End of year jitters came to a head in January. Falling oil prices, a China slowdown, and a panned S&P have raised concerns across credit and equity markets.
While uncertainty is up, there are reasons to maintain a balanced view. GS ISG’s view is that the market dip does not presage a US recession. In this past weeks ISG client call notes, they find:
- continued global growth (albeit with risks to the downside)
- US exposure to a China slowdown is is limited
- a drop in oil prices should generate positive consumer effects
The USD is a major variable in explaining the data. Fed policy differs from other central banks such as Japan which are now testing negative rates. The differing monetary policies has led to a rapidly strengthening US dollar which has put a dent into industrial production and exports.
Bottom-line is that signal from the ISG Recession Index concludes that US Economic Data does not yet signal recession:
As for the ABS market, there are signs of strong ABS demand. Total issuance is down YOY, although though many blame the SEC approval backlog due to the Nov 2015 update to Reg AB and new disclosure requirements.
Nevertheless, it’s worth inquiring how installment loans perform during a recession. Jefferies recently published its review of consumer credit conditions, noting that:
- Risk-adjusted yield (installment loan yields minus net losses) are sufficiently wide to maintain profitability even as charge-offs rise during a recession
- They consider the installment product to be “fairly resilient [ in a recession ] in that there is sufficient margin to protect at least some level of operating profit through an economic cycle”
- And finally that “the market misperceives the performance of consumer finance asset classes in cycles” and is “overly-discounting certain stocks on credit concerns”
To the right is an informative chart that compares average losses to peak losses on leading installment lenders. Jefferies concludes that the selected platforms risk-adjusted margins can sustain profitability despite high financing costs and losses in a downturn.
Finally, as we noted in our Projecting CCOLT Performance Under Stress piece, existing P2P ABS is positioned to perform well through a full cycle given the current pattern and timing of defaults.
Taking a step back, the big question for investors is whether recent deterioration in credit markets represent purely technical and macro factors (China, energy, Fed policy uncertainty , etc.) and are not material from a credit performance perspective, or whether the market is also pricing in expectations of increased defaults. The data seems to suggest the former.
In any case, it all underscores the need for our analytics and risk management to promote transparency and liquidity on this rapidly growing and fascinating asset class.
Last week, PeerIQ was in SF for the Continuum Credit SF conference, which brought together representatives from leading US and China operators, banks, regulators. PeerIQ presented on securitization, with a focus on the recent regulatory opening—and rapid acceleration of the Chinese securitization market.
Upcoming February conferences include:
- Context Summits in Miami (Feb 3-5); PeerIQ to moderate a panel that explores the opportunities and risks for allocators considering P2P hedge funds for investment exposure
- ABS Vegas in Vegas (Feb 28-March 2), where PeerIQ is featured on the “Development of Securitization in Marketplace Lending” panel
2. Hiring Update: Introducing Rahul Sharma and Kevin Sullivan!
We are very excited to introduce two new members to our team this month.
- Rahul Sharma joins PeerIQ as the Director of Legal & Operations. Previously, Rahul served a similar role at Kanerai, the CLO analytics firm. Rahul is a man of many talents, having worked as an operator, lawyer, and trader. He holds degrees from Duke University (BS), INSEAD (MBA), and NYU Law (JD), and holds Series 7, 24, and 63 licenses.
- Kevin Sullivan joins our growing data operations team. Prior to PeerIQ, Kevin was an associate in PWC’s financial services group, and he also supported fundraising and company diligence at Flatiron Investors. Kevin is a graduate of Georgetown University (BS).
Stay tuned for more top-talent hires next month.
3. Sector Update
Big news this week included movement on the sale of Santander’s Lending Club portfolio, and new securitizations coming from student lender Earnest and One Main. And thanks to BuiltInNYC for featuring PeerIQ in the Top 50 NYC StartUps to Watch list.
- Santander Said Close to Selling $1 Billion of LendingClub Loans (Bloomberg, 1/28/16) An update on the sale of Santander’s Lending Club portfolio
- Trustees Forgo Marketplace Deals (ABA, 1/26/16) BNY Mellon and US Trust temporarily shun trustee assignments on securitization of marketplace originated personal loans
- Earnest is Latest Online Lender to Securitize Student Loans (SCI, 1/28/16, subscription required) The student refinance lender to debut next week its first securitization, EARN 2016-A, a $112M transaction run by Credit Suisse and rated by DBRS
- Kroll Bond Rating Agency Assigns Preliminary Ratings to OneMain Financial Issuance Trust 2016-1 (BusinessWire, 1/29/16) Another major consumer ABS deal, OMFIT 2016-1: $555.6M of consumer loans, with AA rating on senior tranche
- Financials: What I Learned at Davos (Morgan Stanley, 1/25/16) Can the gloomy outlook underlined at Davos work as a catalyst to drive change?
- Fed to Stress-Test 33 Banks on Weathering Global Recession (Bloomberg, 1/28/16) 2016 CCAR to be toughest test to date, with Fed to asses how major banks would withstand a severe recession, a doubling of the U.S. unemployment rate to 10 percent, and moderate deflation
- Fintechs Team Up to Become More Banklike (American Banker, 1/27/16) A review of recent fintech partnerships, highlighting Moven’s recent partnerships with Payoff and Commonbond