche after the revelation that the dates on some loans sold to an investment bank were altered.
Buyers also have scrutinized the performance of loans amid a tick-up in the rate of defaults and late payments on loans made last year. The Moody’s warning earlier this year played a role in sparking those questions, and subsequent sales of bonds tied to the loans saw a sharp increase in the interest rates demanded by investors. Platforms including Prosper raised rates on new loans, which gave investors higher returns.
In recent weeks, however, there have been signs of a thaw in the market’s reticence. Social Finance Inc., known as SoFi, completed its first rated sale of bonds tied to personal loans. Marlette Funding LLC this week launched its own sale of bonds tied to loans, the first for the platform since the winter.
An analysis of the online-lending bonds by PeerIQ, which tracks the industry, shows the prices of bonds tied to Prosper loans have risen in recent weeks. Investors had been demanding yields on some Prosper-linked bonds in April of nearly 10 percentage points above benchmark bonds. That spread fell to just roughly 4 percentage points as of the most recent trades in July, PeerIQ data show.
Increased appetite for the bonds could help Prosper and LendingClub in their talks with hedge funds and private-equity firms about securing large loan purchase agreements, possibly in exchange for substantial equity stakes in the companies.
[Original article available here.]