We see it as evidence of our founding hypothesis that the transition of consumer/SME credit to the capital markets is a global, secular trend underpinned by deep regulatory undercurrents.
Access to funding sources will separate the pack
Headed into ABS Vegas we observed that deals were getting pushed down the calendar until more favorable conditions present themselves. That time is now.
Credit facility utilization and risk-exposures to marketplace lending at some banks are at or near the maximum. Securitization relieves this pressure by replenishing warehouse lines and transferring risk from bank warehouse facilities to the ABS markets. Mike Cagney, CEO of SoFi, puts it succinctly, “when you originate $1 Bn a month, you need to have a take-out.”
Platforms that have flush funding lines and staggered maturities have flexibility to weather difficult market conditions – up to a point. As credit facilities age, platforms must trade-off the risk of rolling over recourse warehouse facilities at higher future rates vs. locking in permanent non-recourse financing through securitization at current levels. Moreover, the combination of rapid origination growth and finite warehouse lending capacity implies an inexorably higher velocity of securitization volumes over time.
When a platform bumps up against their funding constraint, they must face the difficult choice of i) contracting originations (and handing market-share and revenues to competitors), or ii) selling assets into the whole loan or ABS market (even when conditions are not favorable).
Promoting frictionless access to the capital markets is a C-level, board-level, and policy level responsibility. Platforms that have secure sources of funding in place will slingshot past their rivals during the next downturn.
Innovation creates a new source of growing pains
One of the central innovations in marketplace lending is the risk-matching function. Marketplace lenders can expand credit to traditionally underserved segments by appropriately underwriting and matching the risk to investors that have the wherewithal to price and absorb the risk.
However, the de-linking of the balance sheet also brings with it a set of new challenges. We see a proliferation of emerging issuers, capital structures, diversity in rep and warrant packages, limited transparency and liquidity in ABS deals, and lack of brand awareness elevating risk premiums in the wholesale funding market.
ABS investors, particularly those participating in the equity and mezzanine tranches, require incremental risk premiums for sifting through the noise and bearing uncertainty in default, prepayment, servicing, and liquidity risk.
Providers of first-loss risk are the soft point in the capital structure
Providers of equity and mezzanine capital are highly sophisticated and represent a small fraction of the world’s investable capital. These providers of capital typically consist of hedge funds, BDCs, private credit funds, and specialty finance funds, all of whom have high cost capital (owing to their hurdle rates of return) and, depending on their funding structure, may be subject to liquidity runs at exactly those times when platforms need funding the most. Sourcing resilient first-loss capital providers is a priority for the industry, and for regulators that seek to encourage stable securitization markets to fund the real economy.
There is no silver bullet to reducing these risk premiums or funding challenges. There are many lead bullets (and a healthy dose of data and analytics). It’s an incredible challenge to work on and we are excited to do so.
We also recommend reading Louise Bowman’s thoughtful piece in Euromoney, “Growing Pains of Marketplace Lenders.”
- CEO, Ram Ahluwalia, will join a panel discussion entitled, “Alternative Lending Securitization and Similar Capital Sources,” on June 9th in New York—RSVP here.
- PeerIQ will speak at SCI’s 2nd Annual Marketplace Lending Securitisation Seminar onJune 28 in New York.
- PeerIQ returns to Miami for the ABS East Conference in Miami September 16-18.
- Adam is a full-stack software engineer who brings a wealth of experience in building leading financial applications, having previously worked at Bloomberg, BAML, and Goldman Sachs. Adam co-founded Chicory, a food industry start-up, and held senior engineering roles at AppNexus and Ben Horowitz’s OpsWare.
- Lending Club Looks at New Deal to Crack Tough Market (WSJ, 4/26/16) Lending Club eyes new funding source – diverse funding sources critical to fintech players.
- Moody’s: China Securitization Will Further Advance When Hurdles are Cleared(Moody’s, 4/28/16) Market participants believe ABS and RMBS asset classes will gain traction and become important structured finance asset classes in China.
- Fintechs’ Goals Are Changing, VCs’ Appetite Is Not (American Banker, 4/21/16) Fintech market shows signs of staying power—global fintech investment rose 75% in 2015.
- Quicken Arm Prepping Personal-Loan Paper (AB Alert, 4/29/16) Quicken Loans to launch securitization program for their online personal-loan affiliate.
- Online Loans Regain Traction (AB Alert, 4/29/16) A flurry of deals (some of which were delayed from last year) are back on the table in response to the completion of a $300m securitization from Avant on April 22nd.
- Goldman, Jefferies Said to Start Marketing Lending Club ABS Deals (Bloomberg, 4/29/16) May sale of loans will be deposited in “Lending Club Investment Trust,” that will issue asset-backed securities with short maturities and credit ratings as high as A- from Kroll Bond Rating Agency.
- From Idea to Innovative Market Leader: A Roadmap For Sustainable Growth (PWC, April 2016) PWC publishes MPL originator “roadmap” highlighting potential areas of opportunity and risks for MPL growth.
- Podcast 63: Ram Ahluwalia of PeerIQ (LendAcademy, 4/29/16) Securitization, recent industry headwinds, outlook, and how PeerIQ is bringing institutional credit risk analytics to MPL.
- Growing Pains of Marketplace Lenders (EuroMoney, 4/26/16) What started out as a market known for its transparency is becoming increasingly complex.
- Securitization Market Turbulence Forces Marketplace Lenders To Rethink Funding Models (Forbes, 3/28/16) Platforms are investing in diverse sources of funding.
- P2P Lending: These are the Nine Key Trends in Alternative Finance (City A.M., 4/13/16) Securitization is necessary – but more standardization is needed.
- OnDeck Prices $250m Securitisation (AltFi, 4/28/16) Second securitization for OnDeck Capital.
- Yum! Brands Announces New Securitization Facility (Reuters, 4/21/16) Verizon cell phones, solar panels, and now the owner of Taco Bell finds securitization as an attractive funding source.