Core CPI rose by 2.2% keeping the Fed on track to raise interest rates next week for the fourth time this year. The market-implied probability of a rate hike next week is ~77%, although the rate hike path in 2019 remains uncertain. The US yield curve saw its first post-crisis flattening which we will look at in greater detail below.
In regulatory news, Colorado has sued the trustees of securitizations that contain online personal loans with interest rates higher than the state’s lending cap. This lawsuit takes litigation related to Madden-Midland issues one step further with trustees being sued, and not just the platforms or the lenders. Colorado alleges that the trustees cannot enforce federal lending law when they purchase receivables from the lending institutions. This lawsuit, if successful, would deal a blow to the securitization markets which have provided online lenders with liquidity and financing, and embolden other State AGs.
In case you missed our webinar on “Lending Earnings Insights 4Q18 with an Introduction to PeerIQ’s Benchmarking Application” you can watch the replay and download the presentation. The webinar analyzed the earnings of bulge-bracket banks, credit card issuers, and FinTechs looking for any signs of changes in the credit cycle, and other related topics. We also demonstrated our newly-launched Benchmarking application. You can watch the demo of the Benchmarking application here.
In this week’s newsletter, we will look at the inversion in the US yield curve, and at FinTech financings and securitizations.
US Yield Curve Inverts for the First Time Post-Crisis
The US yield-curve saw its first inversion post-crisis as the spreads between the yields on 3-year and 5-year Treasuries fell to -1 bps. The spread between the yields on 3-month and 10-year treasuries has been an accurate predictor of past recessions. As the chart below shows, there have been 6 recessions since 1970 after the 3-month – 10-year curve inverted. Currently, the 3-month – 10-year curve is 49 bps away from inversion, but markets are watching every part of the yield curve closely.
While the curve may predict a recession, it may not be imminent. The median time to a recession from when the 3-month – 10-year curve dips below 50 bps is nearly 1.5 years.
Please refer to our prior newsletter for analysis on how late-cycle economies go into a recession.
Source: Federal Reserve, PeerIQ
FinTech Acquisitions and Financings Continue Unabated
CommonBond, a student refinancing startup, has acquired NextGenVest, an AI-based financial platform that helps college-goers fill out financial aid applications and manage their debt. The deal gives CommonBond access to NextGenVest’s ~50 k customers.
This deal represents the 10th acquisition of a venture-backed Fintech startup in 2018. PeerIQ’s CEO Ram Ahluwalia characterized the acquisition a preferable take-out for startups, in an article by Julie Verhage. Most startups in this space have not fared too well in the public markets and M&A is a safer option than an IPO.
In Fintech financing news, Cross River Bank, an origination partner for Fintech companies, has raised $100 Mn in equity from KKR, CreditEase among others, to grow its team and to invest in compliance. PeerIQ and Cross River Bank have a strategic partnership to help institutional loan buyers access the online lending sector. Funding Circle, a UK-based small-business lender, has received a funding commitment of up to 1 Bn pounds from Waterfall Asset Management, a US-based hedge fund. Liberty Lending, a consumer lender, has secured a $200 Mn credit facility from Credit Suisse and Angel Island Capital. Victory Park Capital, an alternative-finance focused lender, has raised $75 Mn from Capital Source to increase the leverage on its fund and to boost returns.
Spreads are Widening on New FinTech Deals
LendingClub and CommonBond are out with new securitizations. KBRA has rated the tranches on LendingClub’s latest $272 Mn deal CLUB 2018-P3 A-, BBB, and BB. The $300 Mn collateral pool consists of 17,825 Prime loans with an average balance of $16.8 k, a weighted average coupon of 14.58%, and a weighted average remaining term of 48 months. The weighted average FICO score of the borrowers is 703. The deal has an initial O/C of 9.2% and an excess spread of 9.1%. Both the O/C and excess spread are the lowest for LC’s 2018 prime deals. This deal priced 27-50bps wider than LC’s prior deal in September due to market volatility and widening structured products spreads, according to DebtWire.
Moody’s has rated the senior tranches on CommonBond’s latest $366 CBSLT 2018-CGS AAA. The collateral pool consists of student loans with an average balance of $91 k, a weighted average coupon of 4.95% on the fixed-rate loans, and a weighted average remaining term of 136 months. The weighted average FICO score of the borrowers is 798. This is CommonBond’s first securitization with a prefunding period. The trust can acquire loans worth up to 20% of the funded balance in 3 months after the deal closes. The prefunded loans are expected to adhere to the same underwriting guidelines as the loans currently in the deal. This deal priced about 15 bps wider of where it was talked, according to DebtWire.
- Underlying U.S. Inflation Picks Up to Keep Fed Hike on Track (Bloomberg, 12/3/18) Core CPI rose by 2.2% keeping the Fed on track to raise interest rates next week for the fourth time this year.
- Colorado Ups the Ante—Sues SPV and Securitization Trusts (Chapman and Cuttler, 12/11/18) This lawsuit takes litigation related to Madden-Midland issues one step further with trustees being sued, and alleging that the trustees cannot enforce federal lending law.
- FHFA would ban VantageScore from Fannie Mae, Freddie Mac credit scores (American Banker, 12/13/18) FHFA wants Fannie and Freddie to use FICO scores only, potentially threatening the use of alternative credit scores that could expand mortgage credit.
- CRA strife, fintech charter, updating AML: Inside Otting’s first year (American Banker, 12/12/18) Comptroller of the Currency Otting reflects on his first year in office and talks about his initiatives to revamp CRA and the FinTech charter.
- CommonBond Acquires NextGenVest to Fuel Expansion and Provide AI-Powered Financial Advice to Generation Z (MarketWatch, 12/4/18) CommonBond, a student refinancing startup, has acquired NextGenVest, an AI-based financial platform that helps college-goers fill out financial aid applications and manage their debt.
- Hedge Fund Boosts U.K. Bet With $1.3 Billion Funding Circle Deal (Bloomberg, 12/7/18) Funding Circle, a UK-based small-business lender, has received a funding commitment of up to 1 Bn pounds from Waterfall Asset Management.
- Credit Suisse, Angel Island Capital Provide More Than $200MM to Liberty Lending (ABL Advisor, 12/4/18) Liberty Lending, a consumer lender, has secured a $200 Mn credit facility from Credit Suisse and Angel Island Capital.
- KKR leads $100 million investment round in Cross River Bank (Reuters, 12/6/18) Cross River Bank, an origination partner for Fintech companies, has raised $100 Mn in equity from KKR, CreditEase among others.
- Victory Park Capital fund secures $75m facility from Capital Source (P2P Finance, 12/3/18) Victory Park Capital, an alternative-finance focused lender, has raised $75 Mn from Capital Source to increase the leverage on its fund and to boost returns.
- CLUB 2018-P3 Presale Report (KBRA, 12/4/18) KBRA has rated the tranches on LendingClub’s latest $272 Mn deal CLUB 2018-P3 A-, BBB, and BB.
- CBSLT 2018-CGS Presale Report (Moody’s, 11/30/18) Moody’s has rated the senior tranches on CommonBond’s latest $366 CBSLT 2018-CGS AAA.
- Robinhood Will Offer Checking Service Promising 3% Interest (Bloomberg, 12/13/18) Robinhood joins other FinTechs like SoFi and Marcus in offering a high-interest bank account as these companies look to round out their offerings.
- A Russian robot named ‘Boris’ hailed as hi-tech on state TV has been unmasked as a man in a suit (INews, 12/13/18) In not so artificial intelligence, a Russian android has been revealed to be a man in a robot suit.